Margining and risk mitigation for non-centrally cleared derivatives - frequently asked questions

Updated 1 June 2020

These FAQs are for clarification purposes only and are not legal advice. APRA encourages you to obtain professional advice about the application of any legislation or prudential standard to your particular circumstances. You should also exercise skill and care when relying on any material contained in these FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs. The FAQs may include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of any externally linked or referenced material in these FAQs.

Note: the numbering of these questions is fixed and will not change as new questions are added.

These frequently asked questions (FAQs) provide information to assist regulated entities to interpret Prudential Standard CPS 226 Margining and Risk Mitigation for Non-centrally Cleared Derivatives.

They do not provide an exhaustive list of examples and regulated entities are encouraged to contact APRA where they have questions regarding the interpretation of the relevant prudential standards.

1. Minimum Transfer Amount

1.1 Does the Minimum Transfer Amount (MTA) limit of 750,000 AUD (CPS 226 Paragraph 30) only apply at inception of the Credit Support Annex (CSA) in the case where the collateral agreement base currency is not AUD, i.e. denominated in a foreign currency?

For both new and existing CSAs where the collateral agreement base currency is not in AUD, APRA expects entities to incorporate a prudent buffer for foreign exchange volatility movements when negotiating the CSA with a given counterparty. However, it may be the case that due to foreign exchange movements, the combined variation margin and initial margin minimum transfer amount exceeds the AUD 750,000 MTA limit despite being below this limit at inception of the CSA agreement.

APRA is aware of the operational difficulties to frequently monitor balances as well as the time required to renegotiate CSAs. Notwithstanding this, it is our expectation that APRA-covered entities have a regular review process to ensure that, in the situation described above where the AUD equivalent MTA amount exceeds the prudential limit, amendments are made to the CSA to return under the AUD 750,000 MTA limit with priority to be given to those whose combined variation and initial margin minimum transfer amount are notably greater than the AUD 750,000 limit and have remained so for some time. 

During the review process, consideration should be given to the following:

• Expected volatility and direction of FX rates;
• Difference between the MTA and the AUD 750,000 MTA limit and the duration of the excess; and
• Nature and level of trading activity undertaken with the counterparty.

An APRA covered entity should clearly document and regularly review the criteria used as part of this process.