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Final phase-in of risk-reducing margin rules for OTC derivatives begins

Global financial watchdogs released guidance for market participants who need to alter their derivative contracts as a result of interest rate benchmark reforms and for entities that will be subject to margin requirements for over-the-counter derivatives in 2019.

The Basel Committee for Banking Supervision and the International Organization of Securities Commissions said March 5 the guidance was intended to ensure the "timely and smooth" implementation of their framework for margin requirements for non-centrally cleared derivatives.

The final stage of the framework's implementation is scheduled for Sept. 1, 2020, and starting in 2019, for the first time since implementation began, a large number of entities will have to arrange documentation, custodial and operational requirements if their initial margin amount is greater than the €50 million threshold envisaged in the framework. If the bilateral initial margin amount is lower, the framework does not enforce the aforementioned requirements.

The bodies said market participants that need to revise legacy derivative contracts just to address interest rate benchmark reforms are not required to apply the framework's margin requirements unless relevant implementation laws say otherwise.

The framework, initiated by the G20 to supplement its 2009 over-the-counter derivatives reform program, was established in 2015 and implementation of it began in September 2016. Its main aim is to levy initial and variable margin requirements on all derivatives transactions that are not cleared by central counterparties.

The measures aim to reduce systemic risk by securing non-standardized derivatives, which generally carry higher risk, with appropriate collateral and to promote central clearing to bolster the effectiveness and consistency of margin requirements across jurisdictions. As such, the framework obligates regulatory regimes to interact and develop "consistent, non-duplicative" regulation.