APRA has released final requirements for margining and risk mitigation for non-centrally cleared derivatives. APRA has made some changes to the requirements, based on feedback to the earlier consultation process. This is one of the risk mitigation elements brought to the fore post the GFC. APRA has not yet set a commencement date.
The release, CPS 226, provides clarity on the final requirements and it will allow APRA regulated institutions with material levels of non-centrally cleared derivatives to actively continue their preparations. APRA will advise an implementation date and phase-in timetable in due course. APRA says they “continue to support internationally harmonised implementation of the requirements and is monitoring the progress of implementation in other jurisdictions”.
There are two tests to determine whether the rules apply.
First the entity has to be a financial services organisation (authorised deposit-taking institutions (ADIs), general insurers, life companies and registrable superannuation entities (RSE) licensees). However entities such as central banks and certain special purpose vehicles are excluded. These entities must post and collect variation margin and initial margin when it trades with covered counterparties.
Second, there is a threshold which must be met first. APRA has kept the AUD 3 billion threshold for the application of variation margin requirement based on the entity’s group’s aggregate month-end average notional amount of non-centrally cleared derivative transactions.
Both the covered entity AND the covered counterparty has to meet this threshold, else the transactions between them will not be caught by the margin requirements.
There were some significant changes from the earlier drafts, which generally have weakened the requirements.
For example, physically settled foreign exchange forwards and swaps, and the fixed physically settled FX transactions associated with the exchange of principal in cross-currency swaps, have been excluded from the requirement to exchange variation margin. In addition, real estate and infrastructure special purpose vehicles and collective investment vehicles are excluded from the scope of the rules if they enter into derivatives for the sole purpose of hedging. Similarly, non-financial institutions are no longer included as covered counterparties. There are others. You will need to read the fine print to see all the changes.
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