One of the main pillars of the G20 reform agenda for OTC derivatives is the obligation to exchange margin for centrally cleared derivatives. The Basel Committee on Banking Supervision (BCBS) and the International Organization of Financial Market Supervisors (IOSCO) have been tasked with publishing a policy framework that recommends minimum standards for margin requirements to ensure a globally consistent approach. Variation Margin (VM) (or Mark To Market Margin) is an essential part of the derivatives market. This is the additional money that a clearing house member must pay to the clearing house to meet the minimum margin requirement. The United States General Accounting Office`s report on the hedge fund Long-Term Capital Management found that traders provided the fund with “favorable credit terms” for its derivatives transactions, including the absence of an initial margin. The Basel Committee on Banking Supervision indicated earlier this year that banks now require a higher initial margin for highly debt-financed institutions. While you may have already entered into a margin exchange agreement, it is unlikely that the existing document will meet the new regulatory requirements. For example, the new requirements define the eligible guarantees, the necessary reductions, the thresholds and minimum acceptable transfer amounts and the frequency with which assessment and margin calls are required, all of which may differ from existing conditions. The questionnaire contains a series of elections to be held. Only by “cross-checking” certain elections will the Margin documentation be effective in the VM protocol.
A clearing house is an intermediary entity that ensures that both parties to a transaction, namely: the buyer and the seller who fulfil the obligations of a contract. A clearing house can act as a third party for futures and options contracts and perform various functions, for example. B trade clearing, payment of trade accounts, reporting of trade data, margin fundraising and regulation of the supply of newly acquired instruments. The variation margin is used to bring the capital on an account back to the margin level. This margin, as well as the associated initial and maintenance margin, must be supported by liquidity that allows it to serve as a guarantee against losses resulting from ongoing trades. Institutions that have an existing credit support annex that they wish to continue to use (and adapt) to the margin regulatory requirements should check whether the changes to the VM protocol work for these existing documents. Where existing documents contain tailor-made provisions incompatible with the VM protocol, they should consider the use of a bilateral agreement. The maintenance margin is an important factor to take into account when calculating the variation margin.
This is the amount of money an investor must hold in their Margin account when trading shares. It is usually lower than the initial margin needed for trades. This requirement gives the investor the opportunity to borrow from a broker. This margin serves as a guarantee against the amount borrowed by the investor. The Securities and Exchange Commission (SEC) has proposed, but has not yet finalized, margin rules for non-bank swap transactions. Since clearing houses are guarantors of all futures contracts, margin requirements help reduce this risk. . . .