Effective date and phase-in schedule 31

2.4.1 Subject to Sub-section 2.5, an AI should exchange VM for all relevant non-centrally cleared derivatives entered into with a covered entity from 1 March 2017.

2.4.2 Subject to Sub-section 2.5, the exchange of IM by an AI in respect of non-centrally cleared derivatives entered into with a covered entity will be phased-in as follows.

The exchange of IM by an AI applies in a one-year period (i.e. from 1 September of each year to 31 August of the following year)³² where both the AI and the covered entity have an average aggregate notional amount of non-centrally cleared derivatives, calculated according to paragraph 2.4.9, exceeding the respective threshold:

Period Threshold

Phase-in

1 March 2017 to

31 August 2017 HKD 24 trillion 1 September 2017 to

31 August 2018 HKD 18 trillion 1 September 2018 to

31 August 2019 HKD 12 trillion 1 September 2019 to

31 August 2020 &

1 September 2020 to 31 August 2021

HKD 6 trillion

1 September 2021 to

31 August 2022 HKD 375 billion

31 For the purposes of paragraphs 2.4.1 to 2.4.4, “AI” or “covered entity” means the group of entities to which the AI or the covered entity belongs.

32 By way of derogation from paragraph 2.4.2, the exchange of IM by an AI in the first phase (1 March 2017 to 31 August 2017) applies in a 6-month period.

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Permanent on a permanent basis from 1 September 20220 for each subsequent 12-month period

HKD 60 billion

2.4.3 Subject to Sub-section 2.5, the adoption of RMS in respect of non-centrally cleared derivatives entered into with a covered entity will be phased-in as follows. The RMS apply in a one-year period (i.e. from 1 September of each year to 31 August of the following year)³³ where both the AI and the covered entity have an average aggregate notional amount of non-centrally cleared derivatives, calculated according to paragraph 2.4.9, exceeding the respective threshold:

Period Threshold

Phase-in

1 March 2017 to

31 August 2017 HKD 24 trillion 1 September 2017 to

31 August 2018 HKD 18 trillion 1 September 2018 to

31 August 2019 HKD 12 trillion 1 September 2019 to

31 August 2020 &

1 September 2020 to 31 August 2021

HKD 6 trillion

1 September 2020

2021 to

31 August 20212022

HKD 60 billion³⁴

33 By way of derogation from paragraph 2.4.3, the RMS apply in the first phase (1 March 2017 to 31 August 2017) in a 6-month period.

34 For AIs that have not yet been subject to IM requirements by 1 September 2021, they should comply with the RMS requirements set out in Section 4 except for those elements that would only be applicable upon the implementation of IM requirements.

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Permanent on a permanent basis from 1 September 2021 2022 for each subsequent 12-month period

Zero (no threshold)

2.4.4 To avoid doubt, both the AI and the covered entity have to exceed the respective threshold for the RMS and/or IM provisions to apply in any one-year period from 1 September of that year to 31 August of the following year. This means that non-centrally cleared derivatives will not be subject to the RMS and/or provision of IM:

(i) if either the AI or the covered entity does not exceed the threshold with respect to a given one-year period.

However, the AI will need to confirm its position and that of its covered entity counterparty against the threshold applicable to the following one-year period again in good time. The RMS provisions should be applied and/or IM should be provided if the threshold is exceeded in the following one-year period (i.e. from 1 September of that year to 31 August of the following year), i.e. both the AI and the covered entity have an aggregate notional amount above the threshold;

(ii) the counterparty is not a covered entity.

2.4.5 Where an AI’s counterparty

(i) becomes subject to margin provisions or higher margin provisions in any one-year period from 1 September of that year to 31 August of the following year (such that VM and/or IM provisions apply), the AI should comply with such margin provisions only for those transactions entered into with that counterparty after the counterparty changes its status (i.e. from 1 September of that year);

(ii) ceases to be subject to margin provisions or becomes subject to lower margin provisions in any one-year period from 1 September of that year to 31 August of the following year (such that VM and/or IM provisions no longer apply), the AI may cease to comply with the

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margin provisions or may comply with the lower margin provisions for transactions entered into with that counterparty after the counterparty changes its status (i.e.

from 1 September of that year) as well as for any outstanding transactions entered into since the beginning of the applicable phase-in period set out in paragraphs 2.4.1 and 2.4.2.

2.4.6 Subject to paragraphs 2.4.5 and 2.5.1, the treatment of non-centrally cleared derivatives entered into before (“legacy contracts”) and after (“new contracts”) the relevant effective date is as follows:

(i) VM and IM provisions will apply to all new contracts entered into during the periods described in paragraphs 2.4.1 and 2.4.2 once the relevant thresholds are exceeded;

(ii) VM and IM need not be exchanged in respect of legacy derivatives contracts. However, an AI may include legacy contracts in its margin calculations. If an AI decides to exercise this option, it would need to do so on a continuous basis;

(iii) VM and IM need not be exchanged in respect of new contracts resulting from portfolio compression or post-trade risk reduction exercises (“replacement trades”) as long as the portfolio on which such exercise is performed consists exclusively of legacy contracts;³⁵ (iv) The RMS generally apply to legacy contracts.

However, the RMS do not need to be applied retrospectively (e.g. the trade documentation for legacy contracts may not be revised).

2.4.7 Genuine and non-material amendments to legacy contracts do not qualify as a new contract.³⁶ Any amendment that substantially changes the terms and

35 For example, replacement trades resulting from any such exercise entered into after the initial implementation date are not subject to margin standards (if otherwise applicable) in cases where the portfolio on which the exercise is performed consists exclusively of derivatives entered into in 2015. On the other hand, VM and IM provisions apply to replacement trades resulting from any such exercise on portfolios comprising legacy and new trades.

36 For example, genuine amendments to existing derivatives contracts which are made to give effect to interest rate benchmark reforms will not be considered new contracts from the perspective of the HKMA’s margin requirements.

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conditions of a non-centrally cleared derivatives contract (“material amendment”) needs to be considered as a new contract. Moreover, any amendment that extends a legacy contract for the purpose of avoiding the margin provisions in this module needs to be considered as a new contract. An AI should be able to produce the relevant transaction records associated with the amendments upon request by the MA.

2.4.8 Material changes in the EUR/HKD exchange rate will result in a review of the thresholds expressed in HKD in this module.

2.4.9 The average aggregate notional amount referred to in this Sub-section:

(i) is calculated as the average of the total gross notional amount of month-end positions of non-centrally cleared derivatives for March, April and May preceding the 1 September starting date in a relevant year. Month-end positions should be converted into HKD using corresponding month-end spot rates, before calculating the average position;

(ii) includes the gross notional amount of all non-centrally cleared derivatives, including non-centrally cleared derivatives mentioned in paragraph 2.1.2(iii), (iv) and (v);

(iii) is calculated on a group level by including all non-centrally cleared derivatives of all entities within the group of companies;^{37, 38}

(iv) includes all the non-centrally cleared derivatives that entities within the group have entered into with each other, counting each of them once.

2.4.10 The MA expects an AI to inform its counterparties whether it is subject to margin provisions (VM and IM)

37 To avoid doubt, non-centrally cleared derivatives (i) for which an AI faces no counterparty risk; or (ii) that are entered into with a sovereign, central bank, public sector entity, multilateral development bank or the Bank for International Settlements should be included.

38 An investment fund managed by an investment advisor will be considered a separate entity for the purpose of applying the average aggregate notional amount as long as the fund is a distinct segregated pool of assets (i) that would be treated as such for the purposes of the fund’s insolvency or bankruptcy and upon the insolvency or bankruptcy of the investment advisor and (ii) that is not collateralised by or otherwise guaranteed or supported by any other investment fund managed by the investment advisor or by the investment advisor.

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and RMS prior to entering into transactions with such counterparties. Further, the MA expects an AI to have an appropriate process in place which allows the AI to identify whether or not its counterparties are covered entities.³⁹