Background

Further to our publication “Delayed Finalisation of the Margin Requirements for Non-centrally Cleared OTC Derivative Transactions in South Africa” dated 10 December 2019 (available here), the Standing Committee on Finance met on 3 December 2019 in order to discuss revisions to the Draft FSRA Joint Standard 1 of 2019 (Draft Margin Requirements for Non-centrally Cleared Over The Counter Derivative Transactions) (the Draft Joint Standard) which revisions were contained in a revised Joint Standard 1 of 2019 (this the Revised Joint Standard). This Revised Joint Standard has now become available and we therefore set out below the key amendments contained in such Revised Joint Standard.

Key changes contained in the Revised Joint Standard

Application of the South African margining rules

Paragraph 2.1 of the Draft Joint Standard had provided that it would be binding on authorised OTC derivative providers (Authorised ODPs) entering into non-centrally cleared OTC derivative transactions with a "counterparty".  As "foreign counterparties" were separately defined in paragraph 1 of the Draft Joint Standard, it appeared that non-centrally cleared OTC derivative transactions between Authorised ODPs and foreign counterparties would not be in-scope for purposes of the South African margining rules.

This uncertainty has been clarified in paragraph 2.1 of the Revised Joint Standard, which provides that the Revised Joint Standard will be binding on an Authorised ODP entering into non-centrally cleared OTC derivative transactions with a "counterparty" or a "foreign counterparty".  It is therefore clear that South African margining rules will apply to any non-centrally cleared OTC derivative transactions entered into between an Authorised ODP and a foreign counterparty, unless the requirements in paragraph 2.2 (Treatment of intra-group transactions) or 2.3 (Cross-border transactions) are met.

Intra-group transactions with foreign counterparties

The Draft Joint Standard provided that the South African margin requirements would not apply to non-centrally cleared OTC derivative transactions entered into between an Authorised ODP and a counterparty in the same group, subject to certain conditions being met.  This provision in the Revised Joint Standard has now been extended to include non-centrally cleared OTC derivative transactions entered into between an Authorised ODP and a foreign counterparty in the same group.

In addition, the Draft Joint Standard provided, amongst other conditions, that the aggregate outstanding gross notional amount of the non-centrally cleared OTC derivative transactions between the Authorised ODP and the counterparty in the same group had to below R50 billion at the close of business on each relevant day for the intragroup exemption to apply.  This threshold has been increased to R100 billion in the Revised Joint Standard.

Minimum transfer amount

The Draft Joint Standard had provided that any margin transfer between an Authorised ODP and a counterparty may be subject to a minimum of R5 million.  The Revised Joint Standard has clarified that all margin transfers may be subject to a minimum transfer amount of which the aggregate or sum of initial margin and variation margin does not exceed R5 million.  This appears to suggest that the minimum threshold amount is to be calculated cumulatively and not separately for each margin transfer but this uncertainty will need to be clarified.

Timing of implementation

The proposed effective date of the Revised Draft Standard is 1 October 2020.

IM phase-in

The phase-in of the initial margin (IM) requirements still covers a period of four years and is applicable to any Authorised ODP belonging to a group of which the aggregate month-end average gross notional amount of the transactions for March, April, and May of the specific year exceeds the thresholds set out below when such Authorised ODP transacts with a counterparty that also meets such requirements.

VM phase-in

From the effective date of the Revised Joint Standard (proposed to be 1 October 2020), any Authorised ODP belonging to a group of which the aggregate month-end average gross notional amount of OTC derivative transactions for March, April, and May 2020 exceeded R30 trillion must exchange VM when transacting with a counterparty belonging to a group that also meets this condition, provided that this requirement to calculate and exchange variation margin will only apply to new contracts entered into after 1 October 2020.  Thereafter, the Revised Joint Standard requires all authorised ODPs to exchange VM six months from the effective date of the Revised Joint Standard (i.e. from 1 March 2021).

Rehypothecation of IM

Finally, the Draft Joint Standard had provided that cash or non-cash collateral collected as IM may be the rehypothecated (once) to a third party only for purposes of hedging the IM collector’s derivatives position arising from derivative transactions for which IM was collected, provided that all relevant transactions, agreements or arrangements must be subject to conditions that protect the IM provider’s rights in the collateral.  The Revised Joint Standard has clarified that, for purposes of such rehypothecation to a third party, the "IM provider" whose rights in the collateral are to be protected only includes "buy-side" financial entities as well as non-financial entities, but does not include entities that regularly hold themselves out as making a market in OTC derivatives, routinely quote bid and offer prices or derivative contracts and routinely respond to requests for bid or offer prices on derivative contracts.

Next steps

We understand that the Standing Committee on Finance’s intention is to request further comment and engagement from industry participants but no indication on publication of the final version of the Joint Standard has been provided.