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Interpretation of WGMR Haircut Means SCSA Lives To Fight Another Day

Risk Magazine is reporting that certain unnamed US and European regulators are hinting that the additional 8% haircut levied on collateral denominated in a different currency to that of the underlying, to be introduced pursuant to the Working Group on Margining Requirement’s (WGMR) “Margin requirements for non-centrally cleared derivatives”, may be applied only to initial margin, and not to variation margin.  If so, this would provide a genuine fillip to ISDA’s new Standard Credit Support Annex (SCSA).  Of course, the operational demands associated with 17 separate currency silos and 7 ‘transport’ currencies used by the SCSA should not be underestimated.  Anecdotally, it seems to be this aspect, rather than the 8% haircut, which is currently the main inhibitor to a more general adoption of the SCSA.  However, as the central clearing of derivatives becomes more widespread over time, so the benefits of a more standardised approach to collateralisation will become apparent.  Therefore, don’t be surprised if we see the SCSA loom ever larger in the rear view mirror over the next 18 months.

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