Treatment of cash variation margin

Treatment of cash variation margin

1. An ADI may reduce its exposure measure by treating the cash portion of variation margin exchanged between counterparties as a form of pre-settlement payment, if the following conditions are met:
   1. for trades not cleared through a qualifying central counterparty (QCCP),[16] the cash received by the recipient counterparty must not be segregated. Cash variation margin would satisfy the non-segregation criteria if the recipient counterparty is not subject to any restrictions by law, regulation or agreement on the counterparty’s ability to use the cash received;
   2. variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions. In order to meet this requirement, derivative positions must be valued daily and cash variation margin must be transferred at least daily to the counterparty;
   3. the cash variation margin is received in a currency specified in the derivatives contract, governing master netting agreement (MNA),[17] credit support annex to the qualifying MNA or as defined by any netting agreement with a central counterparty (CCP);[18]
   4. variation margin exchanged is the full amount that would be necessary to extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty;[19] and
   5. derivatives transactions and variation margins are covered by a single MNA between the legal entities that are the counterparties in the derivatives transaction. The MNA must explicitly stipulate that the counterparties agree to settle on a net basis any payment obligations covered by the MNA, taking into account any variation margin received or provided if a credit event occurs involving either counterparty.
2. If the conditions in paragraph 23 of this Attachment are met and an ADI:
   1. receives cash variation margin from a counterparty, it may reduce the RC (but not the PFE component) of the exposure amount of the derivative transactions consistent with paragraph 19 of this Attachment; and
   2. provides cash variation margin to a counterparty, it may deduct the resulting receivable from its exposure measure, where the cash variation margin has been recognised as an asset in accordance with Australian Accounting Standards, and instead include the cash variation margin provided in the calculation of the RC consistent with paragraph 19 of this Attachment.