Initial Margin Exchange System for OTC Derivatives to Be Fully Implemented Next Month... Targeting 72 Entities

[Asia Economy Reporter Park Jihwan] Starting next month, the initial margin exchange system for uncleared over-the-counter (OTC) derivatives transactions will be fully implemented.

According to the Financial Supervisory Service on the 17th, as of this year, the outstanding balance of uncleared OTC derivatives transactions exceeds 70 trillion KRW, and the number of financial companies subject to the initial margin exchange system is counted at 72. This includes 25 banks, 21 securities firms, 11 insurance companies, and 15 others. Among them, 55 companies belong to financial groups, while 17 operate independently.

In September next year, the scope of financial companies subject to the initial margin exchange system is expected to expand to those with uncleared OTC derivatives transaction balances of 10 trillion KRW or more.

The margin exchange system is an agreement reached at the Group of Twenty (G20) meetings following the global financial crisis, requiring financial companies to exchange collateral-type margins to prepare for potential losses when trading OTC derivatives that are not cleared through a central counterparty (CCP).

In particular, the initial margin exchange system, designed to prepare for losses arising from counterparty default, will be implemented starting next month.

The variation margin exchange system, which has been in effect since September 2017 for financial companies with balances exceeding 3 trillion KRW, covers a total of 145 companies as of next month. Among these, 115 companies belong to financial groups.

Variation margin refers to the exchange of collateral to cover potential losses arising from changes in the market valuation of derivatives.

A Financial Supervisory Service official stated, "We plan to continuously monitor the implementation process of financial companies, including the establishment of systems related to initial margin and the preparation of contract execution processes."

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