Starting in September, financial institutions participating in over-the-counter (OTC) derivatives transactions that are not cleared through a central counterparty (CCP) must exchange margin in advance. If the notional amount of non-cleared OTC derivatives is at least 3 trillion won, variation margin applies, and if it is at least 10 trillion won, initial margin is applied in addition to variation margin.
Variation margin is collateral exchanged to cover daily mark-to-market losses in OTC derivatives transactions and is intended to manage daily exposure. Initial margin is collateral posted at the time of the transaction to prepare for potential future losses that may arise from events such as a counterparty default.
On the 20th, the Financial Supervisory Service said it will extend for one year, starting in September, the administrative guidance on the "Guidelines for exchange of margin for non-cleared OTC derivatives transactions," which has been in effect since March 2017.
The instruments required to exchange margin are all OTC derivatives 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 entities are financial companies that trade the relevant products and whose average notional amount of non-cleared OTC derivatives transactions at the end of each month from March to May each year is at least the threshold amount. Non-financial corporations, central banks, public institutions, and international organizations are excluded from the scope of application.
Financial companies with an average notional amount of at least 3 trillion won are subject to variation margin, and those with at least 10 trillion won are subject to both variation margin and initial margin. For financial companies affiliated with a financial group, when calculating the threshold amount, the applicability is determined by summing the notional amounts of non-cleared OTC derivatives transactions of all companies within the group.
Starting in September, 165 financial companies will be subject to variation margin, of which 130 are affiliated with financial groups. Four companies will be newly subject to the rules—China Guangfa Bank, ABL Life Insurance, Swiss Re Asia Pte. Ltd. Korea Branch, and SBI Savings Bank—while two companies—UBS Bank and Carrot General Insurance—will be excluded.
A total of 143 companies are subject to initial margin. Of these, 118 are affiliated with financial groups. Seven companies will be newly subject—Bank of China, Yuanta Securities Korea, Hyundai Investment Asset Management, Tongyang Life Insurance, ABL Life Insurance, Hyundai Marine & Fire Insurance, and SBI Savings Bank—while Carrot General Insurance and UBS Bank will be excluded.