BANK 3.4.17 Treatment of cash variation margin

(1) If all of the following conditions are met, a banking business firm may treat the cash portion of variation margin exchanged between counterparties as a form of pre-settlement payment:
(a) either of the following is true:
(i) the trades are cleared through a qualifying central counterparty;

Note For the meaning of qualifying central counterparty, see the Glossary.
(ii) the cash received by the counterparty is not segregated;
(b) the variation margin is calculated and exchanged every day, based on mark-to-market valuation of derivatives positions;
(c) the variation margin is received in the same currency as the currency of settlement of the relevant derivative contract;
(d) the 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;
(e) derivative contracts and variation margins are covered by a single master netting agreement (MNA) between the counterparties;
(f) the MNA explicitly stipulates that the counterparties agree to settle net any payment obligations covered by it, taking into account any variation margin received or provided if a credit event occurs involving either counterparty;
(g) the MNA is legally enforceable and effective in all the relevant jurisdictions, including in the event of default, bankruptcy or insolvency.
(2) If the conditions in subrule (1) are met, the firm may use the cash portion of the variation margin received to reduce the replacement cost portion (that is, NRC or RC, defined in rules 3.4.11 and 3.4.13 respectively) of the exposure, and may deduct the resulting receivables assets from the exposure, as follows:
(a) if the firm receives cash variation margin from a counterparty, it may reduce only the replacement cost portion of the exposure amount of the derivatives asset by the amount of cash received if the positive mark-to-market value of the derivatives contract or contracts has not already been reduced by that amount;
(b) if the firm provides cash variation margin to a counterparty, it may deduct the resulting receivable from its exposure, if the cash variation margin has been recognised as an asset.
Inserted by QFCRA RM/2019-6 (as from 1st January 2020).