APRA Consults on Final Phase Margin Rules for Uncleared Derivatives

BCBS and IOSCO have approved a one-year extension to the final implementation of margin requirements from September 01, 2020 to September 01, 2021.BCBS and IOSCO have also adjusted the phase-in schedule requiring covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than EUR 50 billion to be subject to margin requirements from September 01, 2020. APRA supports this extension and proposes to delay the final implementation phase by one year from September 01, 2020 to September 01, 2021. APRA also proposes to increase the qualifying level of AANA of non-centrally cleared derivatives applicable from September 01, 2020 from AUD 12 billion to AUD 75 billion and to defer the application of margin requirements to APRA covered entities with an AANA of non-centrally cleared derivatives greater than AUD 12 billion to September 01, 2021. This amount has been determined using the exchange rate used to convert EUR amounts in CPS 226.

APRA is also proposing other amendments in response to the clarifications made by BCBS and IOSCO and is adding the UK’s PRA and FCA to the list of foreign bodies eligible for substituted compliance with the margin requirements in CPS 226, following Brexit. APRA has previously confirmed that the margin requirements of EC are equivalent to the margin requirements of APRA and substituted compliance is permitted under CPS 226. To ensure a smooth transition and greater certainty in the event of Brexit, APRA will amend the list of foreign bodies whose margin requirements are approved for substituted compliance with the margin requirements in CPS 226 to include the PRA and FCA, the entities that are are jointly responsible for margin requirements in UK, provided that the margin requirements of PRA and FCA are substantively unchanged following the withdrawal  of UK from EU.

BCBS and IOSCO issued a joint statement in March 201 to clarify that the documentation, custodial, and operational requirements for initial margin do not apply in cases where the initial margin is less than EUR 50 million. Following this clarification by BCBS and IOSCO, APRA proposes to clarify that an APRA covered entity is not required to have initial margin documentation, custodial arrangements, and operational processes in place for posting and collecting initial margin in cases where the bilateral initial margin amount for a trading relationship is less than the AUD 75 million initial margin threshold. However, APRA would expect APRA covered entities to act diligently to monitor their exposures and ensure they have initial margin documentation, custodial arrangements, and operational processes in place for posting and collecting initial margin as their exposures approach the threshold. APRA also proposes to amend a footnote that provides the meaning of "new" non-centrally cleared derivatives transactions. Finally, APRA proposes to add that amending contracts for existing derivative transactions solely for the purpose of addressing interest rate benchmark reforms, such as the LIBOR reforms, would not qualify as new derivative transactions and are, therefore, not subject to margin requirements. This amendment is consistent with the BCBS and IOSCO public statement in March 2019.

Related Link: Consultation Letter (PDF)

Comment Due Date: August 28, 2019

Keywords: Asia Pacific, Australia, Banking, Insurance, Pensions, Superannuation, EU, UK, CPS 226, Margin Requirements, Equivalence Regime, AANA, OTC Derivatives, Initial Margin, APRA