BCBS Margin rules

BCBS Margin rules

Overview

Introduction

Since 1 September 2016, new initial margin (IM) and variation margin (VM) requirements for non-centrally cleared over-the-counter (OTC) derivatives have been introduced and applied to jurisdictions globally.

These new margin rules originate from a global policy framework and timetable that was published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO). They are a key part of the reform agenda put in place by the Group of Twenty (G20) as a response to the 2008 financial crisis and seek to reduce systemic risk in the non-centrally cleared OTC derivatives markets by ensuring appropriate collateral is available to offset losses caused by the default of a counterparty.

Important: Although the implementing jurisdictions' margin rules are based on the same global policy framework there will invariably be differences in each jurisdiction's requirements (see the Jurisdictions tab for more detail).

Variation margin in a nutshell

Variation margin reflects the daily change in market value of the financial instruments. Two counterparties must exchange VM to cover their current exposure based on the valuation of the financial instruments they are trading. These daily valuations (also known as 'mark-to-market') and the calculations follow transparent and well recognised industry methodologies.

The variation margin rules apply to trades between the largest market participants since 1 September 2016 (in the US, Canada and Japan). Since 1 March 2017, VM has applied to all other in-scope entities (subject to jurisdictions' implementation schedules). Please review the implementation schedule on the variation margin tab.

Click here to discover variation margin requirements in detail.

Initial margin in a nutshell

Initial margin (IM) is an amount of collateral that investors post to enable trading in financial instruments. Posting of IM aims to reduce the broker's exposure to the investor's credit risk. Whilst there is a common process for exchange traded and cleared derivatives, this is largely a new process for uncleared OTC derivatives.

The IM obligation started on 1 September 2016 in United States, Canada and Japan for a few of the largest market participants only. The IM obligation for the vast majority of the in-scope entities will follow a phased-in implementation calendar between 1 September 2017 and 1 September 2020.

Click here to discover initial margin requirements in detail.

In-scope entities

Financial firms and systemically important non-financial entities are generally in-scope and may need to exchange VM on a bilateral basis or to post IM to a third-party custodian. Each jurisdiction will set forth detailed definitions of in-scope, out-of-scope and exempt entities.

Margin will not be required to be exchanged with all counterparties. For example, many jurisdictions' rules will not require the exchange of margin with certain types of non-financial entities (e.g. non-financial counterparties below the EMIR clearing threshold in the European Union). It is also expected that certain entities (e.g. sovereigns, and central banks) will be exempt.

We will provide entities scope details for each jurisdiction when they will release such information (see the Jurisdictions tab for more detail).

In-scope transactions

New margin requirements will apply to non-centrally cleared OTC derivatives, which are derivative transactions that are not cleared through central clearing counterparties (CCPs). There are some product exemptions, as well as exemptions for certain inter-affiliate transactions; however, these exemptions may vary across jurisdiction.

We will provide transactions scope details for each jurisdiction as and when final rules are released.

Last updated: 6 March 2017

Variation margin

Variation margin

HSBC entities already exchange variation margin (VM) with many clients as this is a widely adopted practice in the OTC derivatives market. The daily exchange of VM reflects the profit or loss of each counterparty compared to the previous valuation of the financial instrument they trade, which reduces counterparty risk. These daily valuations also known as 'mark-to-market' follow transparent and well recognised industry methodologies.

Once the new margin rules are effective, the number of counterparties that will need to exchange VM will significantly increase. To ensure regulatory compliance, all affected counterparties will have to undertake a substantial repapering exercise to put new collateral documents in place or to update existing collateral documents. Affected counterparties will also need to have the capacity to operationally exchange VM.

Variation margin may not be a new process but:

  • it will be mandatory for all in-scope entities;
  • new regulatory requirements will apply; and
  • new regulatory compliant documentation will need to be completed.

Daily exchange of variation margin became mandatory for major market participants
from 1 September 2016 and for all other in-scope entities since 1 March 2017 (subject to jurisdictions' implementation schedules)

Since 1 September 2016, in-scope entities that belong to a group whose Aggregate Average Notional Amount (AANA) of non-centrally cleared derivatives for March, April, and May 2016 exceeds EUR3 trillion* are required to exchange variation margin when transacting with one another. This initial compliance date applies to a few of the largest market participants.

From 1 March 2017, all in-scope entities in certain jurisdictions, regardless of their AANA, will be required to exchange VM. This requirement only applies to new contracts entered into on or after 1 March 2017. An extensive list of lifecycle events may however, bring legacy trades into scope for the new requirements. This list includes but is not limited to amendments and cancelations, partial termination, allocation, partial novation, etc.

Threshold
Region AANA of non-centrally cleared derivatives over EUR3tr or USD3tr* All other in-scope entities
Australia 1 March 2017†‡ 1 March 2017†‡
Canada 1 September 2016 1 March 2017†
EU 4 February 2017 1 March 2017†‡
Hong Kong 1 March 2017† 1 March 2017†
India TBC TBC
Japan 1 September 2016 1 March 2017†
Singapore 1 March 2017† 1 March 2017†
South Africa TBC TBC
South Korea TBC TBC
Switzerland 1 September 2016 1 March 2017†‡
US 1 September 2016 1 March 2017†‡

* Or equivalent in the currency of the relevant margin regime
† Transitional period, relief available subject to certain conditions.
‡Retroactive application of VM to trades entered into on and from 1 March 2017.

Variation margin transfer is not required below a certain amount

Transfers below a Minimum Transfer Amount (MTA) are not required. For instance, under the EU regime, there is a minimum amount of EUR500,000 which may be shared across VM and IM. It may all be allocated to VM if IM is not applicable. A lower MTA may be set where multiple jurisdictional rules apply in order to remove the inherent risks where the MTA is expressed in a different currency to that of the applicable rule.

Eligible Collateral and Haircuts

Eligible forms of collateral that may be used as variation margin are generally broad, although certain rules do require VM to be cash only in certain circumstances. HSBC will continue to have its own requirements and policies with regard to the collateral it can accept.

Important: National supervisors will generate their own list of eligible collateral assets and applicable haircuts taking into account the conditions of their own markets. HSBC will provide eligible collateral assets and haircuts details for each jurisdiction as and when regulators and national competent authorities (NCAs) release such information (see the Jurisdictions tab for more detail).

Certain forms of collateral are subject to a value "haircut" when determining the collateral's value for satisfying the margin requirements (e.g. highly liquid foreign currencies may be subject to appropriate haircuts to reflect the inherent FX risk involved). An additional 8% FX haircut only applies if the non-cash collateral is different to a cash or non-cash currency that is agreed in the relevant credit support annex. If the market value of the collateral declines or the collateral is no longer eligible, clients will be required to post additional eligible collateral as necessary to meet margin compliance.

What are in-scope entities expected to do to comply?

  1. Self-Disclosure to assess if variation margin rules apply
    HSBC counterparties may be required to provide a Regulatory Margin Self-Disclosure Letter detailing all information necessary to determine if and when compliance with one or more of the new variation margin regimes will apply to their transactions with HSBC.
  2. Additional legal documentation when the new margin rules apply
    Where any of the new margin rules apply, HSBC and its counterparties will be required to agree to additional collateral documentation to reflect the requirements of the applicable variation margin regimes and eligible collateral.

Click here to discover initial margin requirements in detail.

Last updated: 6 March 2017

Initial margin

Initial margin

Initial margin (IM) is collateral collected and/or posted to reduce future exposure to a given counterparty as a result of non-cleared derivative activity. Whilst there is a recognised process within exchange traded and cleared derivatives, this is largely a new process for non-centrally cleared OTC derivatives.

Unlike variation margin:

  • IM needs to be segregated from own funds (by example at a third-party custodian)
  • IM cannot be cannot be rehypothecated and must be otherwise transferred by custodian

How is initial margin calculated?

The amount of IM that must be collected and posted will be calculated in accordance with approved margin models that meet defined criteria described within each jurisdiction's final regulatory rules.

Transfers below a Minimum Transfer Amount (MTA) are not required. For instance, under the EU regime, there is a minimum amount of EUR500,000 which may be shared across VM and IM. A lower MTA may be set where multiple jurisdictional rules apply in order to remove the inherent risks where the MTA is expressed in a different currency to that of the applicable rule.

Additionally, an in-scope entity is not required to post or receive initial margin until a consolidated threshold at a group level of EUR50 million IM is reached with its counterparty's group. In practice, counterparties' groups will each allocate this EUR50 million IM threshold across their group's entities and versus defined counterparties.

What are the AANA Thresholds and subsequent in-scope dates for initial margin?

IM will be phased in based on the amount of the counterparty's group Aggregate Average Notional Amount ("AANA") of uncleared OTC derivatives for the months of March, April and May of the year when the obligation applies to them.

Since 1 September 2016 in the United States, Canada and Japan, only entities within large financial groups, which have large aggregate portfolios of uncleared OTC derivatives, have been in-scope for both initial margin and variation margin.

Please see below the BCBS-IOSCO phased-in calendar for initial margin. Please note that some jurisdictions may not adhere to the proposed schedule.

AANA Threshold IM start AANA Calculation period of reference
> EUR 3tr / USD 3tr* 1 Sep 2016 01 March – 31 May 2016
> EUR 2.25tr/ USD 2.25tr* 1 Sep 2017 01 March – 31 May 2017
> EUR 1.5tr/ USD 1.5tr* 1 Sep 2018 01 March – 31 May 2018
> EUR 0.75tr/ USD 0.75tr* 1 Sep 2019 01 March – 31 May 2019
> EUR 8bn/ USD 8bn* 1 Sep 2020 01 March – 31 May 2020

*Or equivalent in the currency of the relevant margin regime

Eligible Collateral and Haircuts

Eligible forms of collateral that may be used as initial margin are generally broad from a regulatory perspective, although certain rules do impose limitations on cash and concentration limits may apply. HSBC will additionally continue to have its own requirements and policies with regard to the eligible collateral it can accept.

Important: National supervisors will generate their own list of eligible collateral assets taking into account the conditions of their own markets. HSBC will provide eligible collateral assets and haircuts details for each jurisdiction as and when regulators and national competent authorities (NCAs) release such information (see the Jurisdictions tab for more detail).

Certain forms of collateral are subject to a value "haircut" when determining the collateral's value for satisfying the margin requirements (e.g. highly liquid foreign currencies may be subject to appropriate haircuts to reflect the inherent FX risk involved). An additional 8% FX haircut will be applied to eligible collateral that is denominated in a currency that is not the same as the "Termination Currency" of the underlying master agreement. If the market value of the collateral declines or the collateral is no longer eligible, clients will be required to post additional eligible collateral as necessary to meet margin compliance.

What are most in-scope entities expected to do?

HSBC will communicate to all counterparties to ensure a smooth transition to the new regime. Initial margin rules will require a 2-step exchange of documentation:

  1. Self-Disclosure to assess if initial margin rules apply
    HSBC counterparties will be required to provide a Regulatory Margin Self-Disclosure Letter detailing all information necessary to determine if and when compliance with one or more of the new initial margin regimes will be required.
  2. Additional legal documentation when the new margin rules apply
    Where any of the new margin rules apply, HSBC and its counterparties will be required to agree to additional collateral documentation to reflect the requirements of the applicable initial margin regimes and eligible collateral as well as segregation arrangements (e.g., 3rd party custodian documentation).

Click here to discover variation margin requirements in detail.

Last updated: 1 March 2017

Jurisdictions

United States

United States

Entity scope (in scope, out of scope, exemptions)

In-scope entities:

  • Covered Swap Entities (CSEs)
  • Financial End Users (FEU) with or without "material swaps exposure"
  • An entity has "material swap exposure" if (at group level) it have an average daily aggregate notional that exceeds USD8 billion in uncleared swaps, SBS, FX forwards and FX swaps for June, July and August of the previous calendar year

Exemptions:

The regulatory margin rules do not apply to:

  • Sovereigns
  • Central banks
  • Multilateral development banks
  • Bank of International Settlements (BIS)
  • Transactions with commercial end users
  • Qualifying small banks (generally insured depository institutions and credit unions with less than USD10 billion in assets)
  • Qualifying captive finance companies
  • Treasury affiliates
  • Certain cooperative entities that would satisfy an applicable clearing exemption

Transactions scope (in scope, out of scope, exemptions)

In-scope transactions:

Initial margin (IM) and variation margin (VM) requirements generally apply to all OTC derivative trades.

Exemptions:

Physically settled FX (spot, fx forwards and fx swaps).

Calendar if different form BCBS-IOSCO

Initial margin:

Aligns to BCBS-IOSCO calendar

Variation margin:

1 September 2016 – Largest market participants - Aligns to BCBS-IOSCO calendar

1 March 2017 –

  • All other in-scope entities regulated by the Commodity Futures Trading Commission (CFTC) and Prudential Regulators (PRs) - Aligns to BCBS-IOSCO calendar
  • CFTC and PRs have both issued statements of relief under certain conditions. Retroactive application of VM to trades entered into on and from 1 March 2017.

Eligible collateral

Eligible collateral would generally include the examples below. However, HSBC will continue to have its own requirements and policies with regard to the collateral it can accept from this list.

  • Cash
  • High-quality government and central bank securities
  • High-quality corporate bonds
  • High-quality covered bonds
  • Equities included in major stock indices
  • Gold

Please click here to review the US Commodity Futures Trading Commission's (CTFCs) list of eligible collateral. Please check Article 23.156 (p. 701).

Please click here to review the US Prudential Regulators (PR) list of eligible collateral. Please check § __.6 Eligible collateral (p. 74903).

Any other specificity

N/A

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Canada

Canada

Entity scope (in scope, out of scope, exemptions)

In-scope entities:

  • Covered Entities. A Covered Entity is a financial entity belonging to a consolidated group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of any year following the implementation date exceeds CAD12 billion.

Exemptions:

  • Sovereigns
  • Central banks
  • Certain multilateral development banks
  • Bank for International Settlements (BIS)
  • Public sector entities
  • Special purpose entities (SPE) established for the purposes of financing a specific pool of assets
  • Treasury affiliates that undertake risk management activities on behalf of affiliates within corporate group

Transactions scope (in scope, out of scope, exemptions)

In-scope transactions:

Initial margin (IM) and variation margin (VM) requirements generally apply to all OTC derivative trades.

Exemptions:

Physically settled FX (spot, fx forwards and fx swaps).

Calendar if different form BCBS-IOSCO

Aligns to BCBS-IOSCO calendar

Eligible collateral

Eligible collateral would generally include the examples below. However, HSBC will continue to have its own requirements and policies with regard to the collateral it can accept from this list.

  • Cash
  • High-quality government and central bank securities
  • High-quality corporate bonds
  • High-quality covered bonds
  • Equities included in major stock indices
  • Gold
  • Collective Investments in Transferable Securities (UCITS) and mutual funds

Please click here to review the Office of the Superintendent of Financial Institutions (OSFIs) list of eligible collateral.

Any other specificity

N/A

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Europe

Europe

Entity scope (in scope, out of scope, exemptions)

In-scope entities:

  • Financial counterparties (as defined in EMIR) and non‐financial counterparties ("NFCs") above the clearing threshold (as specified in EMIR) must exchange VM and IM on a bilateral basis, subject to exemptions.

Out-of-scope entities:

  • Transactions with NFCs below the clearing threshold ("NFC-s") (note that some securitisation vehicles fall within this category)
  • Non-EU entities that would be NFC-s if established in the EU

Exemptions:

  • Sovereigns
  • Central banks
  • Multilateral development banks
  • Bank of International Settlements (BIS)
  • Issuers of covered bonds and covered pools have a specific exemption if certain conditions are met

Transactions scope (in scope, out of scope, exemptions)

In-scope transactions:

Initial margin (IM) and variation margin (VM) requirements generally apply to all OTC derivative trades

Exemptions:

  • Physically settled FX (spot, fx forwards, fx swaps, and principal of cross currency swaps) which can be IM exempted
  • Single stock options and options on equity indices are exempted for 3 years

Calendar if different from BCBS-IOSCO

Initial margin:

  • 4 February 2017 – Largest market participants
  • All other in-scope entities will align to the BCBS-IOSCO calendar

Variation margin:

  • 4 February 2017 – Largest market participants
  • 1 March 2017 – All other in-scope entities - Aligns to BCBS-IOSCO calendar. European Supervisory Authorities (ESAs) expect competent authorities to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation. Retroactive application of VM to trades entered into on and from 1 March 2017.

Eligible collateral

Eligible collateral would generally include the examples below. However, HSBC will continue to have its own requirements and policies with regard to the collateral it can accept from this list.

  • Cash
  • Gold
  • Government debt securities
  • Local government debt securities
  • Multilateral development banks' debt securities
  • Debt securities issued by credit Institutions and investment firms
  • Corporate bonds
  • The most senior tranche of a securitization that is not resecuritisation
  • Convertible bond
  • Equities
  • UCITS

Any other specificity

N/A

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Japan

Japan

Entity scope (in scope, out of scope, exemptions)

In-scope entities:

  • Type 1 Financial Instruments Business Operators ("Type 1 FIBOs") (typically securities houses licensed in Japan in Type 1 securities)
  • Banks*
  • Insurance companies*
  • Shoko Chukin Bank*
  • Development Bank of Japan*
  • Shinkin Central Bank*
  • The Norinchukin Bank*

*Limited to those which are Registered Financial Institutions ("RFIs")

Exemptions:

  • Sovereigns
  • Central banks
  • Multilateral development banks
  • Bank of International Settlements (BIS)

Transactions scope (in scope, out of scope, exemptions)

In-scope transactions:

The margin requirements generally apply to all non-centrally cleared OTC derivatives.

Exemptions:

  • Physically-settled FX forwards and swaps
  • Principal of cross currency swaps can be IM exempted
  • OTC commodity derivatives

Calendar if different form BCBS-IOSCO

Align to BCBS-IOSCO calendar

Eligible collateral

Eligible collateral would generally include the examples below. However, HSBC will continue to have its own requirements and policies with regard to the collateral it can accept from this list.

  • Cash
  • Equities included in major stock indices
  • Government and Central Bank Debt
  • Corporate Bonds
  • Investment Trust (including foreign investment trusts)

Though the Financial Services Agency of Japan (JFSA) has published final rules including eligible collateral, these rules are not provided in English.

Any other specificity

N/A

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Hong Kong

Hong Kong

Entity scope (in scope, out of scope, exemptions)

In-scope entities:

  • Financial counterparty (as per the definition under the HKMA margin SPM) belonging to a group whose month-end average aggregate notional amount of non-centrally cleared derivatives for March, April, May exceeds HKD15 billion.
  • Significant non-financial counterparties with group AANA of HKD60 billion or above.
  • For significant non-financial counterparties, if the covered counterparty has provided declaration that the derivatives transactions are predominantly for hedging, IM and VM may not need to be exchanged.

Exemptions:

  • Sovereigns
  • Central banks
  • Public sector entity
  • Multilateral development banks
  • Bank of International Settlements (BIS)
  • Counterparties located in a non-netting jurisdiction can potentially be exempted from the margin requirements provided that the authorised institutions have obtained formal legal opinion meeting the conditions required under the HKMA margin regulation.

Transactions scope (in scope, out of scope, exemptions)

In-scope transactions:

The margin requirements generally apply to all non-centrally cleared OTC derivatives.

Exemptions:

  • Physically settled FX (spot, fx forwards and fx swaps)
  • Physically settled commodity forwards
  • Equity options (single-stock, basket and index) are delayed until 2020
  • However, a covered entity may choose to agree with a counterparty to include the exempted products above

Calendar if different form BCBS-IOSCO

Initial margin:

  • 1 March 2017: Largest market participants. Entities have been provided a 6 month transitional period
  • All other in-scope entities will align to the BCBS-IOSCO calendar

Variation margin:

  • 1 March 2017: All in-scope entities. Entities have been provided a 6 month transitional period

Eligible collateral

Eligible collateral would generally include the examples below. However, HSBC will continue to have its own requirements and policies with regard to the collateral it can accept from this list.

  • Cash
  • Gold
  • High-quality government debt securities
  • High-quality Multilateral development banks' debt securities
  • High-quality Public sector entities' debt securities
  • Other high-quality marketable debt securities (excluding those securities which are issued by AIs or foreign banks)
  • Equities in major stock indices

Any other specificity

N/A

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Last updated: 6 March 2017