OSFI Updates Guideline on Margin Requirements for Derivatives
OSFI updated the Guideline E-22, which establishes minimum standards for margin requirements for non-centrally cleared derivative transactions undertaken by the federally regulated financial institutions. The updates relate to the amendments to legacy derivative contracts for addressing the interest rate benchmark reforms and to the documentation, custodial, and operational arrangements related to the exchange of initial margin between covered entities. The initial margin requirements will be phased-in to smaller counterparties by September 2020.
The guideline, which is based on the BCBS-IOSCO framework, was initially finalized in February 2016 and became effective in June 2017. Under the guideline, most covered federally regulated financial institutions that meet the definition of a covered entity have been subject to the mandatory exchange of variation margin from March 01, 2017. The guideline also requires the covered financial institutions to exchange initial margin. The exchange of initial margin began in September 2016 for the largest derivatives counterparties and is being gradually phased-in to smaller counterparties until September 2020. The updates to the guideline relate to the following:
- Amendments to legacy derivative contracts, pursued solely for addressing interest rate benchmark reforms, are deemed genuine amendments under footnote 17 of Guideline E-22. As such, these amendments would not require the application of the margin requirements for legacy derivative contracts under Guideline E-22.
- Documentation, custodial, and operational arrangements related to the exchange of initial margin between covered entities are not required to be entered into until the amount of initial margin to be exchanged approaches the CAD 75 million threshold, which is noted in Guideline E-22.
The updates are in support of the BCBS and IOSCO statement that was issued in March 2019. BCBS and IOSCO said that the amendments to legacy derivative contracts pursued solely for the purpose of addressing interest rate benchmark reforms do not require the application of the margin requirements for the purposes of the BCBS-IOSCO framework, although the position may be different under relevant implementing laws. BCBS and IOSCO also noted that the framework does not specify documentation, custodial, or operational requirements if the bilateral initial margin amount does not exceed the framework's EUR 50 million initial margin threshold. The guideline is applicable to banks, foreign bank branches, bank holding companies, trust and loan companies, life insurance companies, property and casualty insurance companies, and insurance holding companies.
Related Links
Keywords: Americas, Canada, Banking, Securities, Insurance, Margin Requirements, Guideline E-22, Non-Centrally Cleared Derivatives, OTC Derivatives, Interest Rate Benchmarks, Initial Margin, OSFI
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Related Articles
PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA Finalizes Standards on Methods of Prudential Consolidation
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA Updates List of Other Systemically Important Institutions in EU
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities Welcome FSB Review of their Remuneration Regime
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC Delegated Regulation on Specialized Lending Exposures Under CRR
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI Proposes to Enhance Assurance Expectations for Basel Returns
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.
