Financial Supervisory Service Extends Margin Exchange Guidelines for Non-Cleared OTC Derivatives Transactions

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

The guidelines for the margin exchange system for non-centrally cleared over-the-counter (OTC) derivatives transactions will be extended.

On the 25th, the Financial Supervisory Service (FSS) announced, "From September this year, for one year, companies subject to the margin exchange system for non-centrally cleared OTC derivatives transactions include 121 companies subject to initial margin and 164 companies subject to variation margin."

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 is collateral exchanged at the time of the transaction to cover the counterparty's future default risk, while variation margin is collateral exchanged to manage daily exposure (risk exposure). To systematically manage systemic risk arising from OTC derivatives transactions, the "Guidelines for the Margin Exchange System for Non-Centrally Cleared OTC Derivatives Transactions" have been in effect since March 2017.

In principle, the guidelines apply to all OTC derivatives transactions not cleared through a central counterparty, but transactions settled in kind such as foreign exchange forwards, swaps, currency swaps (CRS), and physically settled commodity forward transactions are excluded. The system is scheduled to be applied for one year from the 1st of the following month to financial companies whose average nominal amount of non-centrally cleared OTC derivatives transactions at the end of March, April, and May each year exceeds the threshold amount.

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 application. Asset management companies are subject to the guidelines, but collective investment schemes, trust accounts of banks, and specialized credit card companies are exempt.

From the 1st of next month for one year, the number of financial companies subject to initial margin remains the same as last year at a total of 121 companies, of which 97 belong to financial groups. The guidelines will be newly applied to six companies including Industrial and Commercial Bank of China, while six existing companies have been excluded.

The number of financial companies subject to variation margin increased by six from 158 last year to a total of 164 companies, with 130 belonging to financial groups. The guidelines will be newly applied to ten companies including SK Securities, while four existing companies have been removed from the application list.

An FSS official stated, "We will continuously monitor the implementation status of the margin exchange for non-centrally cleared OTC derivatives transactions and actively support financial companies in complying with the margin system by collecting their difficulties related to system compliance."

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