The rules are designed to limit potential losses and prevent problems at one financial institution from spreading to others. They were due to expire later this month but will be renewed and remain in effect from Sept. 1, affecting about 143 financial institutions.
They cover over-the-counter (OTC) derivatives traded directly between two parties without going through a central counterparty or CCP. The collateral helps protect either side from losses if the other party cannot make its required payments.
There are two types of collateral. Initial margin is provided upfront to cover potential losses if the other party defaults, while variation margin is adjusted as the market value of the contract changes over time.
The watchdog introduced the rules in March 2017 to better manage risks arising from OTC derivatives.
Not every such transaction is covered. Certain foreign-exchange deals involving the actual delivery of currencies are excluded, along with cross-currency swaps and commodity contracts settled through physical delivery.
The rules apply to financial firms whose uncleared derivatives holdings exceed set levels, based on their average at the end of March, April and May. Those that cross the threshold must follow the requirements for one year from Sept. 1. For financial institutions, uncleared derivatives held across all their affiliates are combined to determine whether the rules apply.
Nonfinancial companies, public institutions and other international organizations are excluded from the rules. Investment funds, bank and other institutional trust accounts, and credit card companies are also exempt.
Seven firms will be newly subject to the rules including Bank of China, Yuanta Securities, Hyundai Investments Asset Management, Tongyang Life Insurance and Hyundai Marine & Fire Insurance. Two companies that had previously been subject to the rules including Carrot General Insurance will be removed from the list.
Separately, 165 institutions will be subject to variation margin requirements including 130 affiliated with financial groups. Unlike initial margin, which covers potential future losses from a default, this collateral is adjusted regularly to reflect changes in the market value of outstanding contracts.
Four firms including China Everbright Bank, ABL Life Insurance and SBI Savings Bank will be newly added.
The FSS said it will monitor how the rules are implemented, particularly at newly-added firms amid the risk of greater global market volatility. It will also seek feedback from the industry and help financial institutions address difficulties in complying with them.
AJP Takeaways
• The Financial Supervisory Service (FSS) will extend South Korea's collateral requirements for certain over-the-counter (OTC) derivatives for one year from Sept. 1, 2026, to reduce risks from transactions that are not centrally cleared.
• 143 financial institutions will be subject to initial margin requirements, including 118 belonging to financial groups, while 165 institutions will face variation margin requirements, including 130 affiliated with such groups.
• Initial margin is collateral provided upfront to protect against potential losses if a counterparty defaults, while variation margin is adjusted as the market value of a derivatives contract changes.
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