Most Read Contributor in South Africa, September 2016
On 5 June 2015 Treasury released the second draft of the
regulations relating to OTC derivatives under the Financial Markets
Act, 2012 (the "Draft Regulations"). At
the same time, the FSB released a number of draft notices,
including a notice relating to margin for non-centrally cleared OTC
derivatives (the "Draft Margin Notice").
A stated aim of the new regulatory regime for OTC derivatives is to
reduce the systemic risk associated with derivatives. The deadline
for comment on the various documents was 6 July 2015.
A number of key concerns with the Draft Regulations and Draft
Margin Notice are highlighted below.
Corporates and non-bank participants should
note: The Draft Regulations and Draft Margin Notice do not
exclude transactions among affiliates from the need to centrally
clear or post margin for OTC derivatives. As a result, a central
treasury company of a group could find itself being required to
become an authorised OTC derivatives provider in South Africa
and/or exchanging margin with its South African affiliates.
Comparable legislation in other jurisdictions either excludes
such intra-group transactions or provides for a process to apply to
the relevant regulator for the exemption of such transactions from
central clearing and/or margin requirements, on the basis that
transactions among affiliates are not generally for investment or
speculation, and therefore pose little or no systemic risk.
Banks and financial institutions should note:
The Draft Margin Notice requires authorised OTC derivative
providers to exchange margin with all entities with whom it
concludes OTC derivatives, including both counterparties and
clients as defined in the Draft Regulations. One result is that a
financial institution (such as a bank) could find itself posting
margin to corporate clients – or even individual clients
– with no infrastructure for receiving or holding margin.
Other jurisdictions do not require margin to be exchanged with
small non-financial counterparties, and there is a strong view that
requiring unsophisticated parties to receive and hold margin is
unlikely to decrease systemic risk – and may even increase
All OTC derivative market participants should
note: The Draft Margin Notice prohibits any re-use
(re-hypothecation) of initial margin collected in respect of
non-centrally cleared OTC derivative transactions. Generally,
however, such initial margin is used to establish the receiving
party's hedge to the margined OTC derivative and is used with
the posting party's consent. South African regulators should
perhaps follow other jurisdictions' legislation in allowing
such re-use, subject to certain conditions, including that the
posting party must consent to the re-use.
Regulation of OTC derivatives in South Africa will soon be a
reality, and users of derivatives in South Africa, or with South
African counterparties, are urged to consider the effect of the new
regulations on their business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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