Joint Standard on Margin Requirements for Non-Centrally Cleared OTC Derivatives

Ref.: 15/8
Statement of the need for, expected impact and intended operation of a regulatory instrument* Joint Standard on margin requirements for non-centrally cleared over-thecounter (OTC) derivative transactions April 2019 *This statement is drafted in fulfilment of the requirements under section 98(1)(ii) and (iii) of the Financial Sector Regulation Act, 9 of 2017
Table of Contents

Introduction.................................................................................................................... 2
Objectives of BCBS-IOSCO margin requirements......................................................... 2
Statement of the need ― context and definition of policy problem ................................. 2
Analysis of the OTC derivative market ........................................................................... 4
Approach taken by the Authorities on Joint Standard.................................................... 6
Statement of expected impact ― Costs and benefits of the Joint Standard.................... 7
Consultation................................................................................................................. 15
Statement of intended operation ― Implementation and evaluation............................. 17
Conclusion................................................................................................................... 17
Introduction
1.1 Section 98 of the Financial Sector Regulation Act, 2017 (Act 9 of 2017) (FSRA)
requires the maker of a regulatory instrument (i.e. a prudential, conduct or joint standard) to publish the following documents before making any regulatory instrument:
(i) a draft of the regulatory instrument;
(ii) a statement explaining the need for, and the intended operation, of the regulatory instrument; (iii) a notice inviting submissions in relation to the regulatory instrument, stating where, how and by when submissions are to be made; and (iv) a statement of the expected impact of the regulatory instrument.
1.2 In line with the requirements under the FSRA, the Prudential Authority (PA) and
Financial Sector Conduct Authority (FSCA) (the Authorities) have prepared a Statement of the need for, intended operation and expected impact (Statement) of the Joint Standard on margin requirements for non-centrally cleared OTC derivative transactions (Joint Standard). The Statement also seeks to inform the approach undertaken by the Authorities in making the Joint Standard.
1.3 The Statement has been prepared having collated and analysed responses1
received to a questionnaire that was circulated by the Authorities to solicit industry inputs on the expected impact of the Joint Standard on the industry.
Objectives of BCBS-IOSCO margin requirements
In terms of the BCBS-IOSCO Framework, margin requirements for non-centrally cleared OTC derivatives have two main benefits: (i) reduction of systemic risk2 and (ii) promotion of central clearing. 3 Margin requirements are distinct from capital requirements but both perform important and complementary risk mitigation functions.4
Statement of the need ― context and definition of policy problem
3.1 Although derivatives are used to mitigate or transfer risk between counterparties, they
do not eliminate all risks. Derivative dealers and end-users are exposed, in varying degrees, to market, credit, legal, operational, liquidity, as well as legal risk. In the event

1 Responses were received from 19 respondents that included banks, insurers and asset managers. 2 In terms of the BCBS-IOSCO Framework 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. 3 In terms of the BCBS-IOSCO Framework margin requirements on non-centrally cleared derivatives, and reflecting the generally higher risk associated with such derivative transaction will promote central clearing and therefore make the G20 reform agenda more effective. 4 See BCBS-IOSCO Framework at page 4.

that the aforementioned risks are not properly and effectively managed, this may pose systemic risk to the financial system as was experienced during the 2007/2008 global financial crisis.
3.2 In a paper issued by the Joint Forum,
5 which was tasked to investigate the 2007/2008 global financial crisis, the following weaknesses in the regulation of the financial system were identified:
 insufficient use of collateral;
 inadequate risk management practices and infrastructure;  inadequate risk governance;  lack of transparency to both regulators and participants; and  vulnerable market infrastructure.
3.3 The global financial crisis highlighted that further regulation of OTC derivative markets
would be necessary to reduce excessive risk-taking by market participants in order to mitigate the systemic risk posed by OTC derivative transactions.
3.4 In response to the weaknesses identified in the supervisory and regulatory framework
of OTC derivatives, the Group of Twenty (G20) Leaders at the Pittsburgh Summit6 in 2009 pledged to reform OTC derivative markets in order to improve their transparency, prevent market abuse and reduce systemic risk. The G20 Leaders initiated a reform programme to reduce the systemic risk from OTC derivative transactions. The reform programme comprised of the following four key elements:
 all standardised OTC derivatives should be traded on exchanges or electronic platforms, where appropriate;  all standardised OTC derivatives should be cleared through central counterparties (CCPs)7 ;

5
The Joint Forum comprises representatives from the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, and the International Association of Insurance Supervisors. Please see The Joint Forum 2010:
Review of the Differentiated Nature and Scope of Financial Regulation. Basel, Switzerland: Basel Committee on Banking Supervision: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD315.pdf 6 See the G20 Leaders’ Statement from the Pittsburgh Summit accessible at the following link:
file:///C:/Users/P517380/Downloads/G20-declaration-pittsburgh-2009-en%20(1).pdf 7 In order to give effect to the G20 clearing mandate, Regulation 4 of the Financial Markets Act Regulations as published on 9 February 2018 (FMA Regulations) provides that the FSCA may, with the concurrence of the Prudential Authority - (a) determine eligibility criteria for OTC derivative transactions to be subject to mandatory clearing; and (b) conduct assessments into other categories of OTC derivative transactions upon which additional mandatory clearing requirements could be based. In addition, an authorised OTC derivative provider must ensure that an OTC derivative transaction determined by the Authority in terms of sub-regulation (1) as eligible for clearing, is cleared through a licensed central counterparty or a licensed external central counterparty in the manner prescribed by the Authority. The FMA Regulations also introduce a rigorous framework for the regulation of a central counterparty (CCP), recognising the cross-border systemic risk that these institutions pose and containing stringent prudential, governance and conduct requirements. The FMA Regulations can be accessed at the following link:
https://discover.sabinet.co.za/webx/access/netlaw/19_2012_financial_markets_16.pdf

 OTC derivatives contracts should be reported to trade repositories; 8 and  non-centrally cleared derivatives contracts should be subject to higher capital requirements9 .
3.5 In 2011, the G20 mandated the Basel Committee on Banking Supervision (BCBS) and
the International Organisation for Securities Commissions (IOSCO) to develop standards on margin requirements for non-centrally cleared OTC derivatives in order to offer enhanced protection against counterparty credit risk. 10
3.6 In September 2013, the BCBS and IOSCO published an initial regulatory framework
for margin requirements titled: “BCBS-IOSCO Framework for Non-Centrally Cleared Derivatives” (BCBS-IOSCO Framework). This initial draft framework was finalised in 2015 and provided new regulatory guidelines to be adopted into the domestic laws of the G20 member states.
3.7 In order to ensure that South Africa’s (SA’s) legal framework for regulation and
supervision of the financial sector adheres to the internationally agreed standards in line with SA’s commitments under the G20, National Treasury published a discussion document titled “Reducing the risks of over-the-counter derivatives in SA” in March
2012. The discussion document outlined SA’s proposed policy approach to regulating
OTC derivative markets.
3.8 Against the above background, the Joint Standard seeks to incorporate the BCBSIOSCO Framework into the domestic regulatory framework to give effect to SA's
commitment to making the OTC derivatives market safer.
4. Analysis of the OTC derivative market
4.1 Globally, the OTC derivatives market is significant and has been growing since 1999
(see figure 1). According to the Bank for International Settlements (BIS), the size of the global OTC derivatives market as measured by the gross notional amount of outstanding contracts amounted to $532 trillion, as at December 2017. Interest rate

8
The FSCA is in the process of finalising the Conduct Standard on Reporting Obligations (Reporting Obligations) which prescribes reporting obligations in respect of OTC derivative transactions. Once finalised, the Reporting Obligations will be accessible at the following link: www.fsca.co.za. In addition, the PA and the FSCA have finalised the Joint Standard on the Requirements and Additional Duties of a Trade Repository (TR Joint Standard), which sets out the requirements for a trade repository. The TR Joint Standard is accessible at the following links: www.fsca.co.za and www.resbank.co.za 9 The BCBS has developed the international capital standard applicable to prudentially regulated entities that conduct activities in OTC derivatives markets. Basel III introduces the Credit Valuation Adjustment (CVA) as an additional capital requirement to counterparty credit risk related risk exposures. These new capital standards are aimed at encouraging the use of standardised, centrally-cleared transactions. The Bank Supervision Department issued a directive in terms of the Bank Act on 26 March 2015 directing banks to comply with specified capital requirements for OTC derivatives not transacted through a CCP from 1 April 2015, in accordance with the Basel III CVA capital rules. The directive can be accessed at the following link:
http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/6668/D5%20of%202015.pdf

derivatives contracts comprised of 78% of the total gross notional global derivatives market (see figure 2).
4.2 As a share of the global derivatives market, the SA market is quite small (less than
1%). SA’s total gross notional outstanding OTC derivatives balance in 201211 was estimated at about R27.7 trillion. In line with the global trend, interest rate derivatives comprised of more than 85% of the 2012 monthly average gross notional outstanding OTC derivative amount. More than 58% of that volume represented local interbank interest rate trades. The information gathered from returns submitted to the PA by the banks as well as an industry engagement conducted by the PA indicated that as at June 2018, the aggregate outstanding gross notional amount of OTC derivatives for banks amounted to approximately R39 trillion.
Figure 1: Size of the global notional OTC derivative market over the years
Source: BIS
Figure 2: Composition of the global OTC derivative market
Source: BIS OTC derivatives statistics (Table D5.1).

11 The Authorities are in the process of commissioning a further study on the OTC derivatives market in SA in order to update the data from 2012.

Approach taken by the Authorities on Joint Standard
5.1 The Joint Standard is closely aligned to the BCBS-IOSCO Framework. This is aimed
at creating a level playing field among OTC derivative participants. In addition, the Authorities acknowledge that SA market participants interact with foreign counterparties from more developed markets such as the European Union (EU) or United States of America (USA), and failure to adopt or implement the BCBS-IOSCO Framework will create disparities for local market participants and may result in regulatory arbitrage. However, incorporating the international standard into the domestic regulatory framework must take into account the nature of the domestic legal framework and local market conditions.
5.2 The Authorities have therefore made adjustments to the international standard given
SA’s specific market conditions. In drafting the margin requirements, the Authorities have adapted the requirements in the BCBS-IOSCO framework in respect of the areas highlighted in table 1:
Table 1: Approach in the adoption of BCBS-IOSCO framework into domestic
regulatory framework
BCBS-IOSCO Framework Policy approach by the Authorities Thresholds: Reference to foreign currency (Euros) in setting the thresholds. The Authorities adopted a set conversion rate of €1:R10 to convert the foreign currency thresholds into Rands in the domestic legal framework. Scope of coverage: covered entities are financial firms and systemically important non-financial firms (covered entities). The precise definition of financial firms, nonfinancial firms and systemically important non-financial firms will be determined by appropriate national regulation. In order to ensure close alignment with the BCBSIOSCO Framework it is proposed that the scope of coverage of the Joint Standard be applied to OTC derivative providers (providers) and specific counterparties as defined in the Joint Standard. The Joint Standard also allows the Authorities to declare any other person as a “counterparty”. This will allow the Authorities the flexibility to bring other entities (e.g. pension funds) within the ambit of the Joint Standard. Intra-group transactions: the specific legal and regulatory frameworks governing inter-affiliate derivative transactions depend largely on specific features of applicable jurisdictions. The Authorities do not support an outright exemption from the margin requirements for intra-group transactions. The Joint Standard provides that the non-centrally cleared OTC derivative transactions between a provider and a counterparty belonging to the same group, below an aggregate outstanding gross notional amount of R50 billion will be exempt from the margin requirements, subject to certain conditions specified in the Joint Standard. If the value of the intra-group transactions exceeds the threshold (R50 billion), the entities would be required to exchange margin. Cross-border OTC derivative transactions: home-country supervisors may permit a covered entity to comply with margin requirements of a host-country with respect to its derivatives activities, A local counterparty that enters into an OTC derivative transaction with a foreign counterparty is deemed to comply with the Joint Standard provided that the local provider has satisfied itself that (i) the foreign jurisdiction has implemented margin requirements based on the BCBS-IOSCO Framework; (ii) the foreign

provided that the home-country supervisors consider the hostcountry margin regime to be consistent with the margin requirements in the BCBS-IOSCO Framework. counterparty is directly subject to such margin requirements; and (iii) the local counterparty is required to comply with, or is captured by, the margin requirements in the foreign jurisdiction. Treatment of physically settled FX forwards and swaps: the BCBS and IOSCO agree that standards apply for variation margin to be exchanged on physically settled FX forwards and swaps in a manner consistent with the final policy framework set out in the BCBS-IOSCO framework and that those variation margin standards are implemented either by way of supervisory guidance or national regulation. Physically settled FX forwards and swaps have been excluded from variation margin requirements in line with the approach taken in other jurisdictions. The Authorities approach was informed by the practical concerns of requiring local ODPs to be subjected to variation margin for physically settled FX forwards and swaps if the counterparty in another jurisdiction is not required to exchange VM for such a transaction. If the EU requires VM for physically settled FX forwards and swaps for banks and investment firms, local market participants trading with the EU may be captured and be required to exchange variation margin under that framework in respect of FX forwards and swaps.
5.3 The Authorities acknowledge that currently there is no licensed CCP or licensed
external CCP in SA12
. However, the Financial Markets Act No. 19 of 2012 (FMA) and the FMA Regulations create the required regulatory framework for the licensing and regulation of a CCP or a licensed external CCP. Notwithstanding the fact that there is no licensed CCP in SA, the margin requirements for non-centrally cleared OTC derivative transactions aim to reduce systemic risk and can have broader macroprudential benefits by reducing financial system vulnerabilities caused by buildup of uncollateralised exposures within the SA financial system.
6. Statement of expected impact ― Costs and benefits of the Joint Standard
6.1 Derivative market participants who responded to a survey conducted by the Authorities
had a combined outstanding gross notional OTC derivative exposures amounting to R31.4 trillion13 . The majority (99%) of the aggregate outstanding gross notional OTC derivative amount was held by banks and the remainder of the respondents (asset managers and insurers) accounted for the balance.
6.2 The Joint Standard outlines a phased-in approach (from 2019 to 2023), for the
exchange of initial margin (IM) by providers when transacting with counterparties that also meet the condition related to the aggregate gross notional amount of OTC derivatives as outlined in Table 2.

12 The Authorities acknowledge that on 10 December 2012, the Registrar of Securities Services approved JSE Clear as a qualifying central counterparty for listed derivatives on the basis that JSE Clear complied with the Principles for Financial Market Infrastructures (PFMIs). 13 As at April 2018.

6.3 In respect of variation margin (VM), except in 2019 where the R30 trillion threshold
applies, from 1 March 2020 onwards, all providers entering into non-centrally cleared OTC derivatives with counterparties as defined will be required to exchange VM on all new contracts entered into after 1 March 2020, subject to a de-minimis minimum transfer amount not exceeding R5 million and in accordance with the relevant requirements specified in the Joint Standard.
6.4 An assessment of how different stakeholders such as banks and non-banks will be
impacted by the Joint Standard in as far as the IM is concerned has been anchored on the phased-in approach of qualifying aggregate notional OTC amounts outlined in
Table 2.
Table 2: Phasing-in of qualifying aggregate notional amounts relating to IM
Year Qualifying Aggregate Notional Amount
2019 R30 trillion
2020 R23 trillion
2021 R15 trillion
2022 R8 trillion
2023 R100 billion
6.5 The majority of market participants that responded to the questionnaire have gross
notional OTC derivatives amounts substantially below the R100 billion threshold that will come into effect in 2023. Out of the 19 respondents, 13 had outstanding gross notional OTC derivatives amounts below R100 billion ranging from R750 million to R55 billion. Six respondents had outstanding gross notional OTC derivatives amounts ranging from R120 billion to R15 trillion.
6.6 The thresholds in the Joint Standard are set out at the level of the consolidated group.
Stated differently, a provider or a counterparty belonging to a group whose aggregate outstanding average gross notional amount for a specified period exceed the specified aggregate gross notional thresholds in Table 2 will be required to exchange IM and VM14 as outlined in the Joint Standard.
6.7 The definition of a “group” in the Joint Standard is based on the definition of a “group
of companies” as defined in the Companies Act, 2008 (Act 71 of 2008). In its current formulation, the reference to the holding company in the context of a group of companies is not limited to SA incorporated holding companies.

14 For VM, the thresholds will only apply for 2019, from March 2020 onwards, all providers and counterparties will be required to exchange VM subject to the requirements set out in the Joint Standard.

Impact on banks
6.8 An analysis of the information from Banks Act returns submitted by banks to the PA as
well as information gathered through a survey conducted by the PA indicates that out of the 34 banks regulated by the PA (including branches of foreign banks), 99.72% of the total gross notional outstanding OTC derivatives amounting to R37 trillion as at June 2018 is attributable to only 10 banks (including branches). The 10 banks (including branches) alluded to above have total outstanding notional OTC derivative amounts that range from R100 billion to R15 trillion.
6.9 However, the OTC derivative exposures for branches of foreign banks are in respect of
their SA operations and the notional amounts will be inflated at a consolidated level when operations of their parent/ holding companies are taken into consideration. The Authorities did not have an opportunity to analyse the complete figures at the parent or holding company level for branches of foreign banks operating in SA. However, an analysis of the OTC derivative exposures of parent companies for 2 large branches out of the 10 that have exposure in the OTC derivatives market indicates that they will trigger the thresholds for margin requirements on the basis of the size of the outstanding non-centrally cleared OTC derivatives of their offshore parent companies.
6.10 Out of the 15 branches of foreign banks with operations in SA, 5 have no exposure in
the OTC derivatives market and will therefore not be affected by the IM and VM requirements and other requirements set out in the Joint Standard.
6.11 In addition to the 5 branches of foreign banks, 4 banks operating in SA did not have
any exposure to the OTC derivatives market. Sixteen banks (including branches) had an aggregate outstanding gross notional amounts of OTC derivatives ranging from R1 million and R50 billion.
6.12 The comparison between the size of the OTC derivative market against the gross
notional thresholds for IM requirements in table 2 shows most of the banks (excluding branches of foreign banks) will be below the threshold for 2019 and 2020 to exchange IM. A limited number of banks will reach the thresholds for exchanging of IM from 2021 onwards, during the final stages of the phasing-in of qualifying thresholds. However, from 2020 onwards, all banks will be required to exchange VM, subject to relevant requirements specified in the Joint Standard.
6.13 In 2023 when the qualifying threshold of R100 billion comes into effect, all of SA’s
largest 6 banks by asset size will be required to exchange IM.

6.14 Table 3 illustrates how the phasing-in of the qualifying thresholds will affect banks
(except branches of foreign banks) operating in SA.
6.15 While the qualifying thresholds for margin requirements are determined on the basis of
the gross notional, non-centrally cleared OTC derivatives, in the case of SA, the size of this market was last estimated in 2012. For the purposes of assessing the expected impact of the margin requirements on banks, the PA used notional OTC derivative amounts which include both centrally and non-centrally cleared OTC derivative exposures since these are the current known figures. The assessment provides the worst case scenario given that the figures in table 3 might be overstated as they also include centrally cleared OTC derivatives.
Table 3: How SA banks (except branches of foreign banks) will be affected by the
phasing-in of qualifying notional amount
Bank
Average notional OTC derivative amounts for April, May and June, 2018 Year when the bank is likely to qualify for margin requirements under the Joint Standard 1 R14.8 trillion 2021 2 R7.7 trillion 2022 3 R4.9 trillion 2023 4 R4.5 trillion 2023 5 R718 billion 2023 6 R6 billion N/A 7 R4 billion N/A 8 R2 billion N/A 9 R1.5 billion N/A 10 R1.2 billion N/A 11 R789 million N/A 12 R443 million N/A 13 R417 million N/A 14 R64 million N/A 15 R55 million N/A 16 Nil N/A 17 Nil N/A 18 Nil N/A 19 Nil N/A Source: Compiled from information submitted by banks, through returns to the PA
6.16 The results of another survey conducted by the then Bank Supervision Department of
the South African Reserve Bank (SARB) during 2016 on the impact of the margin requirements for non-centrally cleared derivative instruments on banks are presented in Box 1.

Box 1: Key findings of the impact of margin requirements on banks Credit Risk Weighted Assets (RWA) reduced slightly as a result of minimum margin requirements on non-centrally cleared OTC derivatives, for all banks. The leverage ratio will be negatively impacted, but only slightly. Banks use mainly cash as collateral and based on the leverage ratio requirements, cash variation margin may be viewed as a form of pre-settlement and therefore, may be deducted from the exposure measure if certain conditions are met. However, not all banks are capable of distinguishing between initial and variation margin or to meet all the conditions as per the leverage rules. If systems are improved, banks’ leverage ratios would improve and benefit from the new margin requirements directive. The liquidity coverage ratio (LCR) could be impacted as follows: Banks that are currently in a net receiving cash position for derivative instruments would have an improved LCR ratio as opposed to banks that are in a net paying cash position, whose overall cash outflow would not reduce. The new margin requirements would maintain the current status of both cash paid and cash received, however, both levels would increase. Most bank’s LCR ratio would therefore decrease. Impact on non-banks
6.17 All non-bank respondents to the questionnaire had aggregate gross notional amounts
of OTC derivative transactions far below the thresholds set out in Table 2 and will not be required to exchange IM under the Joint Standard. It is therefore anticipated that the requirements for IM set out in the Joint Standard will have limited impact on nonbank market participants given the thresholds.
6.18 The largest non-bank respondent had an aggregate gross notional OTC derivative
transactions amounting to R120 billion while the lowest had R750 million. The expected low impact of the Joint Standard on non-banks as it relates to the IM is also supported by the submission received from one of the industry associations that responded to the survey on behalf of its members who are non-banks. The industry association indicated that having assessed the contents of the Joint Standard, its members will not be impacted by the Joint Standard.
6.19 While the Joint Standard is anticipated to have limited impact on the non-banks as far
as it relates to the IM, in respect to VM, all non-centrally cleared OTC derivative transactions entered into between a provider and a counterparty will be required to exchange variation margin from March 2020.
6.20 Based on the responses received to the survey, 16 respondents indicated that they
already exchange VM and 3 respondents indicated that they did not exchange VM. According to the results of the survey, 84% of the respondents already exchange VM, accordingly, the requirement for all providers and counterparties to exchange VM in

2020 will have limited impact given that the providers can leverage off their existing systems and human resources.
6.21 While a significant number of derivative counterparties have exchanged VM in the
past, this has not been the case for IM. The derivative counterparties will need to be ready, operationally and administratively to exchange IM, in order to comply with the requirements of the Joint Standard. This will require sufficient time. Impact on collateral exchange
6.22 According to the responses received, 11 out of the 19 respondents confirmed to
receiving or posting collateral in the form of cash. Only 8 respondents indicated that they receive non-cash collateral, primarily in the form of government bonds, over and above the cash collateral. Given that cash and government bonds are mainly used as collateral and attract 0% and between 0.5% and 4% haircut respectively, the expected impact of the Joint Standard emanating from the exchange of collateral is expected to be minimal. Impact on intra-group exposures
6.23 In terms of the Joint Standard, transactions entered between entities belonging to the
same group (intra-group transactions) where the aggregate outstanding gross notional amount of OTC derivative transactions is below R50 billion threshold, no margin will be required to be exchanged. This is however subject to the specified in the Joint Standard.
6.24 Out of the 19 respondents, only 3 had intra-group exposures above the R50 billion
threshold, ranging from R50 billion to R250 billion. In light of the R50 billion threshold for intra-group transactions, the margin requirements in respect of intra-group transactions is expected to only affect a limited number of market participants in South Africa. Impact on the general operational and compliance costs
6.25 Margin requirements for non-centrally cleared OTC derivative transactions represent a
significant policy shift, particularly in respect of IM requirements. Implementation of the Joint Standard by qualifying providers and counterparties will require operational enhancements and additional collateral. This will require that the impact on liquidity of providers be properly planned and managed.

6.26 The margin requirements are therefore being phased-in to ensure that the systemic
risk reductions and other benefits from margin requirements are appropriately balanced against compliance and operational costs associated with their implementation.
6.27 The Authorities anticipate that the implementation of the Joint Standard would impact
providers and counterparties through direct costs that include:
 costs associated with IM accounts held at different custodians;  additional compliance / legal resources;  costs associated with sourcing securities to post as IM;  additional system enhancements;  additional human resources;  additional reporting requirements; and  additional regulatory and supervisory costs.
6.28 While there are potential costs associated with the Joint Standard, the phasing-in of
the qualifying threshold for margin requirements, particularly the IM requirements will ensure that the objective of the standard to reduce systemic risk is appropriately balanced with the costs associated with implementing the margin requirements in SA.
Table 4: Expected costs for implementation of margin requirements
Entity15 Size (gross outstanding notional amounts) Estimated weighted average cost as a percentage of the outstanding gross noncentrally cleared OTC derivatives amount Small R12-26 billion 0.060% Medium R35-47 billion 0.0049% Large R7-15 trillion 0.00046% Source: Calculated from information received from the survey conducted by the PA
6.29 According to the responses received, it will cost between R1 million and R65 million to
implement the margin requirements, assuming that all respondents would be required to exchange margin. The indicated costs varied across the different types and sizes of financial institutions that responded.
6.30 However, it must also be emphasised that a significant portion of these costs will be
once-off costs that will be incurred in system development and enhancements for margin requirements. Recurrent costs will be lower once the initial set-up costs have been incurred.

15 These entities have been categorised on the basis of the responses received from the survey conducted by the Authorities

Expected benefits of implementing margin requirements
6.31 The Joint Standard is intended to yield the following benefits:
 improved safety and soundness of financial institutions and consequently reduced systemic risk;  protection against counterparty credit risk;  efficiency in capital utilisation;  reduction in risk-weighted assets;  promotion of central clearing;  IM will make derivative creditors more senior to other creditors since they may use initial margin to offset losses in a default scenario;  the standardisation of margin requirements is expected to bring about consistent, visible and improved pricing across the OTC derivative market;  international compliance is the main benefit and for financial institutions that trade across borders; and  greater transparency to markets. Assessment of policy options considered by the Authorities
6.32 The Authorities could have maintained the status-quo and not implement the OTC
derivative margin requirements in SA. However, maintaining the status-quo and not implementing the margin requirements into the domestic regulatory and supervisory framework was not considered to be a viable option. The developments during the global financial crisis highlighted the risk of an unregulated OTC derivative market. The internationally agreed reforms to making OTC derivatives safer and more transparent are being implemented in other comparable jurisdictions.
6.33 SA’s financial institutions transacting with foreign parties that are subject to margin
requirements would also need to comply with the requirements from other jurisdictions without being able to benefit from substituted compliance or an equivalence assessment in respect of SA’s regulatory framework. The resulting market fragmentation and reduced access to the global OTC derivatives market would be limiting to the SA financial institutions.
6.34 Implementation of the margin requirements will ensure that SA complies with its G20
commitments. The margin requirements will improve the safety and soundness of financial institutions by allowing large financial institutions to exchange margin that reduces counterparty credit and systemic risk. The benefits that will accrue to the

country through the introduction of the margin requirements outweigh the compliance costs that will be incurred by some of the entities particularly in set-up costs as and when entities qualify to exchange margins (see Table 5).
Table 5: Assessment of the options against key objectives of the joint standard
Key objective Status-quo
Implement margin requirements
Compliance costs Neutral Minimum
Meets the objectives envisaged by the
BCBS-IOSCO
Does not meet this requirement
Meets this requirement
Improves safety and soundness of financial institutions Does not meet this requirement Meets this requirement Establishes a broadly internationally consistent framework Does not meet this requirement Meets this requirement Satisfies SA’s G20 Commitments Does not meet this requirement Meets this requirement Overall Assessment Negative net benefit Positive net benefit
6.35 While all providers and counterparties will be required to exchange VM on a bilateral
basis from 1 March 2020 onwards, in accordance with the relevant requirements specified in the Joint Standard, it must be noted that until 2021, none of the respondents to the survey or any of the banks in SA (except branches of foreign banks) will meet the thresholds that require the exchange of IM under the Joint Standard.
7. Consultation
7.1 In 2015 the formerly established FSB released the Board Notice on Margin
Requirements (Board Notice) for public consultation.
7.2 During 2016, the BSD, issued a draft directive on Margin Requirements pursuant to
section 6(6) of the Banks Act, 1990 (Act 94 of 1990), in order to give effect to SA’s
commitment to the G20 reform agenda in respect of OTC derivatives. However, the limitation with this approach is that directives issued in terms of the Banks Act are applicable to banks, and not to other non-bank financial institutions as required in terms of the BCBS-IOSCO Framework. The BSD therefore took a decision that the margin requirements should be implemented as part of the broader OTC derivative reform agenda, which was being driven by the FSB in terms of the FMA.
7.3 In August 2017, the FSB in consultation with the South African Reserve Bank (SARB)
and National Treasury released the Board Notice on Margin Requirements (Board Notice) for public consultation. The Authorities met with industry on numerous occasions to discuss the Board Notice. Subsequent to the release of the Board Notice

in 2017, the FSRA was promulgated and the two Authorities have been formally established. Having regard to the objectives of the two Authorities as set out in the FSRA, and the joint supervisory responsibilities that the two Authorities have in respect of financial institutions, the Authorities consider it appropriate for the margin requirements to be issued as a joint standard under the FSRA.
7.4 The Authorities published the revised Joint Standard, together with the Statement of
Impact and the comments matrix in August 2017. The comments received from the previous round of consultation have been incorporated into the revised Joint Standard.
7.5 The salient issues raised during the consultation process are outlined in table 6.
Table 6: Issues raised during the consultation process and how they were resolved
No. Key issue Resolution

Scope of application of margin
requirements
While the BCBS-IOSCO framework applied to financial firms and systemically important nonfinancial firms, the Joint Standard places an obligation for compliance with the Standard on Over-the-counter Derivative Providers (ODPs), when they transact with a defined list of counterparties. The Authorities will be able to designate additional counterparties over and above financial firms.
Exclusions from margin
requirements
The definition of “sovereign” be defined to reference the central government of the Republic of SA.
Variation margin for FX forwards
and swaps
Physically settled FX forwards and swaps are excluded from VM in line with other jurisdictions. Concerns around practicality of requiring local ODPs to be subjected to VM for these transactions if the counterparty in another jurisdiction is not required to exchange VM. If the EU requires VM for physically settled FX forwards and swaps for banks and investment firms, local participants will be captured and required to exchange margin under that framework.
Intra-group transactions The threshold for the exchange of margin on
intra-group transactions has been increased from to R50 billion.
Clause 3(4) – requirement for
entities to exchange margin where actual exposure is R3 billion Reference to R3billion threshold has been removed as it could be triggered very easily in a cross-border OTC derivative transaction and may impede foreign participants from transacting with SA counterparts.
Cross-border transactions An SA entity will be deemed to be complying
with the Joint Standard when transacting with a counterparty that complies with the BCBSIOSCO framework.
One time re-hypothecation, reuse
or re-pledge of IM
The one-time rehypothecation has been retained and will be executed in accordance with the conditions specified in the Joint Standard, in line with the BCBS-IOSCO Framework.
Phasing-in of margin
requirements
The requirement to exchange IM will commence from 1 September 2019 to align with the phasing in timelines in other jurisdictions.
Statement of intended operation ― Implementation and evaluation
8.1 The Joint Standard will be implemented with effect from 1 September 2019.
8.2 Following the implementation of the Joint Standard, the Authorities will assess and
evaluate the effect of the Joint Standard on a continuous basis as part of the regulators’ supervisory responsibility to ensure that any unintended consequences of the Joint Standard on the industry are adequately addressed.
Conclusion
The Joint Standard and this Statement were prepared in terms of section 98(1) of the FSRA and published in terms of the requirements in terms of section 98(2) of the FSRA and take into consideration all submissions received during the previous public consultation process.

Joint Standard on Margin Requirements for Non-Centrally Cleared OTC Derivatives

Lineage: In force

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