APRA published a frequently asked question (FAQ) providing guidance to all APRA-regulated entities in determining their requirements under the prudential standard CPS 226 on margins and risk mitigation for non-centrally cleared derivatives. The FAQ addresses the treatment of the Minimum Transfer Amount limit where the base currency is foreign-denominated. CPS 226 requires an APRA covered entity to have appropriate margining practices in relation to non-centrally cleared derivatives. An APRA covered entity must exchange variation margin and post and collect initial margin with a covered counterparty, subject to certain criteria.
The guidance states that, for both new and existing Credit Support Annexes (CSAs) where the collateral agreement base currency is not in AUD, APRA expects entities to incorporate a prudent buffer for foreign-exchange volatility movements when negotiating the CSA with a given counterparty. However, it may be the case that due to foreign exchange movements, the combined variation margin and initial margin minimum transfer amount exceeds the AUD 750,000 MTA limit despite being below this limit at inception of the CSA agreement. APRA is aware of the operational difficulties to frequently monitor balances as well as the time required to renegotiate CSAs. Notwithstanding this, the expectation is that APRA-covered entities have a regular review process to ensure that, in the situation described above where the AUD-equivalent MTA amount exceeds the prudential limit, amendments are made to the CSA to return under the AUD 750,000 MTA limit with priority to be given to those whose combined variation and initial margin minimum transfer amount are notably greater than the AUD 750,000 limit and have remained so for some time. During the review process, consideration should be given to the following:
- Expected volatility and direction of foreign-exchange rates;
- Difference between the MTA and the AUD 750,000 MTA limit and the duration of the excess
- Nature and level of trading activity undertaken with the counterparty
Keywords: Asia Pacific, Australia, Banking, Securities, CPS 226, Initial Margin, Derivatives, FAQ, Minimum Transfer Amount, APRA
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