FSS Extends "Guidelines for Non-Cleared OTC Derivatives Transactions" by One Year

The Financial Supervisory Service announced on August 14 that it will extend the "Guidelines for Margin Exchange System for Non-Cleared Over-the-Counter Derivatives Transactions" by one year starting in September.

The margin exchange system is a mechanism in which collateral is exchanged in advance between counterparties for over-the-counter (OTC) derivatives transactions that are not cleared through a central counterparty (CCP), in order to manage default risk and daily profit and loss fluctuations. Initial margin refers to collateral exchanged at the time of transaction to manage the future default risk of the counterparty, while variation margin refers to collateral exchanged to manage daily exposure.

A total of 138 financial institutions are subject to the initial margin requirement, of which 114 are affiliated with financial groups. This is an increase of three institutions compared to the previous year. Four institutions, including Daishin Securities, have been newly added, while KB Fintech has been excluded. The variation margin requirement applies to 163 institutions in total, with 128 belonging to financial groups. Landesbank Baden-W?rttemberg of Germany has been newly included, while KB Fintech has been excluded.

In principle, the margin exchange system applies to all OTC derivatives transactions that are not cleared through a central counterparty. However, physically settled foreign exchange (FX) forwards and swaps, currency swaps (CRS), and physically settled commodity forward transactions are excluded.

The institutions subject to the requirements are financial companies whose average notional outstanding of non-cleared OTC derivatives at the end of March, April, and May each year meets or exceeds the threshold amount. The requirements are applied for one year starting from September 1 of that year. For financial companies belonging to a financial group, the notional outstanding of non-cleared OTC derivatives is aggregated across all companies within the same group to determine applicability.

Institutions excluded from the requirements include general companies that are not financial institutions, central banks, public institutions, and international organizations such as the Bank for International Settlements (BIS). In addition, while asset management companies are subject to the guidelines, collective investment schemes, trust accounts of banks, and specialized credit card companies are excluded.

The Financial Supervisory Service has been implementing administrative guidance on the "Guidelines for Margin Exchange System for Non-Cleared Over-the-Counter Derivatives Transactions" since March 2017 to systematically manage systemic risk arising from OTC derivatives transactions.