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February 19, 2013

Margin Rules Proposed on Some Swaps Trades

Global regulators released “near final” proposals for how financial firms would be able to trade derivatives that fall outside the scope of financial overhauls.

Among the potential rules: payments by both parties trading any derivatives known as swaps that can’t be routed to clearinghouses, which guarantee transactions. This “initial margin,” would tie up an estimated €700 billion ($935 billion), according to the proposal’s authors, the Basel Committee on Banking Supervision and the board of the International Organization of Securities Commissions.

These derivatives aren’t subject to the overhauls because they aren’t standardized enough for clearinghouses to be able to value them and manage their risk. Under mandates from global regulators, routine swaps have to be openly traded and cleared, much like futures. If they can’t be accepted by clearinghouses, they will be subject to higher capital requirements. The new proposal applies to swaps that can’t be cleared. About 5% of swaps fall into this category, according to TABB Group.”

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Read full Wall Street Journal article here

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