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  • Treatment of Cash Variation Margin

    • CA-15.3.34

      In the treatment of derivative exposures for the purpose of the leverage ratio, the cash portion of variation margin exchanged between counterparties may be viewed as a form of pre-settlement payment, if the following conditions are met:

      (a) For trades not cleared through a qualifying central counterparty (QCCP) the cash received by the recipient counterparty is not segregated;
      (b) Variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions;
      (c) The cash variation margin is received in the same currency as the currency of settlement of the derivative contract;
      (d) Variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty; and
      (e) Derivatives transactions and variation margins are covered by a single master netting agreement (MNA)30, 31 between the legal entities that are the counterparties in the derivatives transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty. The MNA must be legally enforceable and effective in all relevant jurisdictions, including in the event of default and bankruptcy or insolvency.
      Added: October 2018

      30 A Master MNA may be deemed to be a single MNA for this purpose.

      31 To the extent that the criteria in this paragraph include the term "master netting agreement", this term should be read as including any "netting agreement" that provides legally enforceable rights of offsets. This is to take account of the fact that for netting agreements employed by CCPs, no standardisation has currently emerged that would be comparable with respect to OTC netting agreements for bilateral trading.

    • CA-15.3.35

      If the conditions in Paragraph CA-15.3.34 are met, the cash portion of variation margin received may be used to reduce the replacement cost portion of the leverage ratio exposure measure, and the receivables assets from cash variation margin provided may be deducted from the leverage ratio exposure measure as follows:

      (a) In the case of cash variation margin received, the receiving bank may reduce the replacement cost (but not the PFE component) of the exposure amount of the derivative asset by the amount of cash received if the positive mark-to-market value of the derivative contract(s) has not already been reduced by the same amount of cash variation margin received under the Bahraini conventional bank licensee's operative accounting standard; and
      (b) In the case of cash variation margin provided to a counterparty, the posting Bahraini conventional bank licensee may deduct the resulting receivable from its leverage ratio exposure measure, where the cash variation margin has been recognised as an asset under the Bahraini conventional bank licensee's operative accounting framework and instead include the cash variation margin in the calculation of derivative replacement cost.
      Added: October 2018