Who will be impacted by the new Margin Rules in South Africa?
In June 2020, the Margin Requirements for Non-Centrally Cleared Over-The-Counter Derivative Transactions were published as Joint Standard 2 2020 under the Financial Sector Regulation Act, 2017 (the ‘Margin Rules’). The Margin Rules set out the regulatory requirements for posting collateral (both initial margin and variation margin) in respect of OTC derivative transactions which are not traded through a central clearing house.
Which entity types are affected by the Margin Rules?
The Margin Rules specify that only entities which fall under the definition of 'Counterparty' will be required to post collateral in terms of the Margin Rules.
A Counterparty is defined as:
An authorised user as defined in the Financial Markets Act, 2012 (‘FMA’) means a person authorised by a licensed exchange to perform one or more securities services in terms of the exchange rules, and includes an external authorised user (as defined in the FMA) as appropriate.
A bank, bank-controlling company or branch as defined in terms of the Banks Act, 1990.
A financial services provider authorised to provide financial services in derivatives instruments as contemplated in the Financial Advisory and Intermediary Services Act.
An insurer licensed or deemed to be licensed to conduct life insurance business in terms of the Insurance Act, 2017.
An insurer licensed or deemed to be licensed to conduct non-life insurance business in terms of the Insurance Act, 2017.
An investment fund, being:
a portfolio of a collective investment scheme administered by a manager registered in terms of the Collective Investment Schemes Control Act, 2002 or
a private equity fund being a managed pool of capital that:
has as its principal business the making of equity, equity-oriented or equity- related investments primarily in unlisted companies or ventures to earn income or capital gains
is managed or advised by a member of the South African Venture Capital and Private Equity Association or other equivalent private equity and venture capital industry body; and
is not open or offered to the public as an investment.
An OTC Derivatives Provider (an authorised OTC derivatives provider as defined in the FMA Regulations).
A Foreign Counterparty (a person outside the Republic of South Africa who is authorised by a supervisory authority to perform a service or services similar to one or more of the services referred to in the definition of an OTC Derivatives Provider or the services performed by an authorised user).
Initial margin and variation margin requirements
Initial margin only applies to the largest market makers in derivatives. Initial margin requirements will be phased-in over a period of 4 years based on the aggregate average notional amount (‘AANA’) of OTC derivatives traded on a group basis over a 3-month period.
The below table indicates the phasing-in timelines for initial margin:
Variation margin will apply:
from the effective date of the Margin Rules (the Margin Rules have not yet been declared effective by the regulator) to any counterparty (as defined) who enters into non-centrally cleared OTC derivatives with an AANA above R30tr
6 months after effective date of the Margin Rules for all other counterparties (as defined) regardless of the AANA threshold.
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