Finally some clarity on impending margin requirements for OTC derivatives
Interestingly, the file of the Second Draft Board Notice that was distributed by the FSB is entitled “Final Draft Margin Requirements Notice for Public Comment”, and paragraph 4.2 of the Second Draft Board Notice contemplates the phasing in of the margin requirements to commence from 1 January 2018. It is therefore reasonable for market participants to anticipate that the final Board Notice will be substantially similar to the Second Draft Board Notice and will, after a number of delays, finally come into effect from 1 January 2018.
The Second Draft Board Notice is a vast improvement on the first draft of the Board Notice in a number of ways. For example, it no longer contemplates the bilateral exchange of margin (ie, cash or securities as collateral) with clients (which, as defined in the Regulations, could have included individuals and small businesses executing once-off trades); it includes exemptions for intra-group transactions under a certain threshold; it provides guidelines for margining requirements in respect of cross-border trades; and it contemplates the phasing-in of the margin requirements.
As evidenced by the evolution of the title “Margin Requirements for Non-Centrally Cleared OTC Derivatives” to “Margin Requirements for OTC Derivative Transactions”, the Second Draft Board Notice seems to acknowledge that the margin requirements have been prioritised by the FSB and will be in place well before central clearing commences in South Africa.
Market participants should note the following requirements:
Finally, we note that there remains room for improvement and clarification in the Second Draft Board Notice. Some examples are the following:
Paragraph 4, entitled “Initial margin”, clarifies that the initial margin aims to protect providers and their relevant counterparties. It is therefore unclear whether the margin requirements apply to covered entities even in transactions where neither covered entity is an OTC derivatives provider, or only to transactions where one of the parties is an OTC derivatives provider and the other is a covered entity.
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