This instrument, Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022, determines Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives and commences on 1 January 2023 (see the Determination text and schedule). It revokes Determination No. 1 of 2022 and replaces the APRA prudential standard that sets mandatory margining and associated risk-mitigation duties for non-centrally cleared derivatives for APRA-covered entities across banking, insurance, life insurance and superannuation sectors (Authority; Application paras 2-6; commencement para 6).

Mechanically, CPS 226 does the following (identified to the relevant paragraphs and Attachments):

Establishes which entities are in scope: authorised deposit-taking institutions (ADIs), authorised banking non-operating holding companies (NOHCs), general insurers and authorised insurance NOHCs, life companies (including friendly societies and registered life NOHCs), and RSE licensees for their RSE business operations (paras 2-3).
Imposes mandatory exchange of variation margin with covered counterparties subject to a size-based implementation timetable, daily calculation and settlement, and zero threshold for variation margin (paras 13-17; Table 1).
Imposes mandatory posting and collection of initial margin with covered counterparties subject to a separate size-based timetable, gross posting and collection, an initial margin bilateral threshold not greater than AUD 75 million, prompt settlement, bilateral aggregation rules and accounting-based margining group definitions (paras 19-29; Table 2; paras 9(n), 24-26).
Requires initial margin to be calculated either using a prescribed standardised schedule (Attachment A) or via an APRA-approved model; sets model calibration standards (one-tailed 99% confidence interval over a 10‑day horizon using stress period data), governance, independent review and APRA approval and supervisory rights (paras 32-46; Attachment A; paras 35-46).

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=OFFICIAL]" title: Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022

Commonwealth Coat of Arms

Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022

Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives

Banking Act 1959

Insurance Act 1973

Life Insurance Act 1995

Superannuation Industry (Supervision) Act 1993

I, Renée Roberts, a delegate of APRA:

(a) under subsections 11AF(3) of the Banking Act 1959 (the Banking Act), 32(4) of the Insurance Act 1973 (the Insurance Act), 230A(5) of the Life Insurance Act 1995 (the Life Insurance Act), and 34C(6) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) REVOKE Banking, Insurance, Life Insurance, and Superannuation (prudential standard) determination No. 1 of 2022, including Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives made under that determination;

(b) under subsection 11AF(1) of the Banking Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all ADIs and authorised banking NOHCs;

(c) under subsection 32(1) of the Insurance Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all general insurers and authorised insurance NOHCs;

(d) under subsection 230A(1) of the Life Insurance Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all life companies, including friendly societies, and registered life NOHCs; and

(e) under subsection 34C(1) of the SIS Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all RSE licensees.

This instrument commences on 1 January 2023.

Dated: 1 December 2022

[signed]

Renée Roberts

Executive Director

Policy and Advice Division

Interpretation

In this instrument:

APRA means the Australian Prudential Regulation Authority.

ADI has the meaning given in section 5 of the Banking Act.

authorised banking NOHC has the meaning given to the expression authorised NOHC in section 5 of the Banking Act.

authorised insurance NOHC has the meaning given to the expression authorised NOHC in subsection 3(1) of the Insurance Act.

friendly society has the meaning given in section 16C of the Life Insurance Act.

general insurer has the meaning given in section 11 of the Insurance Act.

life company has the meaning given in the Schedule to the Life Insurance Act.

registered life NOHC has the meaning given to the expression registered NOHC in the Schedule to the Life Insurance Act.

RSE licensee has the meaning given in section 10 of the SIS Act.

the prudential standard means Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives.

Schedule

Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives comprises the document commencing on the following page.

Commonwealth Coat of Arms

Prudential Standard CPS 226

Margining and risk mitigation for non-centrally cleared derivatives

Objectives and key requirements of this Prudential Standard<br>This Prudential Standard requires an APRA covered entity to have appropriate margining practices in relation to non-centrally cleared derivatives. An APRA covered entity must exchange variation margin and post and collect initial margin with a covered counterparty, subject to certain criteria.<br>The key requirements of this Prudential Standard are that an APRA covered entity must:<br>exchange variation margin and post and collect initial margin in transactions with a covered counterparty subject to certain criteria and the implementation timetables;use a zero threshold in the exchange of variation margin;post and collect initial margin on a gross basis calculated by either the standardised schedule or an approved model approach;ensure that initial margin is held in a manner that provides legal certainty to both counterparties in the event of insolvency or bankruptcy; andcollect eligible collateral to satisfy margin requirements and apply appropriate risk-sensitive haircuts to collateral collected.<br>This Prudential Standard also requires an APRA covered entity to apply risk mitigation practices in the areas of trading relationship documentation, trade confirmation, portfolio reconciliation, portfolio compression, valuation processes and dispute resolution processes.

Table of Contents

Adjustments and exclusions

Previous exercise of discretion

Assets in Australia

Exchange of variation margin for non-centrally cleared derivatives

Post and collect of initial margin for non-centrally cleared derivatives

Minimum transfer amount

Due diligence

Calculation of initial margin for non-centrally cleared derivatives

Model approach to initial margin for non-centrally cleared derivatives

Eligible collateral for margining

Collateral haircuts

Treatment of intra-group transactions

Cross border application of margin and risk mitigation requirements

Risk mitigation requirements for non-centrally cleared derivative transactions

Trading relationship documentation

Trade confirmation

Portfolio reconciliation

Portfolio compression

Valuation processes

Dispute resolution

Attachment A — Standardised schedule for initial margin

Attachment B — Standardised schedule of risk-sensitive haircuts

Attachment C — Credit rating grades

Attachment D — Substituted compliance

Authority

This Prudential Standard is made under:

(a) section 11AF of the Banking Act 1959 (Banking Act);

(b) section 32 of the Insurance Act 1973 (Insurance Act);

(d) section 34C of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Application

2. This Prudential Standard applies to all:

(a) authorised deposit-taking institutions (ADIs), including foreign ADIs, and non-operating holding companies authorised under the Banking Act (authorised banking NOHCs);

(b) general insurers, including Category C insurers, non-operating holding companies authorised under the Insurance Act (authorised insurance NOHCs), and parent entities of Level 2 insurance groups;

(c) life companies including friendly societies and eligible foreign life insurance companies (EFLICs), and non-operating holding companies registered under the Life Insurance Act (registered life NOHCs); and

(d) RSE licensees under the SIS Act in respect of their business operations.[1]

3. The requirements in this Prudential Standard apply in respect of each ‘APRA covered entity’, defined as:

(a) an ADI, including a foreign ADI, and an authorised banking NOHC;

(b) a general insurer, including a Category C insurer, an authorised insurance NOHC and a parent entity of a Level 2 insurance group;

(d) a registrable superannuation entity under the SIS Act (RSE).

4. A requirement imposed on an APRA covered entity that is also the Head of a Level 2 group is to be read as requiring that APRA covered entity to ensure that each member of the Level 2 group that is a covered counterparty complies with the requirements of this Prudential Standard as if it were itself an APRA covered entity.[2]

5. The requirements in this Prudential Standard apply to transactions which are booked in the accounts of an APRA covered entity. For a foreign ADI, Category C insurer or EFLIC, the requirements in this Prudential Standard apply only to transactions booked in accounts of the Australian branch of that entity.

6. This Prudential Standard commences on 1 January 2023.

Interpretation

7. Terms that are defined in Prudential Standard APS 001 Definitions (APS 001), Prudential Standard GPS 001 Definitions (GPS 001) or Prudential Standard LPS 001 Definitions appear in bold the first time they are used in this Prudential Standard.

8. Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing. In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations, Prudential Standard or Australian Accounting Standard is a reference to the instrument as in force from time to time.

Definitions

9. The following definitions are used in this Prudential Standard:

(a) aggregate month-end average notional amount — is the simple average of the total notional amount[3] of outstanding non-centrally cleared derivative transactions as at the end of each month in the reference period. The total notional amount is the aggregate of all outstanding non-centrally cleared derivative transactions across all entities within the margining group. Intra-group transactions (transactions between two counterparties within the same margining group) are excluded from the calculation unless otherwise required by APRA;

(b) asset class — for the purposes of this Prudential Standard, the asset classes are (1) currency/rates, (2) equity, (3) credit, and (4) commodities. The asset class ‘currency/rates’ includes currency, interest rate and inflation derivatives. The asset class ‘commodities’ includes gold, silver and platinum;

(c) BCBS-IOSCO framework — is the margin requirements for non-centrally cleared derivatives as set out by the Basel Committee on Banking Supervision (BCBS) and the Board of the International Organization of Securities Commissions (IOSCO) in Margin requirements for non-centrally cleared derivatives as it exists at 23 July 2019;

(d) central counterparty (CCP) — is a clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. A CCP becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement;

(e) covered bond special purpose vehicle — has the same meaning as in the Banking Act;

(f) covered counterparty — is an entity that is a financial institution with the following exclusions:

(i) sovereigns, central banks, multilateral development banks, public sector entities and the Bank for International Settlements;

(ii) a covered bond special purpose vehicle that enters into derivative transactions for the sole purpose of hedging;

(iii) a securitisation special purpose vehicle in a traditional securitisation that enters into derivative transactions for the sole purpose of hedging; and

(iv) a special purpose vehicle or collective investment vehicle established for the sole purpose of acquiring and holding or investing in real estate or infrastructure assets, that enters into derivative transactions for the sole purpose of hedging;

(g) derivative — is either of the following:

(i) a derivative (within the meaning of Chapter 7 of the Corporations Act 2001); or

(ii) an arrangement that is a forward, swap or option, or any combination of those things, in relation to one or more commodities;

but does not include any arrangement that is of a kind mentioned in subregulation 6(2) of the Payment Systems and Netting Regulations 2001;[4]

(h) exchange traded derivative — is a derivative that is transacted directly through an organised, licensed and regulated exchange;

(i) financial institution — includes, but is not limited to, any institution engaged substantively in one or more of the following activities (domestically or overseas) – banking; leasing; issuing credit cards; portfolio management[5] (including asset management and funds management); management of securitisation schemes; equity and/or debt securities, futures and commodity trading and broking; custodial and safekeeping services; insurance and similar activities that are ancillary to the conduct of these activities. An authorised NOHC, a registered life NOHC, or any overseas equivalent is considered a financial institution. For the avoidance of doubt, hedge funds, trading firms, and foreign deposit-taking institutions are considered to be financial institutions;

(j) Head of a Level 2 group — is each of the following:

(i) where an ADI that is a member of a Level 2 group is not a subsidiary of an authorised banking NOHC or another ADI, that ADI;

(ii) where an ADI that is a member of a Level 2 group is a subsidiary of an authorised banking NOHC, that authorised banking NOHC;

(iii) the parent entity of a Level 2 insurance group as defined in GPS 001;

(k) initial margin — is collateral that is collected to cover the potential future exposure that could arise from future changes in the market value of a derivative over the close-out period in the event of a counterparty default;

(l) IOSCO’s Risk Mitigation Standards — are the risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives as set out by the Board of IOSCO in Risk Mitigation Standards for Non-centrally Cleared OTC Derivatives as it exists at 28 January 2015;

(m) Level 2 group — means the entities that comprise:

(i) Level 2 as defined in APS 001; or

(ii) a Level 2 insurance group as defined in GPS 001;

(n) margining group — is a group, comprising one or more entities, within the meaning of Australian Accounting Standard AASB 10 Consolidated Financial Statements; however, an APRA covered entity may elect to apply equivalent foreign accounting standards that apply to the consolidated financial statements of the APRA covered entity or covered counterparty, as relevant;

(o) margining period — is the period of time during which margin must be exchanged for all new transactions entered into within that period (see Tables 1 and 2);

(p) minimum transfer amount — is the amount specified in a margin agreement that sets the minimum amount of collateral required to be transferred between the two counterparties as part of a collateral call;

(q) netting agreement — is an ‘eligible bilateral netting agreement’ within the meaning of Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112), except that all references to ‘ADI’ are replaced with ‘APRA covered entity’;

(r) non-centrally cleared derivative — is a derivative that is not cleared by a CCP. This does not include exchange traded derivatives, securities financing transactions and indirectly cleared derivatives that are intermediated through a clearing member on behalf of a non-member client where the client is subject to the margin requirements of the CCP, or where the client provides margin consistent with the CCP’s margin requirements;

(s) qualifying level — is the level of aggregate month-end average notional amount for a reference period, in relation to the margining group of an APRA covered entity and the margining group of a covered counterparty, above which an APRA covered entity is subject to variation margin or initial margin requirements in the corresponding margining period (see Tables 1 and 2);

(t) reference period — is the period of time in respect of which month-end totals must be used to calculate the aggregate month-end average notional amount (see Tables 1 and 2);

(u) RSE — is a ‘registrable superannuation entity’ as defined in the SIS Act;

(v) RSE licensee — has the same meaning as in the SIS Act;

(w) securities financing transactions (SFTs) — are transactions such as repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions where the value of the transactions depends on the market valuation of securities and the transactions are typically subject to margin agreements;

(x) securitisation special purpose vehicle — a special purpose vehicle that purchases and holds, or otherwise holds directly in its name, the pool for the purpose of a securitisation. The special purpose vehicle’s acquisition of exposures held in the pool is typically funded by debt issued by the SPV, including through the issue of securities or units by the special purpose vehicle;

(y) senior securitisation exposure — is a securitisation exposure effectively backed or secured by a first claim on the entire amount of the assets in the underlying pool. Securitisation exposures with different maturities that share pro rata loss allocation with senior securitisation exposures so that they benefit from the same level of credit enhancement, are themselves senior securitisation exposures;

(z) threshold — is the amount specified in a margin agreement that defines the level of exposure above which margin will be posted. The threshold represents the amount of uncollateralised exposure allowed under the margin agreement;

(aa) traditional securitisation — a securitisation where the pool is transferred (or assigned) to, and held by, or otherwise held directly in its name by, a special purpose vehicle; and

(ab) variation margin — is collateral that is collected or paid to reflect the current mark-to-market exposure resulting from changes in the market value of a derivative.

Adjustments and exclusions

10. APRA may adjust or exclude a specific prudential requirement in this Prudential Standard in relation to one or more specified person referred to in paragraph 2 of this Prudential Standard.[6]

Previous exercise of discretion

11. An APRA covered entity must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion by APRA under a previous version of this Prudential Standard.

Assets in Australia

12. For the purposes of paragraph 13A(4)(a) of the Banking Act and paragraph 28(a) of the Insurance Act, cash or non-cash collateral given to secure any obligation under a non-centrally cleared derivative transaction is excluded from being assets in Australia.

Exchange of variation margin for non-centrally cleared derivatives

13. An APRA covered entity must exchange variation margin with a covered counterparty[7] during a margining period in the third column of Table 1 where:

(a) the APRA covered entity belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 1 exceeded the corresponding qualifying level in the second column of Table 1; and

(b) the covered counterparty belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 1 exceeded the corresponding qualifying level in the second column of Table 1.

14. Variation margin must be exchanged for all new[8] non-centrally cleared derivative transactions, with the exception of physically settled foreign exchange (FX) forwards and swaps,[9],[10] entered into during the relevant margining period in the third column of Table 1.

Table 1: Implementation timetable for variation margin requirements

Reference period	Qualifying level	Margining period
March, April and May 2016	AUD 3 billion	1 March 2017 to 31 August 2017<br>
March, April and May 2017	AUD 3 billion	1 September 2017 to 31 August 2018
March, April and May of each subsequent calendar year	AUD 3 billion	1 September of the year referred to in the first column of this row to 31 August of the next calendar year

15. Where a non-centrally cleared derivative transaction is subject to variation margin requirements at inception, these requirements apply for the life of that transaction.

16. Variation margin must be calculated and called on a daily basis. Settlement of variation margin amounts must be conducted promptly.

17. Variation margin must be exchanged using a zero threshold so that the mark‑to‑market exposure of the non-centrally cleared derivative transactions is fully collateralised. In the event of a dispute, the undisputed amount must be exchanged between the two counterparties until the dispute is resolved.

18. Transactions that are not subject to the same legally enforceable netting agreement must not be considered in the same variation margin calculation.

Post and collect of initial margin for non-centrally cleared derivatives

19. An APRA covered entity must post and collect initial margin with a covered counterparty[11] during a margining period in the third column of Table 1 where:

(a) the APRA covered entity belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 2 exceeded the corresponding qualifying level in the second column of Table 2; and

(b) the covered counterparty belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 2 exceeded the corresponding qualifying level in the second column of Table 2.

20. Initial margin must be posted and collected for all new[12] non-centrally cleared derivative transactions, with the exception of physically settled FX forwards and swaps,[13] entered into during the relevant margining period in the third column of Table 2.

Table 2: Implementation timetable for initial margin requirements

Reference period	Qualifying level	Margining period
March, April and May 2016	AUD 4.5 trillion	1 March 2017 to 31 August 2017
March, April and May 2017	AUD 3.375 trillion	1 September 2017 to 31 August 2018
March, April and May 2018	AUD 2.25 trillion	1 September 2018 to 31 August 2019
March, April and May 2019	AUD 1.125 trillion	1 September 2019 to 31 August 2021
March, April and May 2021	AUD 75 billion	1 September 2021 to<br>31 August 2022
March, April and May of each subsequent calendar year	AUD 12 billion	1 September of the year referred to in the first column of this row to 31 August of the next calendar year

21. Where a non-centrally cleared derivative transaction is subject to initial margin requirements at inception, these requirements apply for the life of that transaction.

22. Initial margin must be posted and collected on a gross basis.

23. Initial margin must be calculated and called both at the outset of a transaction and on a regular and consistent basis upon changes in the measured potential future exposure. Settlement of initial margin amounts must be conducted promptly.

24. The threshold applicable to the initial margin for each margining group must not be greater than AUD 75 million.[14] The threshold is applied bilaterally at the aggregate level of the margining group and is based on all non-centrally cleared derivative transactions between the two margining groups. In the event of a dispute, the undisputed amount must be posted and collected by the two counterparties until the dispute is resolved.

25. For the purposes of applying the initial margin threshold in paragraph 24 of this Prudential Standard, an investment fund, RSE, trust or managed investment scheme (MIS) may be treated separately from both (i) the investment advisor, RSE licensee, trustee and/or responsible entity for that investment vehicle; and (ii) any other investment vehicle, as long as the fund, RSE, trust or MIS represents a segregated pool of assets that is not collateralised by or otherwise guaranteed or supported by other funds or an advisor in the event of insolvency or bankruptcy.

26. The specific method and parameters that will be used by an APRA covered entity and a covered counterparty to calculate initial margin must be agreed and recorded at or prior to the onset of a transaction.

27. Initial margin must be held so as to ensure that:

(a) the margin collected is promptly available to the collecting party in the event of the posting party’s default; and

(b) the collected margin must be subject to arrangements that protect the posting party to the extent possible under applicable law in the event that the collecting party enters insolvency or bankruptcy.

28. Initial margin must not be re-hypothecated, re-pledged or re-used but cash initial margin may be held in a demand deposit account with a third-party custodian in the name of the posting counterparty. The third-party custodian must not be affiliated with either counterparty. Contractual arrangements providing for the posting and collection of initial margin must provide for initial margin to be held in a manner that satisfies this requirement.

29. Initial margin collected must be segregated from the collector’s proprietary assets. The initial margin collector must also segregate initial margin provided in respect of one or more counterparties from the assets of other parties if requested by the relevant counterparty or counterparties.

Minimum transfer amount

30. The combined variation margin and initial margin amount required to be posted or collected under this Prudential Standard must be subject to a de minimis minimum transfer amount that must not exceed AUD 750,000.

Due diligence

31. An APRA covered entity must undertake a reasonable level of due diligence to assess:

(a) whether a counterparty is a covered counterparty; and if so

(b) whether, for variation margin requirements, the covered counterparty belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 1 exceeded the corresponding qualifying level in the second column of Table 1; and

(c) whether, for initial margin requirements, the covered counterparty belongs to a margining group whose aggregate month-end average notional amount of non-centrally cleared derivatives for the relevant reference period in the first column of Table 2 exceeded the corresponding qualifying level in the second column of Table 2.

A self-declaration or public disclosure from a counterparty is an acceptable way to verify that the counterparty is a covered counterparty whose non-centrally cleared derivatives activity exceeded the applicable variation margin and initial margin qualifying levels. Where an APRA covered entity is of the preliminary view that a counterparty is not a covered counterparty or did not exceed the applicable qualifying levels, the APRA covered entity is required to undertake a reasonable level of due diligence to ensure that there is no reason to believe otherwise.

Calculation of initial margin for non-centrally cleared derivatives

32. The required amount of initial margin posted and collected must be calculated by either a model approach approved by APRA or the standardised schedule set out in Attachment A to this Prudential Standard.

33. Derivative transactions for which an APRA covered entity faces no counterparty risk require no initial margin to be collected and may be excluded from the initial margin calculation under both a model approach and the standardised schedule.

34. The calculation of initial margin for cross-currency swaps differs depending on whether a model approach or the standardised schedule is adopted:

(a) If a model approach is adopted, then the model does not need to incorporate the risk associated with the fixed physically settled FX transactions associated with the exchange of principal. All other risks of the cross-currency swap must be considered in the calculation.[15]

(b) If the standardised schedule is adopted, then the initial margin only needs to be calculated with reference to the relevant row in the interest rates section of the standardised schedule outlined in Attachment A to this Prudential Standard.

Model approach to initial margin for non-centrally cleared derivatives

35. An APRA covered entity may apply to APRA for approval to use a model for the calculation of initial margin for some or all of its portfolio. An APRA covered entity need not restrict itself to a model approach or the standardised schedule for its whole portfolio. APRA may approve an application made under this paragraph.

36. The initial margin calculated by the model approach must be sufficiently conservative even during periods of low market volatility. Calculation of the initial margin amount must be consistent with at least a one-tailed 99 per cent confidence interval over a 10-day time horizon,[16] based on historical data that includes a period of significant financial stress and does not exceed an historical period of five years. The historical data must be equally weighted for calibration purposes.

37. The period of financial stress used for calibration must be identified and applied separately for each asset class.

38. Transactions that are not subject to the same legally enforceable netting agreement must not be considered in the same initial margin model calculation.

39. A model may allow for diversification, hedging and risk offsets within an asset class provided these transactions are covered by the same legally enforceable netting agreement. Any such allowance requires approval by APRA as part of an initial margin model approval.

40. Initial margin calculations by a model for derivatives in distinct asset classes must be performed without regard to derivatives in other asset classes. That is, initial margin amounts calculated for each asset class must not account for diversification benefits across asset classes[17] and must be summed to calculate the initial margin amount for a netting agreement.

41. A model used for initial margin calculations must be subject to an independent internal governance process that:

(a) continuously monitors and assesses the value of the model’s risk assessments;

(b) tests the model against realised data and experience;

(d) regularly reviews the model in line with developments in global industry standards for initial margin models; and

(e) accounts for the complexity of the products covered.

42. An APRA covered entity must ensure that an independent review of the initial margin model and risk measurement system is carried out initially (i.e. at the time when model approval is sought) and then regularly as part of the internal audit process. This review must be conducted by functionally independent, appropriately trained and competent personnel, and must take place at least once every three years or when a material change is made to the model or the risk measurement system.

43. Once an APRA covered entity has obtained approval to use a model for the calculation of initial margin for an asset class, it must continue to employ that model for that asset class on an ongoing basis unless, or except to the extent that, the model approval is varied, revoked or suspended by APRA.

44. APRA may, at any time, vary, revoke or suspend a model approval for the calculation of initial margin, or impose additional conditions on a model approval.

45. Where a model approval has been varied, revoked or suspended, APRA may require an APRA covered entity to revert to the standardised schedule for the calculation of initial margin.

46. Prior notification to APRA is required for any material changes to an initial margin model or risk measurement system. APRA’s prior written approval is required for any material changes to an initial margin model which are not consistent with global industry standards for initial margin models.

Eligible collateral for margining

47. Subject to the conditions set out in this Prudential Standard, an APRA covered entity must collect margin only in the following forms of eligible collateral and, where relevant, credit rating grades must be determined in accordance with Attachment C to this Prudential Standard:[18]

(a) cash collateral;

(b) debt securities rated by an External Credit Assessment Institution (ECAI) with a credit rating grade of either three (or better) for securities issued by: Commonwealth, State and Territory governments in Australia (including State and Territory central borrowing authorities); central, state and regional governments in other countries; the Reserve Bank of Australia; central banks in other countries; and the international banking agencies and multilateral development banks;

(c) debt securities rated by an ECAI with a credit rating grade of either three (or better) for securities issued by: ADIs, overseas banks, Australian and international local governments and corporates;

(d) debt securities not rated by an ECAI where these securities are issued by an ADI or overseas bank as senior debt and are listed on a recognised exchange. This is subject to the condition that all rated issues of the same seniority by the issuing ADI or overseas bank have a long-term or short-term credit rating grade of at least three and the APRA covered entity holding the security has no information suggesting that the security justifies a rating below this level;

(e) covered bonds rated by an ECAI with a credit rating grade of either three (or better);

(f) senior securitisation exposures rated by an ECAI with a credit rating grade of one;

(g) equities included in a major stock index; and

(h) gold bullion.

48. Resecuritisation exposures, irrespective of credit ratings, are not eligible collateral for margining purposes.

49. Collateral in the form of securities issued by a counterparty to the transaction (or by any person or entity related or associated with the counterparty) is considered to have a material positive correlation with the credit quality of the counterparty and is therefore not eligible collateral for margining purposes.

50. An APRA covered entity must have appropriate controls in place to ensure that the collateral collected does not exhibit significant wrong-way risk[19] or significant concentration risk. The controls must consider concentrations in terms of an individual issuer, issuer type and asset type.

51. Eligible collateral that was originally posted or collected may be substituted provided that:

(a) both parties agree to the substitution;

(b) the substitution is made on the terms applicable to their agreement; and

(c) the substituted eligible collateral meets all the requirements of this Prudential Standard and the value of the substituted eligible collateral, after the application of risk-sensitive haircuts, is sufficient to meet the margin requirement.

Collateral haircuts

52. Risk-sensitive haircuts appropriately reflecting the credit, market and FX risk must be applied to the collected collateral. The risk-sensitive haircuts must be calculated using either a model approach approved by APRA or the standardised schedule set out in Attachment B to this Prudential Standard.

53. APRA may, upon written request by an APRA covered entity, approve the use of a model approach for the calculation of risk-sensitive haircuts.[20] The model used must be subject to appropriate internal governance standards.

54. For the model approach, an APRA covered entity must ensure that an independent review of the risk-sensitive haircut model and risk measurement system is carried out initially (i.e. at the time when model approval is sought) and then regularly as part of the internal audit process. This review must be conducted by functionally independent, appropriately trained and competent personnel, and must take place at least once every three years or when a material change is made to the model or the risk measurement system.

55. An APRA covered entity must consistently adopt either the standardised schedule or a model approach for the calculation of risk-sensitive haircuts for all of the collateral within the same collateral class.[21] Once an APRA covered entity has obtained approval to use a model for the calculation of risk-sensitive haircuts for a collateral class, it must continue to employ that model for that collateral class on an ongoing basis unless, or except to the extent that, the model approval is varied, revoked or suspended.

56. APRA may, at any time, vary, revoke or suspend a model approval for the calculation of risk-sensitive haircuts, or impose additional conditions on a model approval.

57. Where a model approval has been varied, revoked or suspended, APRA may require an APRA covered entity to revert to the standardised schedule for the calculation of risk-sensitive haircuts.

58. APRA’s prior written approval is required for any material changes to a risk-sensitive haircut model.

Treatment of intra-group transactions

59. An APRA covered entity is not subject to the initial margin requirements in this Prudential Standard for a non-centrally cleared derivative transaction with a covered counterparty that is a member of the APRA covered entity’s margining group.

60. The variation margin requirements in this Prudential Standard do not apply to a non-centrally cleared derivative transaction between an APRA covered entity that is a foreign ADI, Category C insurer or EFLIC and a covered counterparty that is a member of the APRA covered entity’s margining group.

61. An APRA covered entity is not subject to the variation margin requirements in this Prudential Standard for a non-centrally cleared derivative transaction with a covered counterparty that is a member of the APRA covered entity’s margining group where that covered counterparty is also a member of the APRA covered entity’s Level 2 group.[22]

62. APRA may, upon written request by an APRA covered entity, exclude one or more intra-group transactions from the variation margin requirements applicable to the entity under this Prudential Standard.

63. APRA may require an APRA covered entity to exchange variation margin and/or post and collect initial margin with any other entity within the APRA covered entity’s margining group where APRA deems appropriate to do so.

Cross border application of margin and risk mitigation requirements

64. Attachment D to this Prudential Standard sets out the margin requirements or provisions of a foreign jurisdiction that are comparable in outcomes with the BCBS-IOSCO framework and the margin requirements in this Prudential Standard.[23]

65. Subject to paragraph 66 of this Prudential Standard, the margin requirements in this Prudential Standard do not apply to transactions in which an APRA covered entity complies with the relevant foreign margin requirements or provisions in Attachment D to this Prudential Standard in their entirety (substituted compliance).[24]

66. An APRA covered entity may only substitute compliance with the margin requirements or provisions (in their entirety) of a foreign jurisdiction for compliance with the margin requirements in this Prudential Standard in a transaction where:

(a) the APRA covered entity is transacting with a covered counterparty that is required to exchange margins in respect of the trading relationship between the APRA covered entity and the covered counterparty under the margin requirements or provisions of the relevant foreign jurisdiction, or that would be required to exchange margins in respect of that trading relationship under those requirements or provisions if its amount of non-centrally cleared derivatives exceeded a level specified in those requirements or provisions; or

(b) the APRA covered entity is required to exchange margins in respect of that trading relationship under the margin requirements or provisions of the relevant foreign jurisdiction.

67. Where a foreign ADI, Category C insurer or EFLIC is directly subject to:

(a) margin requirements that are substantially similar to the BCBS-IOSCO framework by its home jurisdiction; or

(b) risk mitigation requirements that are substantially similar to IOSCO’s Risk Mitigation Standards by its home jurisdiction,

it may comply in their entirety with its home jurisdiction’s margin or risk mitigation requirements (as the case may be) or those of a jurisdiction deemed equivalent by its home jurisdiction in lieu of complying with the relevant requirements in this Prudential Standard where the APRA covered entity has completed an internal assessment that positively demonstrates: (i) how it is directly subject to requirements of the foreign jurisdiction; (ii) how the requirements of the foreign jurisdiction are substantially similar to the BCBS-IOSCO framework or IOSCO’s Risk Mitigation Standards (as the case may be); and (iii) how it complies with those requirements. The APRA covered entity’s internal assessment, and any additional requested information, must be made available to APRA upon request.

68. Where a member of an APRA covered entity’s Level 2 group that is incorporated outside of Australia is directly subject to:

(a) margin requirements of a foreign jurisdiction that are substantially similar to the BCBS-IOSCO framework; or

(b) risk mitigation requirements of a foreign jurisdiction that are substantially similar to IOSCO’s Risk Mitigation Standards,

the APRA covered entity may apply for approval by APRA to comply, in respect of that member, with the foreign jurisdiction’s requirements in lieu of complying with the relevant requirements in this Prudential Standard.

69. An APRA covered entity is not required to post or collect initial margin where either it or its counterparty to the transaction is incorporated, and operating, in a legal jurisdiction that does not permit it or its counterparty to satisfy the requirements in paragraph 27 of this Prudential Standard in relation to that transaction.

70. An APRA covered entity is not required to exchange variation margin or post or collect initial margin if there is any doubt as to the enforceability of the netting agreement upon insolvency or bankruptcy of the counterparty. An APRA covered entity must monitor such exposures and set appropriate internal limits and controls to manage its exposure to such counterparties.

71. An APRA covered entity is not required to exchange variation margin or post or collect initial margin where collateral arrangements are questionable or not legally enforceable upon default of the counterparty. An APRA covered entity must monitor such exposures and set appropriate internal limits and controls to manage its exposure to such counterparties.

72. Applicable netting agreements and collateral arrangements must be supported by regularly updated legal opinions consistent with the requirements set out in Attachment H of APS 112.

Risk mitigation requirements for non-centrally cleared derivative transactions

73. An APRA covered entity that transacts in non-centrally cleared derivatives must establish and implement policies and procedures for risk mitigation standards for non-centrally cleared derivative transactions with all of its counterparties (including counterparties that are in the same margining group). Subject to the requirements in paragraph 74 of this Prudential Standard, these policies and procedures may consider the nature of the risks and transaction type, as well as size, complexity, and operating environment of both the APRA covered entity and its counterparty in establishing an appropriate framework.

74. An APRA covered entity entering into a non-centrally cleared derivative transaction with a covered counterparty must, at a minimum, apply the risk mitigation standards outlined in paragraphs 75 to 95 of this Prudential Standard.

Trading relationship documentation

75. An APRA covered entity must establish and implement policies and procedures to execute written trading relationship documentation[25] with a covered counterparty prior to or contemporaneously with executing a non-centrally cleared derivative transaction.

76. The trading relationship documentation must:

(a) promote legal certainty for non-centrally cleared derivative transactions;

(b) include all material rights and obligations of the counterparties concerning the non-centrally cleared derivative trading relationship that have been agreed between them; and

77. An APRA covered entity must have policies and procedures to maintain trading relationship documentation for a reasonable period of time after the maturity of any outstanding transactions with a covered counterparty and such documentation must be made available to APRA upon request.

Trade confirmation

78. An APRA covered entity must establish and implement policies and procedures designed to ensure the material terms of all non-centrally cleared derivative transactions[26] with a covered counterparty are confirmed as soon as practicable after execution of the transaction. Material terms must include terms necessary to promote legal certainty to the transaction including incorporating by reference the trading relationship documentation.

79. An APRA covered entity must establish and implement policies and procedures designed to confirm material changes to the legal terms or the rights and obligations under transactions.

80. Confirmations must be executed in writing through non-rewritable, non-erasable automated methods where it is reasonably practicable for the relevant counterparties to the transaction to do so. In all other cases, confirmation must be executed in writing via non-rewritable, non-erasable electronic or manual means.

Portfolio reconciliation

81. An APRA covered entity must establish and implement policies and procedures designed to ensure that the material terms and valuations of all transactions in a non-centrally cleared derivatives portfolio are reconciled with covered counterparties at regular intervals.

82. The policies and procedures must be designed to ensure the process or method of portfolio reconciliation is agreed upon with its counterparties and designed to:

(a) ensure an accurate record of material terms and valuations of the non-centrally cleared derivatives transactions in the portfolio; and

(b) identify and resolve discrepancies in the material terms and valuations in a timely manner.

83. An APRA covered entity must conduct portfolio reconciliation with a scope and frequency that reflects:

(a) the nature and extent of its non-centrally cleared derivative activity;

(b) the materiality and complexity of the risks it faces;

(d) market practice and industry protocols in the relevant derivative markets.

Portfolio compression

84. An APRA covered entity must establish and implement policies and procedures to regularly assess and, to the extent appropriate, conduct portfolio compression.

85. On either a bilateral or multilateral basis, portfolio compression must seek to replace economically-equivalent transactions by decreasing the number of transactions and/or the notional value of a portfolio.

86. An APRA covered entity must conduct portfolio compression with a scope and frequency that reflects:

(a) the nature and extent of its non-centrally cleared derivative activity;

(b) the materiality and complexity of the risks it faces;

(d) market practice and industry protocols in the relevant derivative markets.

Valuation processes

87. An APRA covered entity must agree with its covered counterparties and clearly document the process for determining the value of each non-centrally cleared derivative transaction at any time from the execution of the transaction to the termination, maturity, or expiration thereof, for the purpose of exchanging margin. Valuation processes must be reasonably designed to minimise the likelihood of disputes.

88. All agreements on valuation process must be documented in the trading relationship documentation or trade confirmation.

89. Valuation determinations must be based on economically similar transactions or other objective criteria. Documentation must include an alternative process or approach by which counterparties will determine the value of the non-centrally cleared derivative transaction in the event of the unavailability or other failure of any inputs required to value the transaction.

90. An APRA covered entity must perform periodic review of the agreed upon valuation process to take into account changes in market conditions. An APRA covered entity must establish and implement policies and procedures for updating any such changes as a result of a review.

Dispute resolution

91. An APRA covered entity must establish and implement policies and procedures designed to ensure rigorous and robust dispute resolution procedures are agreed with its covered counterparties prior to or contemporaneously with executing a non-centrally cleared derivative transaction. The dispute resolution procedures must address the mechanism or process for determining when discrepancies in material terms or valuations should be considered disputes as well as how such disputes should be resolved as soon as practicable.

92. The dispute resolution mechanism or process must include the escalation of material disputes to senior management. The dispute resolution mechanism or process must include escalation to the Board where the dispute is considered material to the APRA covered entity.

93. An APRA covered entity must have policies and procedures to document disputes and such documentation must be made available to APRA upon request.

94. In the event that a margin dispute arises, an APRA covered entity must make all necessary and appropriate efforts, including timely initiation of dispute resolution protocols, to resolve the dispute with its counterparty and exchange the required amount of margin in a timely manner.

95. An APRA covered entity must notify APRA of disputes that are material either in dollar value or period of time outstanding. An APRA covered entity must clearly document and regularly review the criteria used to determine when a dispute is reported to APRA.

Attachment A — Standardised schedule for initial margin

Initial margin calculated according to the standardised schedule equals the sum of the ‘net standardised initial margin amount’ calculated separately for each netting agreement.
APRA may, upon the request of an APRA covered entity, approve the entity to calculate the ‘net standardised initial margin amount’ using a schedule already in use for regulatory capital purposes prior to the application of this Prudential Standard, provided that such a schedule is at least as conservative as that outlined below.
For each particular netting agreement:

(a) Net standardised initial margin amount = 0.4 x gross standardised initial margin amount + 0.6 x net-to-gross ratio x gross standardised initial margin amount. The net-to-gross ratio (NGR) is the ratio of the net current credit exposure (NCCE) of all transactions included in a netting agreement to the gross current credit exposure (GCCE) of the same transactions. That is, NGR = NCCE/GCCE.

(b) NCCE is the sum of all positive and negative mark-to-market values of all individual contracts covered by a netting agreement (i.e. positive mark-to-market values of transactions may be offset against negative mark-to-market values on other transactions covered by the same netting agreement). If the net sum of individual mark-to-market values is positive, the NCCE is equal to that sum. If the sum of mark-to-market values is zero or negative, the NCCE is set equal to zero.

(c) GCCE is the sum of the mark-to-market values of all transactions covered by a netting agreement with a positive mark to-market value with no offsetting against contracts with a negative mark-to-market value.

(d) The ‘gross standardised initial margin amount’ is the sum over all derivative contracts in the netting agreement of the gross notional size of each derivative contract multiplied by the relevant initial margin rate provided in the standardised schedule in Table 3. Simple netting of notional amounts where contracts are matched by the same underlying and maturity is allowed.[27]

Table 3: Standardised schedule of initial margin rates

Asset class	Initial margin rate (% of notional amount)
Credit: Duration less than 2 years	2%
Credit: Duration from 2 years to less than 5 years	5%
Credit: Duration 5 years or longer	10%
Commodity	15%
Equity	15%
Foreign exchange	6%
Interest rate: Duration less than 2 years	1%
Interest rate: Duration from 2 years to less than 5 years	2%
Interest rate: Duration 5 years or longer	4%
Other	15%

Attachment B — Standardised schedule of risk-sensitive haircuts

The risk-sensitive haircut percentage under the standardised schedule is calculated as the sum of the collateral class haircut percentage in Table 4 and the FX haircut percentage outlined in paragraphs 3 and 4 of this Attachment.
APRA may, upon the request of an APRA covered entity, approve the entity to calculate the risk-sensitive haircut using a schedule already in use for regulatory capital purposes prior to the application of this Prudential Standard. Such a schedule must be at least as conservative as that outlined below.
For the purposes of variation margin, an additional FX haircut of eight per cent of market value applies to all non-cash collateral in which the currency of the collateral asset differs from the currency agreed in an individual derivative contract, the relevant governing master netting agreement or the relevant credit support annex.
For the purposes of initial margin, an additional FX haircut of eight per cent of market value applies to all cash and non-cash collateral in which the currency of the collateral asset differs from the termination currency. Each counterparty may specify only one termination currency.

Table 4: Standardised schedule of risk-sensitive haircuts

Collateral class Residual maturity Haircut (% of market value)
Cash 0%
Debt securities under paragraph 47(b) of this Prudential Standard ≤1 year 0.5%
1 year, ≤5 years 2%
5 years 4%
Debt securities under paragraphs 47(c), 47(d), 47(e) and 47(f) of this Prudential Standard ≤1 year 1%
1 year, ≤5 years 4%
5 years 8%
Equities included in a major stock index 15%
Gold 15%

Attachment C — Credit rating grades

For the purposes of this Prudential Standard, an APRA covered entity must use the credit rating grades in Table 5 and Table 6 below.

Table 5: Recognised long-term ratings and equivalent credit rating grades

Credit rating grade	Standard & Poor’s Corporation	Moody’s Investors Services	Fitch Ratings
1	AAA<br>AA+<br>AA<br>AA-	Aaa<br>Aa1<br>Aa2<br>Aa3	AAA<br>AA+<br>AA<br>AA-
2	A+<br>A<br>A-	A1<br>A2<br>A3	A+<br>A<br>A-
3	BBB+<br>BBB<br>BBB-	Baa1<br>Baa2<br>Baa3	BBB+<br>BBB<br>BBB-

Table 6: Recognised short-term ratings and equivalent credit rating grades

Credit rating grade	Standard & Poor’s Corporation	Moody’s Investors Services	Fitch Ratings
1	A-1	P-1	F-1
2	A-2	P-2	F-2
3	A-3	P-3	F-3

Attachment D — Substituted compliance

For the purposes of this Prudential Standard and subject to the condition in paragraph 2 of this Attachment, substituted compliance with the margin requirements or provisions issued or administered by any of the following foreign bodies is permitted:

(a) Office of the Superintendent of Financial Institutions, Canada;

(b) European Commission;

(d) Financial Services Agency, Japan;

(e) Ministry of Agriculture, Forestry and Fisheries, Japan;

(f) Ministry of Economy, Trade and Industry, Japan;

(g) Monetary Authority of Singapore, Singapore;

(h) Swiss Financial Market Supervisory Authority, Switzerland;

(i) Financial Conduct Authority, United Kingdom;

(j) Prudential Regulation Authority, United Kingdom;

(k) Commodity Futures Trading Commission, United States;

(l) Farm Credit Administration, United States;

(m) Federal Deposit Insurance Corporation, United States;

(n) Federal Housing Finance Agency, United States;

(o) Board of Governors of the Federal Reserve System, United States; and

(p) Office of the Comptroller of the Currency, Treasury, United States.

2. The following condition applies in relation to the foreign margin requirements or provisions issued or administered by a foreign body set out in paragraphs 1(a) to (j) of this Attachment:

(a) Substituted compliance is not permitted for a transaction where the APRA covered entity and the covered counterparty are both members of the same margining group.

[1] For the purposes of this Prudential Standard, an ‘RSE licensee’s business operations’ includes all activities as an RSE licensee (including the activities of each RSE of which it is the licensee), and all other activities of the RSE licensee to the extent that they are relevant to, or may impact on, its activities as an RSE licensee.

[2] For the avoidance of doubt, a reference to an ‘APRA covered entity’ in this Prudential Standard is to be read, for the purposes of paragraph 4 of this Prudential Standard, as a reference to the entity and also all members of an APRA covered entity’s Level 2 group that are covered counterparties.

[3] The calculation of the notional amounts must include physically settled foreign exchange forwards and swaps.

[4] Subregulation 6(2) of the Payment Systems and Netting Regulations 2001 identifies obligations that are not eligible obligations in relation to a close out netting contract. The arrangements mentioned include credit facilities, reciprocal purchase agreements (otherwise known as repurchase agreements), sell buyback arrangements, securities loan arrangements, contracts of insurance and managed investment schemes.

[5] For clarity, the definition does not apply where a portfolio manager is acting as an agent.

[6] Refer to subsection 11AF(2) of the Banking Act, subsection 32(3D) of the Insurance Act, subsection 230A(4) of the Life Insurance Act and subsection 34C(5) of the SIS Act.

[7] Refer to paragraphs 59 to 63 of this Prudential Standard for the treatment of intra-group transactions.

[8] Genuine amendments to existing derivative transactions do not qualify as a new derivative transaction. This includes any amendments made solely for the purpose of addressing benchmark reforms. Any amendment that extends an existing derivative transaction for the purpose of avoiding margin requirements must be considered a new derivative transaction. The novation of a grandfathered transaction, application of standard trade maintenance processes on a grandfathered transaction or a transaction that results from portfolio compression of grandfathered transactions, does not qualify as a new derivative transaction. However, a transaction resulting from compression of both grandfathered transactions and transactions which are subject to mandatory margin requirements is subject to the margin requirements in this Prudential Standard.

[9] For clarity, physically settled FX forwards and swaps must be included in the calculation of aggregate month-end average notional amount for the purposes of determining whether qualifying levels are exceeded, but may be excluded from the calculation of variation margin and initial margin to be exchanged.

[10] For clarity, the fixed physically settled FX transactions associated with the exchange of principal in cross-currency swaps may also be excluded from the calculation of variation margin to be exchanged. All other risks associated with cross-currency swaps must be included in the calculation of variation margin to be exchanged.

[11] Refer to paragraphs 59 to 63 of this Prudential Standard for the treatment of intra-group transactions.

[12] Refer to footnote 8.

[13] Refer to footnote 9.

[14] For the avoidance of doubt, an APRA covered entity is not required under this Prudential Standard to have initial margin documentation, custodial arrangements and operational processes in place for posting and collecting initial margin with a margining group if the bilateral initial margin amount is less than AUD 75 million.

[15] For avoidance of doubt, the only payments that may be excluded from initial margin requirements for a cross-currency swap are the fixed physically settled FX transactions associated with the exchange of principal. All other payments or cash flows that occur during the life of the swap must be subject to initial margin requirements.

[16] The 10-day requirement applies in the case that variation margin is exchanged on a daily basis. If variation margin is exchanged at less than daily frequency, the minimum time horizon must be set equal to 10 days plus the number of days in between variation margin exchanges.

[17] This applies to all products including those which have risk exposures in multiple asset classes (e.g. quantos).

[18] For the avoidance of doubt, eligible collateral for margining purposes is distinct from the eligible collateral under APS 112 that can be used to reduce the credit risk capital requirement.

[19] Wrong-way risk occurs when the value of the collateral collected exhibits a significant correlation with the creditworthiness of the counterparty or the value of the underlying non-centrally cleared derivatives portfolio in a way that undermines the effectiveness of the protection offered by the collateral collected.

[20] For clarity, while an APRA covered entity may have approval to use a model to calculate haircuts on collateral for the purpose of calculating regulatory capital, a separate approval by APRA is required for the use of a model in calculating haircuts for margining collateral.

[21] Classes of collateral must be consistent with the categories in Table 4 of Attachment B to this Prudential Standard and include (1) cash; (2) debt securities under paragraph 47(b) of this Prudential Standard; (3) debt securities under paragraphs 47(c), 47(d), 47(e) and 47(f) of this Prudential Standard; (4) equities; and (5) gold. Foreign exchange haircuts must be modelled consistently for all collateral classes.

[22] For a life company or a friendly society, non-centrally cleared derivative transactions between any of its funds (e.g. statutory fund, benefit fund, management fund or shareholder fund) are not in the same Level 2 group and are therefore subject to the variation margin requirements.

[23] For the avoidance of doubt, all requirements in this Prudential Standard are margin requirements except for the risk mitigation requirements in paragraphs 73 to 95 of this Prudential Standard.

[24] For the avoidance of doubt, this includes an APRA covered entity to which subparagraph 66(a) of this Prudential Standard applies and the entity would be compliant with the foreign margin requirements or provisions in their entirety if the entity were directly subject to the requirements or provisions.

[25] A long form confirmation that meets the conditions in paragraph 76 of this Prudential Standard and is received as soon as practicable after the execution of a transaction is considered to satisfy the requirement for trading relationship documentation.

[26] This requirement applies to all transactions including transactions entered into from novation.

[27] For example, a pay-fixed AUD interest rate swap with maturity of three years and notional of AUD 100 million could be netted against a pay-floating AUD interest rate swap with maturity of three years and notional of AUD 50 million to arrive at a single notional of AUD 50 million to which the appropriate initial margin rate would be applied. Derivatives with different fundamental characteristics such as the underlying, maturity etc. may not be netted against each other.

meta-content-style-type: text/css meta-content-type: application/xhtml+xml; charset=utf-8 meta-generator: Aspose.Words for .NET 22.10.0 meta-keywords: "[SEC=OFFICIAL]" title: Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022

Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022

Prudential Standard CPS 226 Margining and risk mitigation for non-centrally cleared derivatives

Banking Act 1959

Insurance Act 1973

Life Insurance Act 1995

Superannuation Industry (Supervision) Act 1993

I, Renée Roberts, a delegate of APRA:

(b) under subsection 11AF(1) of the Banking Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all ADIs and authorised banking NOHCs;

(c) under subsection 32(1) of the Insurance Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all general insurers and authorised insurance NOHCs;

(e) under subsection 34C(1) of the SIS Act, DETERMINE the prudential standard in the form set out in the schedule, which applies to all RSE licensees.

This instrument commences on 1 January 2023.

Dated: 1 December 2022

[signed]

Renée Roberts

Executive Director

Policy and Advice Division

Interpretation

In this instrument:

CPS 226 relies on a small set of interlocking concepts to determine scope, triggers and operational requirements. The key definitional and conceptual building blocks in the text are:

APRA covered entity and covered counterparty (paras 2-3; definitions para 9(f),(i)): An APRA covered entity is an in‑scope regulated entity (ADIs, insurers, life companies, RSEs). A covered counterparty is a financial institution, subject to listed exclusions (sovereigns, central banks, certain SPVs), and is the class of counterparty with which the margin rules apply if both sides exceed qualifying notional thresholds (para 13, 19). The "financial institution" definition is broad and explicitly includes hedge funds, trading firms and foreign deposit-taking institutions (para 9(i); fn 5 clarifies portfolio managers acting as agents are excluded).
Margining group and qualifying level (para 9(n),(s)): Margining group is a consolidation concept based on AASB 10 consolidated financial statements (with the option to elect "equivalent foreign accounting standards"). The standard uses an aggregate month‑end average notional amount across margining groups as the trigger , the "aggregate month‑end average notional amount" is the simple average of month‑end total notional amounts for the reference period (para 9(a); fn 3 notes that physically settled FX forwards and swaps are included in notional for trigger purposes). The "qualifying level" (Tables 1 and 2) determines whether variation and initial margin obligations apply in a specified margining period.
Variation margin and initial margin (paras 13-18; 19-29; para 9(k),(ab)): Variation margin is collateral to reflect current mark‑to‑market exposure and must be exchanged daily with zero threshold (para 17). Initial margin is to cover potential future exposure over the close‑out period, must be posted and collected on a gross basis, calculated by either the standardised schedule (Attachment A) or an APRA‑approved model, and must be segregated and not re‑used (paras 22-29; Attachment A).
Implementation timetables and thresholds (Tables 1 & 2, paras 13-21): Variation margin came in for entities with aggregated month‑end notional above AUD 3 billion under the timetables in Table 1. Initial margin follows Table 2, with a descending set of qualifying levels from AUD 4.5 trillion down to AUD 12 billion for subsequent years. The bilateral threshold for initial margin must not exceed AUD 75 million (para 24); combined minimum transfer amount for variation + initial must not exceed AUD 750,000 (para 30).
Standardised schedule vs model approaches (paras 32-46; Attachments A & B): Initial margin and haircut calculations can follow prescriptive standardised schedules (Attachment A for initial margin rates by asset class and Attachment B for haircuts) or an APRA‑approved internal model. Model approvals require conservative calibration, governance, independent validation and notification/approval for material changes (paras 36-46; 52-58).
Eligible collateral and risk controls (paras 47-51, 52-56): The standard lists eligible collateral types (cash, certain rated debt securities, covered bonds, senior securitisation exposures, equities in major indices, gold) and excludes resecuritisation and securities issued by the counterparty or associated entities (paras 47-49). APRA requires controls on wrong‑way risk and concentration risk (para 50) and insists on risk‑sensitive haircuts (Attachment B or model).
Legal certainty, enforceability and cross‑border enforceability (paras 12, 27, 69-72): Initial margin must be held to ensure prompt availability on default and to protect posting parties to the extent the law permits in the event of collector insolvency; legal enforceability of netting and collateral arrangements is a condition of margin exchange, and where enforceability is in doubt APRA permits non‑exchange and requires monitoring and internal limits (paras 27, 69-71). Attachment D sets out specified foreign authorities whose frameworks may be accepted for substituted compliance, with limits where both parties are in the same margining group (Attachment D para 2).
Risk‑mitigation standards beyond margin (paras 73-95): The standard transposes IOSCO’s Risk Mitigation Standards into APRA requirements for trading relationship documentation, trade confirmations, portfolio reconciliation, portfolio compression, valuation processes and dispute resolution, with minimum process and governance requirements.

These concepts combine to create a system that uses size triggers and consolidation definitions to bring entities into scope, prescriptive operational rules for margin exchange and collateral treatment, and supervisory discretion to approve models, adjust requirements, or accept alternative foreign regimes in specified circumstances. The instrument embeds international standards (BCBS‑IOSCO, IOSCO) by reference while setting out specific Australian operational requirements and supervisory levers (Attachment references; paras 9(c), 9(l), 64-69).

CPS 226 applies to a defined set of APRA-covered entities and, by its definitions, to covered counterparties that are financial institutions. The affected parties and the channels by which they are affected are:

Primary regulated entities (paras 2-3): All ADIs (including foreign ADIs operating in Australia) and authorised banking NOHCs; general insurers (including Category C insurers), authorised insurance NOHCs and parent entities of Level 2 insurance groups; life companies including friendly societies and EFLICs and registered life NOHCs; and RSE licensees in respect of their RSE business operations. Paragraph 4 treats Heads of Level 2 groups as responsible for ensuring that Level 2 members that are covered counterparties comply as if they were APRA covered entities.
Covered counterparties (para 9(f)): Entities that are financial institutions are "covered counterparties" for the purpose of margin obligations, subject to specific exclusions: sovereigns, central banks, multilateral development banks, public sector entities and BIS; covered bond SPVs and certain securitisation SPVs established solely for hedging; and special purpose vehicles or collective investment vehicles set up to hold real estate or infrastructure assets used only for hedging (para 9(f)(i)-(iv)). The definition of "financial institution" is broad and explicitly includes hedge funds, trading firms, foreign deposit‑taking institutions and NOHCs (para 9(i)).
Margining group participants (para 9(n)): The determination uses consolidation (AASB 10) to establish margining groups. The margining group construct means that obligations (variation and initial margin) are triggered based on aggregated month‑end average notionals across the consolidated group. An APRA covered entity may elect to use equivalent foreign accounting consolidation standards where applicable (para 9(n)).
Indirectly affected entities: Custodians, third‑party service providers and market counterparties: The standard requires initial margin segregation and allows cash to be held in a demand deposit with a third‑party custodian in the name of the posting counterparty, provided the custodian is not affiliated with either counterparty (para 28). Entities providing custody, legal opinions, valuation services, netting documentation or dispute resolution support will be materially involved in operational compliance.
Foreign branches and overseas entities: For foreign ADIs, Category C insurers and EFLICs, the standard applies only to transactions booked in the Australian branch (para 5). Substituted compliance provisions (paras 64-69; Attachment D) allow entities to rely on certain foreign margin regimes in their entirety, subject to conditions , relevant for firms operating cross‑border or with foreign group members directly subject to comparable home regime requirements.
Funds and vehicles (para 25): The standard allows investment funds, RSEs, trusts and MISs to be treated separately from managers/advisors for the initial margin threshold application where the fund represents a segregated pool not collateralised by or guaranteed by the advisor/manager. This matters for pooled vehicles, aggregated thresholds and bilateral application.

Channels of effect and practical considerations:

Size thresholds: Entities whose aggregate month‑end average notionals exceed the qualifying levels in Tables 1 and 2 will be pulled into variation margin and initial margin obligations respectively , the transition timetable escalates obligations over successive reference periods, with qualifying levels declining for initial margin down to AUD 12 billion for subsequent years (Table 2). Entities near these thresholds need ongoing monitoring and may face sudden operational obligations when they cross thresholds.
Intra‑group treatment (paras 59-63): Intra‑group transactions are largely excluded from initial margin (para 59) and variation margin obligations in some circumstances (para 60-61), but APRA retains the power to require intra‑group margining or to exclude intra‑group transactions upon request (paras 62-63). Treatment differs for life companies and friendly societies of the same corporate group (fn 22).
Legal and operational readiness: Firms that will be in scope must have trading relationship documentation, daily MTM, margin operations, collateral management, custodian arrangements, segregated accounts, legal opinions on enforceability (paras 75-95; para 72 referencing APS 112 Attachment H legal opinion consistency), reconciliations and dispute-resolution processes.

Who pays and who decides:

Paying parties: Where bilateral initial margin and variation margin obligations apply, each counterparty will be required to post the necessary collateral; the posting counterparty supplies initial and variation margin, while the collecting counterparty holds it subject to segregation rules (paras 13-29). Funding costs for initial margin (which often must be posted in high‑quality assets or cash) fall on the posting counterparty.
Decision-makers: The regulated entity must decide whether a counterparty is a covered counterparty and whether qualifying levels are exceeded (due diligence para 31), how to calculate initial margin (standardised schedule or APRA-approved model paras 32-36), which collateral to accept (paras 47-51) and how to manage dispute resolution and valuation (paras 73-95). APRA decides on model approvals, adjustments and exclusions and whether substituted compliance applies in particular cross‑border contexts (paras 10, 35-46, 52-58, 64-69; Attachment D).

In short, CPS 226 directly affects regulated financial institutions and any financial institutions with which they transact if size thresholds are met; it imposes operational obligations that will redistribute funding costs, require governance and documentation, and increase demands on custody and legal processes.

CPS 226 sets mandatory duties on APRA covered entities in discrete operational areas and confers supervisory and approval rights on APRA. The principal duties and the institutional rights provided to APRA follow.

Principal duties of APRA covered entities

Margin exchange duties:
- Exchange variation margin with covered counterparties when both margining groups exceed qualifying levels (paras 13-14). Variation margin must be calculated and called daily, settled promptly, and exchanged with a zero threshold so mark‑to‑market exposures are fully collateralised; disputed amounts are subject to exchange of the undisputed portion (paras 16-17).
- Post and collect initial margin when both margining groups exceed the qualifying levels in Table 2 (para 19). Initial margin applies to all new non‑centrally cleared derivative transactions (excluding physically settled FX forwards/swaps as specified) and must be posted on a gross basis and re‑calculated at outset and on a regular basis upon changes in measured potential future exposure (paras 20-23, fn 12-13).
Thresholds and minimum transfers:
- Ensure the initial margin bilateral threshold is not greater than AUD 75 million per margining group (para 24; fn 14 provides for operational relief where bilateral initial margin would be under AUD 75 million).
- Apply a de minimis minimum transfer amount for combined variation and initial margin not exceeding AUD 750,000 (para 30).
Collateral eligibility and treatment:
- Collect only eligible collateral as listed (cash, certain rated debt securities, covered bonds, senior securitisation exposures, major index equities, gold) and exclude resecuritisation and securities issued by the counterparty or related parties (paras 47-49).
- Apply controls to avoid significant wrong‑way risk and concentration risk (para 50).
- Apply risk‑sensitive haircuts to collected collateral (paras 52-56; Attachment B), using the standardised schedule or an APRA‑approved model, and consistently apply one approach per collateral class (para 55).
Custody, segregation and re‑use:
- Hold initial margin in a manner that ensures prompt availability on default and protects the posting party in collector insolvency to the extent possible under law (para 27).
- Do not re‑hypothecate, re‑pledge or re‑use initial margin; cash initial margin may be held in a demand deposit with an independent third‑party custodian in the name of the posting counterparty (para 28).
- Segregate initial margin from the collector’s proprietary assets and, if requested, segregate collateral by counterparty (para 29).
Model governance and validation:
- Use either the standardised schedule or obtain APRA approval for any model used to calculate initial margin (paras 32-36).
- For model approaches, ensure conservative calibration (one‑tailed 99% over 10 days, stress period data equally weighted and not exceeding 5 years), no cross‑asset diversification benefits (para 36, 40), and independent governance, monitoring and validation processes (paras 41-42).
- Notify APRA prior to material changes to a model; obtain APRA prior written approval for material changes not consistent with global industry standards (para 46).
Risk mitigation process duties:
- Establish trading relationship documentation prior to or contemporaneously with transactions (paras 75-77).
- Confirm material terms promptly after execution, using non‑rewritable/non‑erasable methods where practicable (paras 78-80).
- Reconcile portfolios at appropriate frequency with counterparty agreements (paras 81-83).
- Regularly assess and where appropriate conduct portfolio compression (paras 84-86).
- Put in place documented valuation processes and alternative approaches for unavailability of inputs (paras 87-90).
- Maintain dispute resolution procedures, escalate material disputes to senior management/Board and notify APRA of material disputes (paras 91-95).
Due diligence and monitoring:
- Undertake reasonable due diligence to determine if a counterparty is a covered counterparty and whether qualifying levels are exceeded; self‑declaration/public disclosure is acceptable evidence but the APRA covered entity must undertake reasonable due diligence if it preliminarily believes otherwise (para 31).

APRA’s rights and supervisory powers

Discretion to adjust or exclude prudential requirements (para 10): APRA may adjust or exclude specific prudential requirements in relation to one or more specified persons.
Model approvals and supervisory removal (paras 35-46, 52-58): APRA may approve models for initial margin and haircuts, require internal governance and independent reviews, revoke, vary or suspend approvals, impose additional conditions, and require reversion to the standardised schedule where approvals are varied or suspended.
Intra‑group adjustments (paras 62-63): APRA may, on written request, exclude intra‑group transactions from variation margin requirements, and may require exchange of margin among entities within the same margining group where APRA deems appropriate.
Substituted compliance and cross‑border supervisory assessment (paras 64-69; Attachment D): APRA identifies foreign authorities whose regimes may be accepted for substituted compliance and sets conditions; APRA may require internal assessments and additional information and may approve the use of those foreign rules for members of a Level 2 group.
Monitoring and information rights (multiple provisions): APRA may request internal assessments, information on model changes, and documentation for trading relationships, valuation, disputes and legal opinions (paras 42, 44, 46, 72, 77, 83, 93-95). Where the instrument provides for an APRA decision, that decision is to be made in writing (Interpretation para 8).

Rights of APRA covered entities

Use of model or standardised schedule (paras 32-36; Attachment A/B): Entities have the right to choose the standardised schedule or to apply for an APRA‑approved model for initial margin and haircuts, and to request APRA approve equivalently conservative schedules already used for capital purposes (Attachment A para 2; Attachment B para 2).
Substituted compliance where conditions met (paras 64-69; Attachment D): Entities may, under conditions, apply substituted compliance with specified foreign regimes in lieu of CPS 226 requirements where the conditions in paras 65-66 and Attachment D permit.

Key implementation rights/duties interaction

Approval is a gate: model approaches require APRA approval; APRA can revoke/alter approvals and require reversion to standardised approaches (paras 35-46, 52-58). Entities must therefore maintain fallback operational ability to adopt the standardised schedule if approvals are withdrawn.
Documentation and legal certainty: the standard makes legal opinion and enforceability a practical gating factor , where enforceability is in doubt APRA allows non‑exchange of margin but requires monitoring and internal limits (paras 69-71; para 72 referencing APS 112 legal opinion requirements).

These duties create operational obligations (daily calls, collateral segregation, legal opinions, governance and modelling infrastructure), funding costs (initial margin must be posted on high‑quality assets or cash) and compliance tasks (due diligence, documentation, independent reviews). APRA’s supervisory rights allow it to tailor or enforce prudential change through approval, exclusion or reversion mechanisms rather than setting explicit criminal or pecuniary penalties within the text of CPS 226 itself.

CPS 226 does not itself set out a regime of civil or criminal penalties in the instrument text; instead it operates as a prudential standard made under APRA’s statutory powers, and enforcement occurs through APRA’s supervisory and administrative powers under the Acts cited in the Authority section (section 11AF of the Banking Act, section 32 of the Insurance Act, section 230A of the Life Insurance Act and section 34C of the SIS Act). The instrument sets supervisory levers and procedural obligations that APRA can exercise; the text provides multiple mechanisms APRA may use to require or enforce compliance:

APRA’s power to adjust or exclude requirements (para 10): APRA may adjust or exclude specific prudential requirements in relation to one or more specified persons. That statutory discretion operates as an administrative tool to temper or remove certain obligations where APRA considers it appropriate; use of this authority will effectively relieve those persons from specified requirements.
Model approval and supervisory revocation (paras 35-46, 52-58): APRA is given express power to approve model approaches for initial margin and haircuts, and to vary, revoke or suspend those approvals, and to impose additional conditions. APRA may also require an APRA covered entity to revert from a model to the standardised schedule where approval has been varied, revoked or suspended (paras 44-46, 56-57). These powers mean that APRA controls firms’ use of internal models by granting and withdrawing permission, which has immediate prudential consequences (e.g. higher initial margin under the standardised schedule).
Requirement and direction powers over margin exchange (paras 62-63): APRA may, upon written request, exclude intra‑group transactions from variation margin requirements, and APRA may require an APRA covered entity to exchange variation margin and/or post and collect initial margin with any other entity within its margining group where APRA deems appropriate. This is a direction power enabling APRA to impose bilateral margining within groups.
Monitoring, information and documentation requirements (multiple paras): The prudential standard requires entities to maintain and make available documentation (trading relationship documentation para 77; dispute documentation para 93; legal opinions para 72 referencing APS 112), to notify APRA of material disputes (para 95), and to obtain APRA’s approval for material model changes (paras 44, 46, 58). Failure to provide requested information or to maintain required documentation would typically engage APRA’s supervisory toolkit.
Reversion, conditioning and supervision as enforcement levers: APRA’s ability to require reversion to a standardised approach, to impose conditions on approvals, and to vary or revoke approvals are practical enforcement mechanisms that can be used to compel changes in firm behaviour. The standard contemplates these administrative enforcement actions without specifying pecuniary fines or criminal sanctions in the document itself.

What the instrument does not specify

No specific pecuniary or criminal penalties are specified in CPS 226 itself. Enforcement relies on the underlying Acts and APRA’s broader statutory supervisory powers under those Acts. The text therefore leaves the specific statutory enforcement measures (directions, conditions on licences, prudential standards enforceable by APRA under the Acts, potential civil penalties under the Acts) to the enabling statutes rather than restating them in the prudential standard.

Operational enforcement risks and practical implications

Immediate operational consequences from supervisory actions: APRA’s ability to suspend model approvals or to require reversion to the standardised schedule can have direct economic impact on firms (e.g. materially higher initial margin requirements under the standardised schedule than an approved model). Because APRA can impose conditions or revoke approvals at any time, firms must maintain operational flexibility and contingency planning (paras 44-46, 56-57).
Information rights and supervisory oversight: APRA’s requirement for documentation and prior notices of material changes to models gives it significant oversight. Entities should expect to be required to provide internal assessments and additional information if relying on substituted compliance (paras 66-68). Failure to comply with documentation or reporting obligations could be treated as non‑compliance and trigger supervisory remedies.
Legal enforceability gates: The standard permits non‑exchange of margin where netting or collateral enforceability is in doubt (paras 69-71), but requires monitoring and internal controls. Firms choosing not to exchange margin for legal enforceability reasons must maintain monitoring and may be subject to supervisory scrutiny of their internal limits and controls.

Summary

CPS 226 provides APRA with supervisory and administrative enforcement levers , model approval control, variation or revocation of approvals, the ability to adjust or exclude requirements and to require intra‑group margining , and relies on documentation, reporting and information obligations to enable oversight. The instrument itself does not prescribe monetary penalties; rather, enforcement is implemented through APRA’s statutory powers and administrative actions under the Acts cited in the Authority. Entities should regard APRA’s approval and review powers as the primary mechanism by which compliance will be compelled and supervised (paras 10, 35-46, 52-58, 62-63, 95).

CPS 226 references and interfaces with multiple other regulatory instruments and accounting standards. The standard explicitly anchors itself to the enabling statutes and to several other prudential standards and legal instruments; the interactions are functional and often prescriptive.

Statutory foundations and interpretive cross‑references

Enabling Acts: The Prudential Standard is made under s 11AF of the Banking Act 1959, s 32 of the Insurance Act 1973, s 230A of the Life Insurance Act 1995 and s 34C of the SIS Act (Authority para 1). Those Acts provide APRA’s statutory authority to make prudential standards and give the broader enforcement framework. CPS 226 does not reproduce enforcement measures from those Acts; entities should consult the Acts to understand APRA’s broader powers.
AASB 10 and accounting consolidation: The margining group is defined by reference to Australian Accounting Standard AASB 10 Consolidated Financial Statements; entities may elect equivalent foreign accounting standards applicable to their consolidated financial statements (para 9(n)). That means accounting consolidation and the treatment of subsidiaries under AASB 10 directly affect whether an entity is aggregated into a margining group and hence whether it triggers qualifying levels for margin obligations.

APRA prudential standards and regulatory instruments

APS 001, GPS 001, LPS 001: Definitions from these prudential standards are used for defined terms and appear in bold on first use (Interpretation para 7). Relevant cross‑references include Level 2 group definitions and parent entities (para 9(j),(m)).
APS 112: Netting agreement and legal opinions: The standard requires that netting agreements be an “eligible bilateral netting agreement” within the meaning of APS 112, substituting references to ADI with APRA covered entity (para 9(q)). Para 72 mandates that applicable netting agreements and collateral arrangements be supported by regularly updated legal opinions consistent with Attachment H of APS 112. Therefore legal enforceability analysis under APS 112 is integral to operational compliance with CPS 226.

Other statutory instruments and regulations

Payment Systems and Netting Regulations 2001: The definition of “derivative” excludes arrangements mentioned in subregulation 6(2) of the Payment Systems and Netting Regulations 2001 (para 9(g); fn 4). This ties CPS 226’s scope of “derivative” to the statutory list of obligations excluded from eligible close‑out netting contracts.
Banking and Insurance Act provisions on “assets in Australia”: Paragraph 12 states that for purposes of particular provisions in the Banking Act and Insurance Act (paragraph 13A(4)(a) of the Banking Act and paragraph 28(a) of the Insurance Act), cash or non‑cash collateral given under a non‑centrally cleared derivative transaction is excluded from being assets in Australia. That cross‑reference affects cross‑border prudential calculations of assets in Australia and could have balance sheet or regulatory capital implications.

International standards and substituted compliance

BCBS‑IOSCO and IOSCO standards: CPS 226 explicitly defines the BCBS‑IOSCO framework (para 9(c)) and IOSCO’s Risk Mitigation Standards (para 9(l)) by reference to the international documents and bases many of its requirements on those texts. The standard implements the BCBS‑IOSCO margin requirements domestically and transposes IOSCO risk‑mitigation standards into APRA’s prudential obligations (paras 32-36; paras 73-95).
Substituted compliance: Attachment D lists specified foreign authorities and permits substituted compliance where the foreign margin or risk‑mitigation requirements are comparable in outcomes with BCBS‑IOSCO and IOSCO standards (paras 64-66; Attachment D). Conditions apply , e.g. substituted compliance is not permitted where the APRA covered entity and the covered counterparty are both members of the same margining group (Attachment D para 2). Entities must demonstrate direct subjection to the foreign rules and that those rules are substantially similar (para 67). This creates an interaction where foreign prudential regimes can supplant CPS 226 obligations if APRA accepts equivalence and conditions are met.

Contract law and insolvency law

Legal enforceability gates: The standard conditions margining on enforceable netting agreements and collateral arrangements; where enforceability is doubtful in a legal jurisdiction, entities are not required to post/collect initial margin or exchange variation margin but must monitor exposures and set internal limits (paras 69-71). Consequently, applicable insolvency and netting law in a foreign jurisdiction will directly affect operational margining obligations.

Operational standards and market practice

Custody and third‑party arrangements: The requirement that cash initial margin be held in a demand deposit with a third‑party custodian in the name of the posting counterparty and that the custodian not be affiliated with either party (para 28) engages contractual arrangements with custodians and bank account structures.
Legal opinions and market documentation: The requirement to maintain trading relationship documentation, confirm material terms, reconcile portfolios and have dispute resolution mechanisms (paras 75-95) interacts with widely used market protocols, master agreements and industry standards for collateral and margining (e.g. ISDA Master Agreements and credit support annexes), although CPS 226 does not name specific industry contracts.

Summary of interaction risks

Accounting and consolidation determine scope: A firm’s accounting consolidation policy feeds directly into the margining group calculation and hence into whether the entity is in scope for margin obligations (para 9(n)).
Cross‑border legal variance matters: Insolvency and netting law differences between jurisdictions can prevent margining; where enforceability doubts exist APRA allows non‑exchange but requires monitoring and internal controls (paras 69-71). Substituted compliance with foreign regimes is conditional and limited (paras 64-69; Attachment D).
Overlap with other prudential rules: CPS 226 references APS 112 netting requirements and legal opinion standards, so compliance will necessarily involve coordination with other APRA prudential standards and supervisory expectations.

Entities must therefore manage a web of interactions: APRA prudential standards, accounting consolidation rules, contractual ISDA/CSA structures and relevant foreign legal frameworks. CPS 226 builds on and interfaces with those instruments rather than operating in isolation.

The instrument itself contains a small, explicit amendment history and the schedule indicates the immediate predecessor. The text records the following formal changes and the circumstances under which the standard applies:

Revocation of the previous determination: The Determination states that the delegate of APRA revokes Banking, Insurance, Life Insurance, and Superannuation (prudential standard) determination No. 1 of 2022, including Prudential Standard CPS 226 Margining and risk mitigation for non‑centrally cleared derivatives made under that determination (opening recital (a)). That revocation is mechanical and indicates this instrument replaces the prior Determination No. 1 of 2022.
New determination No. 2 of 2022: The delegate determines the prudential standard in the form set out in the schedule under the four enabling Acts (Banking Act, Insurance Act, Life Insurance Act, SIS Act) and specifies that the standard applies to the specified APRA covered entities (recitals (b)-(e); Authority paras 1-3).
Commencement date: The instrument and the schedule both state that the Prudential Standard commences on 1 January 2023 (recital and para 6). For transitional purposes, the implementation timetables in Tables 1 and 2 set out past and future dates when variation and initial margin requirements come into effect relative to reference periods.
Implementation timetables included: Table 1 for variation margin and Table 2 for initial margin list historical reference periods and their corresponding margining periods , these tables in effect document staged roll-outs that began in 2017 for larger entities and progressively brought smaller counterparties into scope (paras 13-21). While these timetables are present in this Determination, they reflect staged implementation that has already occurred; the standard continues to include ongoing annual reference periods and margining periods for subsequent years.
Attachments and footnotes: The schedule adds Attachments A-D, which contain the standardised initial margin schedule, the standardised haircuts, credit rating grades, and substituted compliance foreign authority list. Footnotes included in the schedule provide clarifications about definitions, exclusions, and operational interpretations (for example, fn 3 on calculation of notional amounts, fn 8 on what constitutes a new derivative, fn 14 clarifying operational relief where bilateral initial margin is less than AUD 75m, fn 22 clarifying Level 2 treatment for life companies). These attachments and footnotes are part of the Determination itself and are therefore part of the current text.

What the instrument does not record

The instrument contains no history of amendments subsequent to this Determination within the provided text. No later amending instrument, revisions or reissues are included in the schedule provided to me. Consequently, the only explicit amendment recorded is the revocation of Determination No. 1 of 2022 and the replacement with No. 2 of 2022, effective 1 January 2023.

Operational note for practitioners

Because the standard contains time‑dependent triggers and model approval processes, practitioners should check for any subsequent APRA instruments, variations, or guidance after 1 January 2023 that may alter model approvals, substituted compliance lists or supervisory interpretations. The Determination itself directs entities to consult APRA in writing for variations and for prior notification of material model changes (paras 10, 44-46, 58). The text supplied shows no later amendments; however, APRA retains an ongoing supervisory role and may vary or revoke approvals and apply adjustments to covered persons under the enabling Acts (paras 10, 44-46, 56-57).

The provided instrument and schedule do not mention any litigation, court decisions or case law challenging CPS 226 or Determination No. 2 of 2022. The text contains no judicial references or citations to legal proceedings. Accordingly, based solely on the supplied material, there is no litigation history recorded within the instrument.

Practical implications

Absence of litigation references: The lack of litigation history in the instrument means practitioners cannot rely on any case interpretations or judicial clarifications within this text. Where disputes arise about enforceability, model approvals, or APRA’s exercise of discretion, the legal position will be determined by reference to the enabling Acts, the instrument’s text and any relevant external case law or statutory interpretation, none of which is set out in this Determination.
Supervisory disputes and APRA notification: The standard requires APRA-covered entities to notify APRA of material disputes (para 95) and to maintain dispute documentation (para 93). This requirement institutionalises supervisory oversight and may lead to regulatory actions, but the instrument provides no record of court challenges or judicial determinations within its text.

Recommendation for research

Practitioners seeking litigation history should search judicial databases and APRA decisions or take instructions regarding any contested APRA regulatory actions, because CPS 226 itself does not provide litigation precedents or references. Any legal challenges to APRA’s exercising of discretion under paras 10, 44-46, 62-63 or enforcement actions under the enabling Acts would be located outside the instrument text.

CPS 226 contains several technical features and drafting choices that create operational and legal pitfalls for practitioners and in‑scope firms. These “gotchas” are concrete, source‑grounded traps for the unwary.

Aggregation for thresholds includes physically settled FX forwards/swaps for trigger purposes but excludes them from margin exchange calculations
- Footnote 3 requires that calculation of total notional amounts must include physically settled FX forwards and swaps (fn 3).
- Yet footnote 9 and paras 14, 20 note that physically settled FX forwards and swaps are excluded from the calculation of variation margin and initial margin to be exchanged (fn 9; paras 14, 20).
- Gotcha: an entity may be pulled into scope (by including FX in notional calculation) but then find many FX transactions are excluded from margin exchange , this affects threshold monitoring and operational design. Firms must ensure their threshold calculations include FX even if they will not exchange margin on those specific FX transactions.
Cross‑currency swap treatment differs between model and standardised approaches
- Para 34(a) allows a model to exclude the fixed physically settled FX principal exchange cash flows from the initial margin model but requires all other risks to be considered.
- Para 34(b) states that under the standardised schedule initial margin for cross‑currency swaps is calculated only with reference to the interest rate section.
- Gotcha: adopting the standardised schedule may materially reduce the initial margin calculated for cross‑currency swaps relative to a model or relative to economic exposure; meanwhile, model calibration requires a careful and documented approach to which cash flows are excluded. Practitioners need to align model design to this asymmetric treatment.
No diversification across asset classes allowed in model approach
- Para 40 forbids accounting for diversification benefits across asset classes: initial margin calculations for distinct asset classes must be performed without regard to derivatives in other asset classes and then summed.
- Gotcha: models that implicitly net across asset classes (e.g. multi‑asset models) will not be acceptable without APRA approval and explicit, auditable segregation by asset class. Firms must design models and reporting so asset‑class margins are separate.
Model approval contingency risk
- APRA may vary, revoke or suspend model approvals at any time and require reversion to the standardised schedule (paras 44-46, 56-57).
- Gotcha: firms that materially rely on a model to reduce initial margin must maintain operational readiness to revert to the standardised schedule, which may produce materially higher initial margin and associated funding costs. The standard also requires ongoing independent review at least every three years (para 42), and prior written approval for material changes not consistent with global industry standards (para 46).
Initial margin segregation and prohibition on re‑use with narrow custodial exception
- Para 28 forbids re‑hypothecation, re‑pledging or re‑use of initial margin and requires cash initial margin to be held in a demand deposit with a third‑party custodian in the posting counterparty’s name, with the custodian not affiliated with either counterparty.
- Gotcha: market conventions where collateral is posted into pooled or rehypothecable accounts will not meet the standard. Establishing segregated custody arrangements in multiple jurisdictions is operationally complex and costly.
Thresholds and de minimis aggregation mechanics
- The initial margin bilateral threshold cannot exceed AUD 75 million (para 24) and the minimum transfer amount for combined margin must not exceed AUD 750,000 (para 30).
- Gotcha: the initial margin threshold applies bilaterally at the margining group level and is based on all non‑centrally cleared derivatives between two margining groups; misaggregation (e.g. not treating funds separately when permitted under para 25) can inadvertently increase required margin calls.
Substituted compliance limitations
- Attachment D enumerates foreign authorities whose regimes may be accepted for substituted compliance, but Attachment D para 2 places a condition forbidding substituted compliance for a transaction where both counterparties are members of the same margining group.
- Gotcha: entities relying on substituted compliance must ensure both counterparties are not in the same margining group; failing that, substituted compliance will be unavailable even if both parties are otherwise subject to comparable foreign regimes.
Enforceability and cross‑border non‑exchange
- Paras 69-71 permit non‑exchange of margin where legal jurisdiction does not permit satisfaction of paragraph 27 requirements regarding custody and protections against collector insolvency, or where enforceability of netting agreements is doubtful.
- Gotcha: firms that rely on non‑exchange because of legal limitations must set and document internal limits and monitoring and will be exposed to supervisory scrutiny under para 71. Non‑exchange does not remove credit risk but shifts it and requires APRA monitoring.
Treatment of intra‑group transactions differs by vehicle and Level 2 status
- Paras 59-61 exclude intra‑group transactions from initial margin and vary treatment of variation margin depending on whether the covered counterparty is in the same margining group or Level 2 group; fn 22 clarifies that for life companies/friendly societies, non‑centrally cleared derivative transactions between funds are not in the same Level 2 group and so are subject to variation margin.
- Gotcha: corporate structure matters. Life companies with multiple funds need to check Level 2 definitions to determine whether inter‑fund trades are captured.
Legal opinions and APS 112 linkage
- Para 72 requires applicable netting agreements and collateral arrangements be supported by regularly updated legal opinions consistent with Attachment H of APS 112.
- Gotcha: firms must maintain legal opinions in the APS 112 form to demonstrate enforceability. Where opinions are not updated or do not meet APS 112 standards, margining may be restricted.
Footnote traps on what is and is not a “new transaction”
- Footnote 8 sets out a specific definition of “new” transactions for the purpose of margining; for example, genuine amendments for benchmark reforms do not qualify as new, whereas amendments that extend a transaction to avoid margin requirements do qualify as new.
- Gotcha: operational changes to transaction terms can inadvertently re‑classify a trade as “new” and thereby trigger margin obligations; legal and front‑office teams must coordinate to identify transactions that may be deemed new.
No explicit penalties in the standard itself
- The standard does not list fines or civil penalties; enforcement depends on APRA’s powers under the enabling Acts (see Penalties and enforcement above).
- Gotcha: absence of explicit penalties in the text does not mean there are no regulatory consequences. Firms must consider APRA’s administrative powers and potential licence conditions under the relevant Acts.

These are concrete operational and legal interaction points where failure to reconcile accounting, legal opinions, custody arrangements, modelling assumptions, operational readiness and corporate structuring with CPS 226 will result in compliance failures, funding surprises or supervisory actions.

Compliance with CPS 226 requires a programme covering legal, modelling, collateral, operations, governance and reporting. Below is a practical checklist and suggested internal controls tied to specific provisions in the standard.

Establish scope and constant threshold monitoring (paras 2-3; para 9(a), fn 3)
- Map corporate entities to margining groups using AASB 10 consolidation rules, or elect and document equivalent foreign accounting standards where appropriate (para 9(n)).
- Implement automated monthly reporting to compute the aggregate month‑end average notional amount for each margining group (para 9(a)). Include physically settled FX forwards and swaps in the notional for trigger calculations (fn 3), and maintain historical reference periods for threshold comparison against Tables 1 and 2.
- Flag when both sides of a bilateral relationship would exceed qualifying levels for variation margin (AUD 3 billion per Table 1) and initial margin (Table 2 stages down to AUD 12 billion) to prompt operational mobilisation.
Due diligence and counterparty identification (para 31)
- Adopt a documented due‑diligence process to determine whether a counterparty is a covered counterparty and whether qualifying levels are exceeded. Acceptable evidence can include counterparty self‑declaration or public disclosures but require checks where there is reason to believe the declaration is incorrect (para 31).
- Maintain a counterparty register capturing whether each counterparty is a covered counterparty, margining group affiliation and whether substituted compliance applies.
Trade documentation and confirmations (paras 75-80)
- Execute written trading relationship documentation (master netting agreements and CSAs) prior to or contemporaneously with transacting (para 75-77).
- Implement long‑form confirmations or other non‑rewritable, non‑erasable electronic confirmation processes consistent with para 78-80.
- Ensure CSAs incorporate zero threshold for variation margin and capture initial margin thresholds and minimum transfer amounts consistent with CPS 226 (paras 17, 24, 30).
Collateral management and custody arrangements (paras 27-29, 47-51)
- Identify eligible collateral classes per para 47 and ensure policies rule out resecuritisation exposures and securities of the counterparty (paras 48-49).
- Implement segregation arrangements for initial margin: initial margin collected must be segregated from the collector’s proprietary assets and may not be re‑used; cash initial margin may be held in a demand deposit account with a third‑party custodian in the posting counterparty’s name, with the custodian unaffiliated with either party (para 28-29). Draft and negotiate custodial agreements to satisfy these conditions.
- Implement concentration and wrong‑way risk limits and controls (para 50) with monitoring and reporting to senior management.
Margin calculation approach and model approval (paras 32-46; Attachment A)
- Decide whether to adopt the standardised schedule (Attachment A) or to seek APRA approval for a model approach for initial margin and haircuts (paras 32-36, 52-55).
- If pursuing a model, prepare a complete model approval submission for APRA covering: calibration methodology (one‑tailed 99% over a 10‑day horizon; stress period identification; historical data equally weighted, not exceeding five years) (para 36-37; fn 16), independent governance arrangements (paras 41-42), validation and backtesting, handling of diversification and hedging only within asset classes (para 39-40), and documentation of model inputs and treatment of cross‑currency swaps per para 34.
- Maintain an independent model validation plan and an audit schedule for at least once every three years or on material model change (para 42). Prepare to obtain APRA’s prior written approval for material changes not consistent with global industry standards (para 46).
Haircut calculation and collateral valuation (paras 52-56; Attachment B)
- Select either the standardised haircut schedule (Attachment B) or apply for an APRA‑approved haircut model. If using a model, maintain independent model governance and periodic review similar to the initial margin model (paras 52-55).
- Apply FX haircuts where collateral currency differs from contract/termination currency (Attachment B paras 3-4).
Operational processes: daily variation margin, settlement, and minimum transfer amounts (paras 16-17, 22-24, 30)
- Implement daily MTM and variation margin call processes with prompt settlement capability (paras 16-17).
- Enforce zero threshold on variation margin exchanges (para 17) and ensure disputed amounts are treated per para 17 and para 24 (undisputed portion exchanged).
- Set and enforce a combined minimum transfer amount that does not exceed AUD 750,000 (para 30).
- Ensure the initial margin bilateral threshold is no greater than AUD 75 million and apply it bilaterally at the margining group level (para 24).
Legal opinions and netting enforceability (para 72; fn 4; fn 27)
- Obtain regularly updated legal opinions on netting enforceability and collateral arrangements consistent with Attachment H of APS 112 (para 72). Map jurisdictions where enforceability doubts may arise and maintain internal limits and monitoring where margining cannot be enforced (paras 69-71).
- Ensure that netting agreements used in variation and initial margin calculations qualify as “eligible bilateral netting agreements” per APS 112 (para 9(q)).
Risk‑mitigation process implementation (paras 73-95)
- Implement and document trading relationship documentation, trade confirmation, portfolio reconciliation protocols (with appropriate scope and frequency), portfolio compression policies and valuation methodologies (paras 75-90).
- Establish a dispute resolution framework that escalates material disputes to senior management and the Board where necessary, and implement reporting processes to notify APRA of material disputes per para 95.
Substituted compliance and cross‑border coordination (paras 64-69; Attachment D)
- If relying on substituted compliance, prepare an internal assessment demonstrating that the foreign margin or risk‑mitigation requirements are substantially similar and that the entity is directly subject to them (para 67). Maintain documentation and be ready to supply it to APRA.
- Check Attachment D’s list of accepted foreign authorities and ensure substituted compliance conditions are met , notably, do not rely on substituted compliance if both counterparties are in the same margining group (Attachment D para 2).
Governance, escalation and contingency planning (paras 41-46, 91-95)
- Establish Board‑level oversight and senior management accountability for margining and risk mitigation. Maintain policies for escalation of material model issues, material disputes, and margin disputes (paras 41-42, 91-95).
- Prepare contingency plans for revocation/suspension of model approvals (paras 44-46), including capacity to switch to standardised schedules and to source additional collateral or liquidity to meet higher initial margin requirements.
Recordkeeping and evidence for APRA interactions (paras 11, 31, 42, 46, 68)
- Keep records of prior APRA discretions relied on (para 11).
- Record due diligence checks, counterparty self‑declarations, model approval submissions, model validation and independent reviews, legal opinions, and dispute logs, and make them available to APRA upon request (paras 31, 42, 77, 93). For substituted compliance, retain internal assessments showing direct subjection and comparability (para 67).
Testing and control environment
- Test settlement and reconciliation processes end‑to‑end, including custody arrangements and daily margin calculation automation.
- Validate haircut computations, FX conversion logic and the application of minimum transfer amounts. Ensure reconciliation between front‑office and collateral management systems.
Communication and negotiation with counterparties
- Negotiate CSAs and master agreements that align with CPS 226’s zero variation threshold, initial margin segregation and ineligible collateral lists. Update templated legal documentation (ISDA CSAs, custody agreements) and obtain counterparty consent for cash custodial arrangements where required.

Priorities and sequencing for an implementation project

Immediate: threshold monitoring, due diligence, legal opinion inventory, trading documentation gap analysis and identification of high‑value counterparties and margining groups likely to be in scope.
Short term (weeks to months): custody arrangements and segregation contracts for initial margin, CSAs with required terms, daily MTM processes, and minimum transfer amount configuration.
Mid term: model approval submissions (if pursuing models), independent validation frameworks, governance and board reporting lines, and substituted compliance assessments where applicable.
Ongoing: periodic independent reviews (at least triennial), legal opinion refreshes, continuous monitoring of thresholds and cross‑border enforceability, and readiness to revert to standardised schedules if APRA varies/revokes model approvals.

This compliance checklist aligns with the statutory text (paras cited above) and should be tailored to the entity’s business model, product mix and corporate structure. Documentation and conservative governance are recurring themes in the standard; practitioners should prioritise robust, auditable processes that demonstrate to APRA that models, collateral arrangements and dispute resolution processes meet the specified requirements.

Deep Dive

What it does

Current sections

Banking, Insurance, Life Insurance and Superannuation (prudential standard) determination No. 2 of 2022

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Authority

Application

Interpretation

Definitions

Adjustments and exclusions

Previous exercise of discretion

Assets in Australia

Exchange of variation margin for non-centrally cleared derivatives

Post and collect of initial margin for non-centrally cleared derivatives

Minimum transfer amount

Due diligence

Calculation of initial margin for non-centrally cleared derivatives

Model approach to initial margin for non-centrally cleared derivatives

Eligible collateral for margining

Collateral haircuts

Treatment of intra-group transactions

Cross border application of margin and risk mitigation requirements

Risk mitigation requirements for non-centrally cleared derivative transactions

Trading relationship documentation

Trade confirmation

Portfolio reconciliation

Portfolio compression

Valuation processes

Dispute resolution

Attachment A — Standardised schedule for initial margin

Attachment B — Standardised schedule of risk-sensitive haircuts

Attachment C — Credit rating grades

Attachment D — Substituted compliance

Source text: opening excerpt

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Main concepts

Who it affects

Key duties and rights

Penalties and enforcement

How it interacts with other laws

Amendment history

Litigation history

Gotchas

How to comply

Authority

Application

Interpretation

Definitions