This chapter sets out baseline requirements and methodologies for initial and variation margin, including eligible collateral. Banks may use standardised approaches to calculate margin requirements or, subject to supervisory approval, internal models.

Version effective as of 15 Dec 2019

First version in the format of the consolidated framework.

Introduction

20.1 Margin requirements for non-centrally cleared derivatives have two main benefits:

(1) Reduction of systemic risk: only standardised derivatives are suitable for central clearing. A substantial fraction of derivatives are not standardised and cannot be centrally cleared. These non-centrally cleared derivatives, totalling hundreds of trillions of dollars in notional amounts, pose the same type of systemic contagion and spillover risks that materialised in the recent financial crisis. Margin requirements for non-centrally cleared derivatives would be expected to reduce contagion and spillover effects by ensuring that collateral is available to offset losses caused by the default of a derivatives counterparty. Margin requirements can also have broader macroprudential benefits, by reducing the financial system’s vulnerability to potentially destabilising procyclicality and limiting the build-up of uncollateralised exposures within the financial system.