June 2014

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When new recommendations on non-cleared derivatives were finalized by the Basel Committee and IOSCO in September 2013, it was the next step in years of efforts on how to protect the financial system from the systemic risk coming from bilaterally traded derivatives. As these recommendations now start to become rules in various jurisdictions, financial market participants must evaluate how to best implement them.

This report focuses on strategies and preparations for risk-based margining and collateral management in the non-cleared derivatives arena. Initial Margin (IM) in particular will change meaningfully as regulators shift to a “defaulter pays” model. The credit exposure that was embedded in bilateral derivatives, and especially those historically without IM requirements, will require a new operationalization of more risk-sensitive collateral management. Variation Margin (VM) siloing by asset class and its inherent complications should also be considered. Banks and investors need to understand what the changes are, if and when those changes impact them, and what choices they need to make as a result.

This report provides a robust overview of the Basel Committee on Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO) recommendations on non-cleared derivatives margining, and strategies for mitigating the regulatory burden. The intended audience is operations, technology and risk professionals at financial institutions that will be affected by the rules their national regulators put into place, following the BCBS/IOSCO standards. The paper concludes with a checklist of important questions to ask as managers start to prepare for new market-wide practices in non-cleared derivatives margining.

This report is 24 pages with 4 exhibits.

This report is available at no charge courtesy of Murex.


■ Executive Summary

■ The New Rules for Non-Cleared Derivatives
– Regulations, Exemptions and Distortions

■ Thresholds and Phase-In Periods

■ Initial Margin Models
– Exposure Netting Sets and Dual Margining
– Internal Model Calibration
– The Standardized Margin Model
– Collateral Haircuts

■ Mitigating the Regulatory Burden
– The End of Collateral Rehypothecation?
– Broader Collateral Eligibility
– FX Risk

■ A Checklist for Non-Cleared Derivatives Risk Management

■ About the Author

■ About Finadium

■ About Murex


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