In response to the financial crisis, the G-20
mandated the Basel Committee on Banking
Supervision (BCBS) and Board of International
Organization of Securities Commissions (IOSCO)
to develop consistent standards for
non-centrally cleared over-the-counter (OTC)
derivatives. In September 2013 BCBS-IOSCO
published a global policy framework and
timetable for OTC derivative margin reform which
aimed to reduce systemic risk by ensuring
collateral is available to offset losses caused
by the default of a derivatives trading
counterparty.
This framework and base level requirements have
now been implemented in multiple jurisdictions
under multiple regimes (described collectively
herein as the un-cleared margin rules, “UMR”)
and require entities which enter into certain
OTC derivative transactions on an un-cleared
basis to exchange variation margin on a daily
basis and in some cases collect and post initial
margin (IM). IM is required to cover exposures
that may arise in the period from default of one
party to the time when the portfolio of OTC
derivatives is closed out or replaced. Each
party will both post and collect collateral to
meet the IM requirement and such collateral will
be subject to segregation requirements.
