EU applies 8% haircut to margin-currency mismatches
European regulators confirm haircut will apply to both initial and variation margin, threatening viability of industry's new standard credit support annex; a replacement is in the works
An 8% haircut would apply to variation margin under Europe's draft version of margin rules for non-cleared swaps, in cases where the currency of the collateral does not match a trade's settlement currency. The decision is an attempt by regulators to mitigate currency risk at the point of a counterparty default – which could be significant if a large dealer has collapsed – and clarifies a topic on which dealers claim they had received conflicting answers.
The haircut is bad news for the industry
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