C18/04: Treatment of regulatory capital - risk margin placed with licenced exchanges

2004- 12- 10
TO ALL BANKS, BRANCHES OF FOREIGN BANKS AND MUTUAL BANKS BANKS ACT CIRCULAR 18/2004 TREATMENT OF REGULATORY CAPITAL - RISK MARGIN PLACED WITH LICENCED EXCHANGES

1. INTRODUCTION
   The pur pose of r i sk mar gi n i s t o pr ot ect t he member s of an exchange f r om mar ket f l uct uat i ons when t hey t r ade i n f ut ur es and opt i ons on an exchange. Each i nst r ument has a pr ecal cul at ed i ni t i al mar gi n, whi ch i s pr ef unded, and a var i at i on mar gi n whi ch i s pai d or r ecei ved on a dai l y basi s, dependi ng on t he pr i ce f l uct uat i on of t he under l yi ng der i vat i ve i nst r ument . Initial margin means t he amount of money det er mi ned by a cl ear i ng house on t he basi s speci f i ed by t he par t i cul ar exchange and hel d i n r espect of t he aggr egat e posi t i on of a der i vat i ve member or a cl i ent . Variation margin means t he amount pai d t o or by a der i vat i ve member or cl i ent i n whose name a posi t i on i n an exchange cont r act i s r egi st er ed as a r esul t of t he mar ki ng t o mar ket of a posi t i on, as def i ned i n t he cl ear i ng house r ul es or t he cl osi ng out of a posi t i on or par t t her eof .
2. CURRENT TREATMENT
   The DI 400 r et ur n ( Capi t al Adequacy) pr escr i bes t hat al l r i sk mar gi n pl aced wi t h ei t her a f or mal or an over - t he- count er ( “OTC”) exchange be i mpai r ed agai nst capi t al . The pur pose of t hi s r equi r ement i s t o compl y wi t h t he r equi r ement s set by t he Basel Commi t t ee on Banki ng Super vi si on ( “Basel Commi t t ee”) i nsof ar t hat so- cal l ed doubl e- gear i ng of capi t al shoul d not r esul t , as t hi s woul d i ncr ease syst emi c r i sk wi t hi n a banki ng syst em. The Basel Commi t t ee, however , has agr eed

2 t hat i ndi vi dual super vi sor y aut hor i t i es have t he di scr et i on t o appl y ei t her an i mpai r ment , or a r i sk wei ght i ng of 100 per cent on such hol di ngs.
3. PROPOSED TREATEMENT
Af t er due consi der at i on of t he above mat t er , t hi s Of f i ce wi shes t o advi se t hat t he f ut ur e t r eat ment of r i sk mar gi n as i t per t ai ns t o capi t al adequacy pur poses wi l l be as f ol l ows:
3. 1 Ri sk mar gi n i n r espect of exchange t r aded t r ansact i ons ar e t o be
r epor t ed under l i ne i t em 84 ( Ot her asset s) i n t he DI 100 r et ur n ( Bal ance Sheet ) and r i sk wei ght ed at 100 per cent ; and
3. 2 r i sk mar gi n i n r espect of OTC t r aded t r ansact i ons ar e t o be
r epor t ed under l i ne i t em 72 ( Ri sk- mar gi n r equi r ement s of any f or mal or OTC mar ket ) of t he DI 400 r et ur n and t her ef or e impai r ed agai nst capi t al .
4. ACKNOWLEDGEMENT OF RECEIPT
Two addi t i onal copi es of t hi s ci r cul ar ar e encl osed f or t he use of your i nst i t ut i on' s i ndependent audi t or s. The at t ached acknowl edgement of r ecei pt , dul y compl et ed and si gned by bot h t he chi ef execut i ve of f i cer of t he i nst i t ut i on and t he sai d audi t or s, shoul d be r et ur ned t o t hi s Of f i ce at t he ear l i est conveni ence of t he af or ement i oned si gnat or i es. E M Kruger Registrar of Banks The pr evi ous ci r cul ar i ssued was Banks Act Ci r cul ar 17/ 2004 dat ed 29 Oct ober 2004.