APRA is consulting on changes to the implementation schedule for initial margin requirements in Australia, in line with the one-year phased extension granted by BCBS and IOSCO last month.
APRA (the Australian Prudential Regulation Authority) has issued a letter to all regulated institutions on proposed amendments to margin requirements to align with updates to the global framework.
The margin requirements were part of a series of reforms agreed by G20 countries to enhance stability and transparency in OTC derivatives markets in the aftermath of the 2018 global financial crisis.
In March 2015, the BCBS (Basel Committee on Banking Supervision) and IOSCO (International Organization of Securities Commissions) set out a differential implementation schedule for initial margin requirements according to an institution’s AANA (aggregate average notional amount) of non-centrally cleared derivatives.
Australia’s prudential standard for margining and risk mitigation for non-centrally cleared derivatives (CPS 226) came into effect from 1 March 2017. It applies to all ADIs (authorised deposit-taking institutions), general insurers, life companies and superannuation entities, particularly those that transact in material levels of non-centrally cleared derivatives.
In July 2019, the BCBS and IOSCO announced a one-year phased extension of the 5th and final phase of initial margin implementation, under which covered entities with AANA of non-centrally cleared derivatives greater than EUR 50 billion will be subject to margin requirements from 1 September 2020, and those with AANA greater than EUR 8 billion from 1 September 2021.
In line with this, APRA has commenced a consultation on revisions to CPS 226 to extend the implementation timeline for margin requirements an additional year, whereby firms with AANA over AUD 75 billion will have to comply from 1 September 2020, and those with AANA over AUD 12 billion by September 2021.
APRA also proposes to clarify that covered entities are not required to have initial margin documentation, custodial arrangements and operational processes in place for posting and collecting initial margin in cases where the bilateral initial margin amount for a particular trading relationship is less than the AUD 75 million initial margin threshold, in line with BCBS-IOSCO’s March announcement.
However, APRA would expect covered entities to act diligently to monitor their exposures and ensure they have the required arrangements in place as they approach the threshold, the letter says.
APRA is also proposing to amend the list of foreign bodies whose margin requirements are approved for substituted compliance to include UK regulators, to ensure a smooth transition and greater certainty in the event of Brexit.
The draft revisions to CPS 226 – set out in the appendix of APRA’s letter – are open for comment for two weeks, i.e. until 28 August.