March 18, 2019

HKMA announced updates to the Supervisory Policy Manual (SPM) module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions. The SPM module CR-G-14 outlines the HKMA approach for determining the comparability of a jurisdiction’s margin and risk mitigation standards with the provisions set out in the module. The updates relate to the comparability of the UK standards after Brexit and to the recent statement published by BCBS and IOSCO on the final implementation phases of the margin requirements.

Comparability of the UK standards after Brexit

Under the substituted compliance treatment in the module, the margin and risk mitigation standards of the Working Group on Margin Requirements (WGMR) member jurisdictions are deemed to be comparable from the day the respective standards have entered into force in those jurisdictions. Footnote 24 of SPM module CR-G-14 lists the jurisdictions deemed comparable by referring to EU and all non-EU WGMR member jurisdictions. This wording would currently not cover the UK after its planned withdrawal from EU. It is, however, the intention of HKMA to maintain UK’s status as a deemed-comparable jurisdiction in the context of SPM module CR-G-14, independent of its EU membership status. Footnote 24 would, therefore, be revised to specifically cover UK once it withdraws from EU.

Clarifications on the final implementation phases for margin requirements

BCBS and IOSCO issued a joint statement on March 05, 2019, providing two clarifications with respect to the their framework for margin requirements for non-centrally cleared derivatives. Regarding the remaining phases of implementation of the framework in 2019 and 2020, initial margin requirements will apply to a large number of entities for the first time, potentially involving documentation and custodial and operational arrangements. BCBS and IOSCO clarify 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 above clarifications provided by BCBS and IOSCO are applicable in the context of SPM module CR-G-14. Genuine amendments to the existing derivatives contracts that are made to give effect to interest rate benchmark reforms will not be considered new contracts from the perspective of the HKMA margin requirements. In addition, SPM module CR-G-14 does not specify a requirement for initial margin documentation and custodial or other related operational arrangements that must be in place before a covered entity crosses the HKD 375 million initial margin threshold. Covered entities should, however, take necessary steps to prepare the documentation and other related arrangements well enough in advance to be in a position to exchange initial margin when the threshold is exceeded and to protect exchanged initial margin with proper custodial arrangements. HKMA, in coordination with other BCBS and IOSCO members, will continue to monitor the effect of meeting the final stage of phase-in of the margin requirements.

 

Keywords: Asia Pacific, Europe, EU, UK, Hong Kong, Banking, Securities, SPM Module CR-G-14, Brexit, Margin Requirements, Interest Rate Risk, OTC Derivatives, HKMA

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