Expansion of Non-Cleared Derivatives Initial Margin Exchange System to be Implemented Next Month

[Asia Economy Reporter Lee Jung-yoon] Starting next month, the initial margin exchange system for uncleared over-the-counter (OTC) derivatives transactions will be expanded to companies with transaction balances exceeding 10 trillion won.

According to the Financial Supervisory Service on the 5th, the number of companies subject to the initial margin exchange system for one year from September this year is a total of 121 companies. This is an increase of 49 companies compared to 72 companies with balances exceeding 70 trillion won last year.

The margin exchange system refers to the pre-exchange of margin between transaction parties for OTC derivatives transactions that are not cleared through a central counterparty (CCP). Margin is divided into initial margin and variation margin. Initial margin refers to collateral exchanged at the time of transaction to cover the counterparty's future default risk, while variation margin refers to collateral exchanged to manage daily exposure (risk exposure). To systematically manage systemic risk arising from OTC derivatives transactions, the "Guidelines for Margin Exchange System for Uncleared OTC Derivatives Transactions" have been in effect since March 2017.

Every year, from March to the end of May, financial companies whose average nominal balance of uncleared OTC derivatives transactions exceeds the threshold amount are subject to the system for one year starting from September 1 of the same year. For financial companies belonging to a financial group, the nominal balances of all financial companies within the group are aggregated to determine eligibility.

General companies that are not financial companies, central banks, public institutions, or international organizations such as the Bank for International Settlements (BIS) are excluded from the scope of application. Asset management companies are subject to the guidelines, but the guidelines do not apply to collective investment schemes, trust accounts of banks, or specialized credit card companies.

From September this year for one year, the number of financial companies subject to the variation margin exchange system is a total of 158 companies, of which 129 belong to financial groups. Also, during the same period, the number of financial companies subject to the initial margin exchange system is a total of 121 companies, with 99 belonging to financial groups.

A Financial Supervisory Service official stated, "We plan to continuously monitor the implementation process of financial companies, including the establishment of collateral management systems related to initial margin and the preparation of contract signing processes," and added, "We will actively support the system's market settlement by collecting difficulties faced by financial companies in complying with the margin system."

This content was produced with the assistance of AI translation services.