Financial Market Regulation BCBS / IOSCO Initial Margin Regulations

Last update: 19 May 2022

In response to the 2007-2008 financial crisis, the G20 mandated the Basel Committee on Banking Supervision (BCBS) and Board of International Organization of Securities Commissions (IOSCO) to develop consistent global 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 counterparty.

A key element to this is the requirement that financial firms and systemically important non-financial entities exchange both Variation Margin (VM) and Initial Margin (IM) to mitigate counterparty credit risk from uncleared OTC transactions. VM ensures that the current value of a derivative is collateralised and was already a standard feature of the OTC market. IM is designed to ensure there is a margin "buffer" to protect against potential losses following a change in value of a derivative position occurring between a counterparty closing out a position upon default of its counterparty and the last exchange of Variation Margin.

Since the release of the final policy framework these global standards have been leveraged by various jurisdictional regulators across the globe to develop their own local rules. Uncleared Margin Rules (UMR) have been finalised and are being enforced by the following regulators:

Implementation Timeline

IM and VM thresholds are being phased in at different times and are specific to each regulatory jurisdiction. Whether and when a particular counterparty is under a regulatory obligation to exchange IM will depend on:

1. Whether it is the type of entity which is subject to IM requirements under a particular regime (an Obligated Entity¹);
2. The volume of its Group’s¹ non-cleared Over-The-Counter (OTC) derivatives business, commonly referred to as the Aggregate Average Notional Amount (AANA); and
3. Who it is trading with

You should note that even if your entity is not directly subject to any IM regime you may still be impacted by the IM rules (an Impacted Entity) and effectively required to exchange IM if you trade with an Obligated Entity. This is because such an Obligated Entity would have a regulatory obligation to collect IM from you in manner consistent with the regimes to which it is subject.²

Each regulator has different rules for determining who is an Obligated Entity and has defined its own compliance dates and AANA threshold values, along with a methodology for calculating the AANA. For additional information on UMR AANA Calculation Periods for Wave 6: ISDA AANA Calculation Periods and Compliance Dates for Non-Cleared Margin Requirements.

For further information on the BCBS IOSCO Uncleared Margin Rules and how they may affect you, please get in touch with your Credit Suisse sales coverage person or email Uncleared.Derivatives@Credit-Suisse.com.

^1. Please see full definitions in the ‘What you need to consider’ section
^2. For example, from an EU margin rules perspective a hedge fund established in the EU or managed by an authorised or registered EU fund manager would be an Obligated Entity. A non-EU hedge fund, however, would only be an Impacted Entity and its requirement to exchange IM would be contingent on facing an EU Obligated Entity

What is an "Obligated Entity" and what is a "Group"?

Whether a counterparty is an Obligated Entity and therefore potentially subject to the requirement to exchange IM varies by jurisdiction:

^1. Note that a Financial End User (FEU) is only subject to the US rules when its counterparty is a Covered Swap Entity, and not subject if trading with another FEU

The "Group" definition varies by jurisdiction. Broadly speaking it is the Ultimate Parent of the Covered Entity together with such parent’s subsidiaries (i.e. all entities consolidated in the same set of financial statements), however there are specific jurisdictional definitions and nuances that must be observed, particularly with regards to specific entity types, for example funds. You should consult the specific regulatory text for further details.

When is Credit Suisse an 'Obligated Entity'?

The below table highlights under which regimes Credit Suisse entities can be considered Obligated Entities and directly required to exchange IM when facing an in-scope counterparty.

^1. Credit Suisse International and Credit Suisse Securities (Europe) Ltd’s US rule obligations only apply when facing a counterparty that brings a US nexus into the relationship. We consider a US nexus to be either (i) incorporated within the US; (ii) one or more “offices” located in the US specified on the ISDA Master Agreement between us; (iii) a Foreign Consolidated Subsidiary of a US-organised parent; and (iv) our counterparty’s trades benefit from a guarantee from a US entity. It should also be noted that US CFTC rules include a “principal place of business” test that may trigger a US nexus, but this test does not apply to the US PR rules.
^2. Credit Suisse AG's branches rely on substituted compliance and apply the European rules in order to discharge their regulatory obligations under FINMA rules and their respective regulators under the MAS, HKMA, OSFI and APRA margin regimes. Credit Suisse AG Tokyo Branch is a registered RFI but is not yet a “Covered Entity” as it does not meet the de minimis branch trading threshold. However, should it meet that threshold in the future, Tokyo Branch will be considered a “Covered Entity” and will be obliged to exchange IM in accordance with the JFSA margin rules.
^3. Credit Suisse AG’s Seoul branch became obligated to exchange IM with on-shore Korean Financial Companies Covered Counterparties from September 2021. Under the Korean margin rules, substituted compliance is not available when Credit Suisse AG Seoul branch is trading with a Korean Financial Company (excluding a Korean branch of an offshore Financial Company).
^4. Credit Suisse Securities (USA) LLC is not directly obligated to exchange IM under any of the published rules. However, note that it is considered a ‘Covered Counterparty’ under all regimes and will therefore be required to comply in order to facilitate a counterparty’s discharging of their own regulatory obligations.

What transactions are in scope for IM

Generally, all non-centrally cleared OTC derivatives are subject to the exchange of IM between in-scope parties, with the exception of FX spot, deliverable FX forwards and deliverable FX swap transactions, which are universally exempt from IM across all jurisdictional rulesets. In addition, most regimes (including US, EU, UK, Swiss, HK, AU and KOR) also exclude equity options although these may come into scope on a grandfathered basis at a later date.

For more information, please go to ISDA Derivatives Subject to Non-Cleared Margin Rules (Initial and Variation Margin).

For further information on the BCBS IOSCO Uncleared Margin Rules and how they may affect you, please get in touch with your Credit Suisse sales coverage person or email Uncleared.Derivatives@Credit-Suisse.com

The margin obligations vary between jurisdictions but broadly, there are key requirements which are generally consistent across all regulations. These include:

For further information on the BCBS IOSCO Uncleared Margin Rules and how they may affect you, please get in touch with your Credit Suisse sales coverage person or email Uncleared.Derivatives@Credit-Suisse.com.

BCBS / IOSCO released a statement on March 5, 2019, outlining further regulatory guidance regarding IM thresholds and Threshold Monitoring (click here for details). Credit Suisse will be reaching out to all counterparties we believe to be in scope for Threshold Monitoring with more details in due course for Wave 6. If you have any questions concerning Threshold Monitoring or the key steps required to achieve compliance, please contact our client outreach team: Uncleared.Derivatives@credit-suisse.com.

Key highlights of the Threshold Monitoring process:

• ISDA Regulatory Initial Margin AANA Self-Disclosure (SDL) Letter: Full population of the ISDA Regulatory Initial Margin AANA SDL Answer Sheet (click here for details) is a prerequisite in our ability to provide this service. In the event the ISDA SDL is not returned before the regulatory compliance date, this will likely result in an inability to continue trading non-centrally cleared OTC derivatives with Credit Suisse.
• One-way monitoring: We do not expect to perform any reconciliations and/or send daily Initial Margin numbers to counterparties. If a counterparty requests to view the Initial Margin for Threshold Monitoring on a daily basis then this could be made available via AcadiaSoft.
• Frequency: Threshold Monitoring will be performed by Credit Suisse on a daily basis.
• Aggregation Methodology: Credit Suisse will leverage the information obtained from the ISDA Regulatory Initial Margin AANA SDL in order to aggregate the IM from the Legal Entity level (LEI) to the Ultimate Parent Entity level for the Margin Group (the group of entities required to aggregate their AANA under each applicable regime). IM will be compared on both the Call and Post side to the Threshold Amount and Currency applied at the Ultimate Parent Entity level.
• Threshold Amount and Currency: The Threshold Amount and Currency will differ depending on the applicable Regime. Where multiple Regimes apply to the Ultimate Parent Entity, we will apply the stricter regulatory Threshold Amount and Currency. This is determined by conversion to a common currency using daily prevailing Foreign Exchange rates.
• Monitoring and Communication: Credit Suisse will monitor our respective IM exposures and communicate with you if we believe you fall within the below categories:
  • Papering: Where Credit Suisse has established that the IM exposure is significant enough, we will seek to begin papering of Initial Margin documentation. We will aim to do this in good time to mitigate the risk of an internal limit breach.
  • Internal Limit Breach: Credit Suisse will establish its own internal haircut to the Threshold Amount and Currency at Ultimate Parent Entity level. Where we establish that the IM has breached our internal limit, it is likely that no further trading of non-centrally cleared IM OTC derivative products will be permitted until papering of IM documents has completed. Credit Suisse will endeavour to work with you in good faith to identify any exceptions to this.

Credit Suisse will be reaching out to all counterparties we believe to be in scope for Threshold Monitoring with more details in due course. If you have any questions concerning Threshold Monitoring or the key steps required to achieve compliance, please contact our client outreach team: Uncleared.Derivatives@credit-suisse.com.

For further information on the BCBS IOSCO Uncleared Margin Rules and how they may affect you, please get in touch with your Credit Suisse sales coverage person or email Uncleared.Derivatives@Credit-Suisse.com.

Other Useful Links

• International Swaps and Derivatives Association (isda.org)
• Bank for International Settlements (bis.org)
• OICV-IOSCO - Iosco.org

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