Initial Margin (IM) is a significant aspect of the bilateral and centrally cleared derivative markets, as regulators strive to reduce systemic risk in the global OTC markets. However, it does not come without a price. Not long ago, we discussed how word on the Street was that, in addition to operational and legal challenges, the newly proposed margin requirements for uncleared swaps could become 40 to 45 percent higher than for cleared transactions.1
Given the prevailing uncertainty, many of today’s OTC derivative participants are currently experiencing challenges as they begin to navigate new initial margining (IM) regulations—and the resulting shift in margining practices.
So, with current IM methodologies not yet standardized across the market, what is the best way to navigate this murky labyrinth? For firms who are unaccustomed to posting IM, which IM methodology should they use for pre-trade decision-making and collateral optimization, or to verify post-trade calculations from CCPs or bilateral counterparties? Most importantly, how will IM affect their derivative business’ costs and processes?
Breaking Down the Regulations
Despite the release of the second consultative document outlining the near-final policy for consistent standards last year by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), ambiguity still persists when it comes down to managing non-centrally cleared derivative margin requirements. To help break it all down, we’ve outlined at a high level what we consider the eight key principles and requirements for non-centrally cleared trades:
REGULATORY SUMMARY: FOR NON-CENTRALLY CLEARED TRADES2
For a more detailed analysis of initial margin and its impact on the derivative markets, view our on-demand webinar, “Primer on Initial Margin and its Impact on Derivatives Markets.”
1Financial Technologies Forum, ftfnews.com, “Uncleared Swaps Hit with Steep Margin Increases,” September 5, 2014
2Source: Basel Committee on Banking Supervision (BCBS), International Organization of Securities Commissions (IOSCO), Margin requirements for non-centrally cleared derivatives