Financial Supervisory Service Extends Guidelines for Margin Exchange for Non-Cleared OTC Derivatives Transactions

121 companies applying initial margin, 164 companies applying variable margin

Administrative guidance from March 2017

ⓒYonhap News

The guidelines for the non-cleared OTC derivatives trading margin exchange system are being extended.

The Financial Supervisory Service announced on the 25th that “135 companies applying the initial margin and 163 companies applying the variation margin will be subject to the margin exchange system for non-cleared over-the-counter derivatives transactions for one year starting in September of this year.”

The margin exchange system refers to the exchange of margin between the trading parties in advance for over-the-counter derivatives transactions that are not cleared through a central clearing house (CCP). Margin is divided into initial and variation margin. Initial margin refers to the collateral exchanged at the time of the transaction to manage the risk of future default of the counterparty, and variation margin refers to the collateral exchanged to manage daily exposure (risk exposure amount).

In order to systematically manage systemic risks arising from over-the-counter derivatives transactions, the ‘Non-cleared OTC Derivatives Transaction Margin Exchange System Guidelines’ were implemented in March 2017.

The margin exchange system is applicable to all over-the-counter derivatives transactions that are not cleared at the central clearing house. However, it is not applicable to foreign exchange forward swaps, currency swaps (CRS), and commodity forward transactions that are settled in real money. It is scheduled to be applied for one year from the 1st of the following month to financial institutions whose average notional balance of non-cleared over-the-counter derivatives transactions at the end of March, April, and May each year exceeds the standard amount.

General companies that are not financial institutions, central banks, public institutions, or international organizations such as the Bank for International Settlements (BIS) are excluded from the application. Asset management companies are subject to the guidelines, but the guidelines do not apply to trust accounts of collective investment organizations, banks, etc., or professional card companies.

The number of financial companies subject to the initial margin requirement for one year from the 1st of next month has increased by 14 from the previous year to a total of 135 companies, of which 111 are financial companies belonging to financial groups. The guidelines will be newly applied to a total of 17 companies, including DGB Financial Group, and three existing companies will be excluded.

The number of financial companies subject to the variable margin requirement has decreased by one from 164 companies in the previous year to a total of 163 companies, of which 129 are financial companies belonging to financial groups.

A Financial Supervisory Service official said, “We will continuously monitor the status of compliance with the margin exchange for non-cleared over-the-counter derivatives transactions,” and “We will actively support financial institutions’ compliance with the margin system by collecting any difficulties they may have with regard to compliance with the margin system.”

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