Isda Australian Risk Mitigation Agreement
On September 1, 2019, the requirements imposed by the Securities and Futures Commission (SFC) for licensed companies (LC) to mitigate risks to non-centralized over-the-counter derivatives will come into effect. The International Swaps and Derivatives Association, Inc. (ISDA) has issued a bilateral amending agreement that allows industry participants to modify their covered Master Agreements. In the wake of the financial crisis, international regulations require that the major market players who contract OTC derivatives that are not regulated by a central clearing house margin cover their exposures. These margin requirements are intended to encourage the use of centralized clearing and reduce systemic risk by ensuring that collateral is available to cover losses caused by the failure of a derivative counterparty. Operators subject to margin requirements may be required to present both the initial margin and the margin of variation. The initial margin is provided to cover potential future exposures (i.e. exposures likely to occur in the future). The margin of variation is provided to cover changes in current exposure.
Compliance with these contracts is an important step towards an orderly transition from the referenced libor derivative contracts. It is essential to reduce both the individual risks of entity and the systemic risks associated with stopping LIBOR. Australia`s long-awaited new laws that allow Australian banks, funds, insurers, superannuation units and other market players to access the increasingly regulated international risk management market have been enacted. In addition, new internationally compliant marginalizing documents have been published. This will be a great relief for Australians who have not been able to use certain offshore clearing markets and those that are subject to the looming international maturities. Today, I will review the Australian regulation recently adopted by APRA as “Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives”.” It will come into force on 1 September 2017 and will be followed by a consultation period and a draft published in October 2016. ASIC Commissioner Cathie Armour said: “The publication of the ISDA Ibor protocol and supplement will be an important step towards an orderly transition of billions of dollars of financial contracts into the derivatives market. Introducing the industry significantly will reduce the risk of contractual litigation, litigation and frustration by creating a consistent approach to recovery rates when LIBOR comes to an end.