HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions. The module sets out minimum standards that HKMA expects authorized institutions to adopt in relation to margin and other risk mitigation techniques for non-centrally cleared OTC derivatives transactions. The consultation is open until June 25, 2020.
Margin standards for non-centrally cleared OTC derivatives are designed to reduce counterparty credit risk and limit contagion by ensuring that collateral is available to offset losses following the default of a derivatives counterparty. Exchanging margin also helps to internalize the cost of risk-taking, thus creating an incentive for counterparties not to take on excessive risk when entering into derivatives transactions. On an aggregate level, margin requirements help to reduce contagion and spillover effects when a major market participant defaults, thus reducing systemic risk. The risk mitigation standards for non-centrally cleared OTC derivatives encourage the adoption of sound risk mitigation techniques to promote legal certainty over the terms of non-centrally cleared OTC derivatives transactions, to foster effective management of counterparty credit risk and to facilitate timely resolution of disputes.
Comment Due Date: June 25, 2020
Keywords: Asia Pacific, Hong Kong, Banking, Securities, Supervisory Policy Manual, OTC Derivatives, Counterparty Credit Risk, Variation Margin, Initial Margin, HKMA
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