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When the PRC Futures and Derivatives Law comes into effect on 1 August 2022, China will become a
“clean netting jurisdiction”. Therefore, now is the time for Chinese companies and their international
financial institution counterparties to actively focus on regulatory margin requirements for OTC
derivatives and negotiate initial margin and variation margin documentation.
Based on KWM’s extensive experience in assisting major international and Chinese financial institutions
with margin documentation negotiations, this bilingual guide is designed to help Chinese companies gain
a better understanding of the key initial margin documents used in the international market.
I. Overview of regulatory margin requirements
The Basel Committee on Banking Supervision and the International Organization of Securities
Commissions have jointly published a set of global regulatory margin standards which require
counterparties to OTC derivatives to post and collect initial margin and variation margin to and from
each other. To implement the global regulatory margin standards, most major jurisdictions have
introduced their own local regulatory margin rules subject to some important jurisdiction-specific
variations.
Generally speaking, regulated financial institutions (such as banks) are directly subject to local
regulatory margin rules issued by the relevant financial regulator(s). These rules generally require the
institution to both post and collect (i.e., exchange) variation margin and initial margin to and from
certain types of counterparties.
To comply with the regulatory requirement to exchange margin, a regulated financial institution will
negotiate and enter into margin documents with each of its counterparties, which will impose
contractual obligations on each side to exchange margin. Therefore, even if a counterparty to a
regulated financial institution is not directly subject to regulatory margin rules – either because (1) it is