The Joint Standard 2 of 2020 Margin Requirements for non-centrally cleared OTC Derivative Transactions (‘the Margin Rules’) apply to a provider entering into a non-centrally cleared OTC derivative with a ‘counterparty’ or ‘foreign counterparty.’
The definition of a ‘counterparty’ includes reference to legal entities such as authorised users; banks; financial services providers; insurers and investment funds (defined as a portfolio of a collective investment scheme administered by a manager, and a private equity fund).
When one considers these definitions, I am of the view that the Margin Rules apply to the legal entities with whom transactions are done (i.e. a ‘provider’ and ‘counterparty’). In an agency structure, an OTC derivative transaction done under an agency ISDA®, is concluded between (typically) the bank on one side (the ‘provider’) and a fund or disclosed principal on the other. If a fund is a legal entity which falls within the definition of ‘counterparty’, then the fund will be required to comply with the Margin Rules. It is therefore my reading of the Margin Rules that one needs to determine and categorise each fund (at the legal entity level) in terms of the definition of a ‘counterparty’.
If we take this analysis further to consider the treatment of the Minimum Transfer Amount (‘MTA’), the Margin Rules specify that all margin transfers are subject to an MTA of which the aggregate or sum of any Initial Margin and Variation Margin does not exceed R5m.
My analysis of this requirement is that per legal entity pairing e.g. between a bank and each fund (as a legal entity), the MTA cannot exceed R5m for that pairing. Therefore, if you have a life insurance fund which comprises various sub-accounts or sub-funds, the MTA of R5m would need to total in aggregate to R5m (across IM and VM and across all sub-funds which constitute the legal entity of the life insurance fund). The regulations do not provide clarity on this, and this is my interpretation of the regulations.
How has your institution approached this issue, and do you perhaps have a different interpretation? It would be great to hear your comments and thoughts on this.