Circular to licensed corporations
Margin requirements for non-centrally cleared OTC derivative transactions

7 May 2020



This circular informs licensed corporations (LCs) that the Securities and Futures Commission (SFC) will defer the introduction of initial margin (IM) requirements for non-centrally cleared over-the-counter (OTC) derivative transactions1 by one year to provide operational relief amidst the COVID-19 situation.

Subject to specified thresholds, the IM requirements for LCs which are contracting parties to non-centrally cleared OTC derivative transactions entered into with a covered entity2 were originally to be phased in starting from 1 September 2020.

In light of the significant challenges posed by the COVID-19 outbreak, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) on 3 April 2020 announced a one-year extension of the deadlines for completing the final implementation phases of the IM requirements for non-centrally cleared OTC derivatives. Covered entities with an average aggregate notional amount (AANA) of non-centrally cleared OTC derivatives greater than €50 billion will now be subject to the IM requirements from 1 September 2021. Covered entities with an AANA of non-centrally cleared OTC derivatives greater than €8 billion will be subject to the IM requirements from 1 September 20223.

Taking into consideration the BCBS-IOSCO announcement, the SFC will extend the phase-in schedule for the IM requirements by one year:

  Period Threshold
Phase-in 1 September 2021 to 31 August 2022 HK$375 billion
Permanent

On a permanent basis from
1 September 2022 for each
subsequent 12-month period

HK$60 billion

(a) From 1 September 2021 to 31 August 2022, the exchange of IM by an LC is required in a one-year period where both the LC and the covered entity have an AANA of non-centrally cleared OTC derivatives exceeding HK$375 billion on a group basis.

(b) On a permanent basis starting from 1 September 2022 and for each subsequent 12-month period, the exchange of IM by an LC is required in a one-year period where both the LC and the covered entity have an AANA of non-centrally cleared OTC derivatives exceeding HK$60 billion on a group basis.

Paragraphs 9(a) and 9(b) of the proposed Part III of Schedule 10 to the Code of Conduct4 will be amended accordingly and gazetted in due course.

For the avoidance of doubt, the variation margin requirements will still become effective on 1 September 2020.

Should you have any queries regarding the contents of this circular, please contact your case officer.


Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

End

SFO/IS/020/2020

1 See the Consultation Conclusions on the OTC derivatives regime for Hong Kong – Proposed margin requirements for non-centrally cleared OTC derivative transactions, 18 December 2019.
2 A covered entity includes an authorised institution, an LC or another defined entity.
3 See press release issued by BCBS and IOSCO dated 3 April 2020.
4 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.


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Page last updated : 7 May 2020