We present review of margining as Credit Counterparty Risk mitigation tool in OTC derivative trading based on International Swap and Derivative Association standards. Practical part of paper contain demonstration of impact of margining thresholds, amounts and timing parameters on portfolio exposure.
On September 2nd, the Basel Committee and IOSCO released the final framework for margin requirements for non-centrally cleared derivatives.
According to the document, non-centrally cleared derivative trades will be subject to initial and variation margin, in order to mitigate the inherent counterparty risk. The framework has been designed to reduce systemic risks related to over-the-counter (OTC) derivatives markets, as well as to provide firms with appropriate incentives for central clearing while managing the overall liquidity impact of the requirements.
Compared with the near-final framework proposed earlier this year, the final document exempts some deal types from initial margin requirements (such as physically settled FX forwards and swaps). Also, it permits “one-time” re-hypothecation of initial margin collateral among the features to mitigate the liquidity impact associated with the requirements.
The implementation will be spanned over a four-year period, with a first milestone on 1st December 2015.
Full text of the document is available at http://www.bis.org/publ/bcbs261.pdf