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    APRA Revises Standard on Margin Rules for Uncleared Derivatives

    September 19, 2019

    APRA revised CPS 226, which is the prudential standard on margin and risk mitigation requirements for non-centrally cleared derivatives. Both final and marked up versions of the standard have been published. APRA also published a response to the submissions received on the proposed amendments to margin requirements in CPS 226. The proposed changes will apply to all authorized deposit-taking institutions, general insurers, life insurers, and registrable superannuation entity licensees. The final revised version of CPS 226 will take effect on registration of CPS 226 in the Federal Register of Legislation.

    APRA had received eight submissions in response to the consultation. All respondents supported the proposals, with a few respondents requesting clarity or additional guidance. APRA is proceeding with its proposal to amend CPS 226 to:

    • Delay the final implementation phase for initial margin requirements by one year from September 01, 2020 to September 01, 2021 and, in doing so, increase the qualifying level of aggregate average notional amount (AANA) of non-centrally cleared derivatives applicable from September 01, 2020 from AUD 12 billion to AUD 75 billion
    • Defer, to September 01, 2021, the application of margin requirements to APRA-covered entities with an AANA of non-centrally cleared derivatives greater than AUD 12 billion 
    • 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

    APRA confirms that it intends to amend the list of foreign bodies whose margin requirements are approved for substituted compliance with the margin requirements in CPS 226 to include the UK’s PRA and FCA, provided that the margin requirements of PRA and FCA are substantively unchanged following the withdrawal of UK from EU. This change will occur expeditiously following Brexit or once the rules are in place. One respondent requested that the U.S. SEC also be included on the list of foreign bodies. APRA will assess whether the margin requirements of U.S. SEC should be recognized for substituted compliance. APRA also updated the date of the BCBS-IOSCO framework in paragraph 9(c) of CPS 226 and has removed the out-of-date requirements.

    Additionally, APRA had proposed to specify that amending contracts for existing derivative transactions solely for addressing interest rate benchmark reforms, such as the LIBOR reforms, would be a genuine amendment that does not qualify as a new derivative transaction and is, therefore, not subject to the margin requirements. Two respondents sought additional clarification on the interpretation of genuine amendment, including for auctions, close-outs and replacements, and that it incorporates all genuine processes, changes, and updates that occur in the process of benchmark transition and over the transaction life cycle. The APRA clarification of genuine amendments is not intended to be exhaustive but rather sets out the broad principles for what could be considered a genuine amendment to an existing derivative transaction. APRA has broadened the scope to any amendments made solely to address benchmark reforms, rather than just interest rate benchmark reforms. To provide further clarity to market participants, APRA has added that the application of standard trade maintenance processes on a grandfathered transaction does not qualify as a new derivative transaction. This would include entering into protocols to amend trades to reference updated ISDA definitions.


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

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