2020: What to Expect in the OTC Derivatives Industry
Updated: Feb 4
2020 will see further regulations being finalised and implemented in South Africa and globally. The imminent focus will be preparing for Phase 5 Initial Margin with EU and US counterparties which will affect a great number of SA counterparties on 1 September 2020. Phase 5 will capture all those entities that have at least EUR50bn or $50bn of uncleared derivatives notional exposure on group basis for March, April and May of 2020. Those who may be in-scope will need to run their Aggregate Average Notional Amount (AANA) calculations at the end of the March, April and May period. Relief has been granted further to BCBS/IOSCO guidelines that legal documentation for Initial Margin need only be completed once the Initial Margin threshold of EUR50m and $50m is breached.
The margin rules for uncleared derivatives in South Africa are due to be published in February 2020, after further time to engage with the market on the last draft rules (which were published in November 2019). This will be critical for the local market as there is much to be done from a legal documentation and operational point of view in order to comply with variation and initial margin requirements. Variation margin rules could be implemented as soon as 1 April 2021, which will be a challenge for the buy-side who may not yet be set up to manage collateral.
Benchmark reform continues to dominate headlines in the OTC derivatives industry as the transition away from Libor continues. ISDA® will be publishing revised definitional booklets (to update the 2006 definitions) which will contain robust contractual fallbacks for derivatives which reference key IBORS.
The implementation of the Securities Financing Transaction Regulation (SFTR) will be a focus in the EU in 2020 where many firms who transact in securities financing transactions may have to start reporting, in granular detail, information on their repo and securities lending transactions to an EU-approved trade repository. There is a phased-in approach to this regulation, and primary dealers in the EU will have to comply by 1 April 2020.