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Final South African Margin Requirements for Non-Centrally Cleared OTC Derivative Transactions published

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Colegrave Anthony
Anthony Colegrave

Senior Associate

London

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12 June 2020

On 2 June 2020, the Financial Sector Conduct Authority and the Prudential Authority, acting with the concurrence of the South African Reserve Bank, published the final margining rules in respect of non-centrally cleared OTC derivatives in South Africa. The effective date is yet to be determined by the Authorities.

Further to our publication Key Changes to the Final Draft Margin Requirements for Non-centrally Cleared OTC Derivative Transactions in South Africa dated 13 December 2019,  the Standing Committee on Finance determined to delay the finalisation of the margining rules in respect of non-centrally cleared over-the-counter (OTC) derivative transactions set out in the Draft FSRA Joint Standard 1 of 2019 (Draft Margin Requirements for Noncentrally Cleared Over The Counter Derivative Transactions) (the Draft Joint Standard) until February 2020 in order to allow for a final period of industry engagement on the Draft Joint Standard.

Following a further delay resulting from, amongst others, the COVID-19 lockdown imposed in South Africa from 27

March 2020, the margin requirements have now been finalised by the publication of Joint Standard 2 of 2020 (Margin Requirements for Non-centrally Cleared Over The Counter Derivative Transactions) (the Joint Standard).

The margin requirements are finalised – what does this mean?

The amendments made to the Draft Joint Standard which we discussed in our publication Key Changes to the Final Draft Margin Requirements for Non-centrally cleared OTC Derivative Transactions in South Africa dated 13 December 2019 have been retained, with one minor change to the definition of “netting set” to include a group of derivative transactions between an authorised OTC derivative provider (Authorised ODP) and a foreign counterparty which are subject to a single legally enforceable bilateral netting agreement.

The effective date of the Joint Standard (Effective Date) is yet to be determined by the Authorities.

Notwithstanding the fact that the Effective Date is yet to be determined, we note that the period for phasing in the margining requirements remains as follows:

IM phase-in

The phase-in of the initial margin (IM) requirements 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.

IM Phase-in Period Aggregate month-end average gross notional outstanding amount Threshold
Effective Date - 31 August 2021 March, April and May of 2020 R30 Trillion
1 September 2021 - 31 August 2022 March, April and May of 2021 R23 Trillion
1 September 2022 - 31 August 2023 March, April and May of 2022 R15 Trillion
1 September 2023 - 31 August 2024 March, April and May of 2023 R8 Trillion
1 September 2024 onwards March, April and May of 2024 of the relevant preceding year R100 Billion

Authorised ODPs should therefore note that the Effective Date will very likely be determined as a date well before 31 August 2021. Authorised ODPs belonging to a group of which the aggregate month-end average gross notional amount of OTC derivatives for March, April and May 2020 exceeded R30 trillion should consider whether the counterparties they have entered into OTC derivative transactions with also meet this requirement and take the necessary steps to prepare to comply with the IM requirements when entering into new non-centrally cleared OTC derivative transactions with such counterparties after the Effective Date.

VM phase-in

From the Effective Date, 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 the Effective Date. Thereafter, the Joint Standard requires all authorised ODPs to exchange VM six months from the Effective Date.

While we do not expect the Authorities to determine the Effective Date without prior notice to the market, Authorised

ODPs should note that the Authorities are not subject to any notice period when determining the Effective Date.  

Next steps

All Authorised ODPs, and particularly Authorised ODPs likely to fall within the first phase of IM and VM implementation, should take the necessary steps to ensure they are ready to comply with the provisions of the Joint Standard once the Effective Date is determined.