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 Friday 13 March 2015

ISDA Standard Initial Margin Model for uncleared trades


The Working Group on Margining Requirements (“WGMR”) was formed in October 2011 to develop a consistent global standard for margin requirements for uncleared OTC derivative transactions.  The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) in consultation with various committees prepared the WGMR Implementation Program. A global plan was proposed by them in 2013.

One of the key components of the WGMR Implementation Program is how initial margin (IM) calculations can be standardised for uncleared transactions of which it is currently estimated there may be USD 170 trillions’ worth in notional value.

To this end, ISDA is working with industry dealers to create a model to deal with IM which they call the Standard Initial Margin Model (“SIMM”).  The purpose of this model is to provide calculations which are predictable, transparent, appropriate, easy to calculate and to replicate.  This would lead to fewer disputes among collateral managers and others or at least provide a framework for resolving IM disputes quickly.

The proposed initial effective date for the WGMR Implementation Program is currently 1st December 2015. Variation margin (VM) requirements would apply from day 1 for all covered entities but IM requirements would be implemented in a phased basis over 4 years.

Depending on whether an entity is a “covered entity” as defined at a national level and the average aggregate notional amount (“AANA”) of OTC derivatives, a party may be required to post VM only or VM and IM. Currently the latter would apply if a firm has over USD 4 trillion notional in uncleared swaps if US proposals apply or EUR 3 trillion notional in uncleared swaps if EU proposals apply.

It is useful to note that in August 2014 ISDA issued a letter to the BCBS and IOSCO which, among other things, requested a delay to the effective date of the WGMR Implementation Program and suggested that this be extended to 2 years after the rules are finalised in Europe, Japan and the US.  It is expected that domestic rule-making is unlikely to be finalised until early-mid 2015 which would postpone the implementation to 2017. However, in a speech in Florida on 11th March, Timothy Massad, head of the Commodity Futures Trading Commission, stated he was thinking more of a delay of 2 months until February 2016. We shall see if this is practical.

As mentioned above, the intention of the SIMM is to make available an open, transparent and standard methodology for calculating IM.  An open source code utility is currently being developed by OpenGamma, a risk management software company. 

So long as they obtain regulatory approval and meet certain criteria, market participants will be able to use their own internal models for IM.  However, historically many dealers have been sensitive about disclosing information about their OTC derivatives business.

It will be interesting to see over the next few months how the SIMM project evolves. Particularly in respect of the new CSA and CSD templates ISDA’s Legal and Documentation Working Group is currently drafting to include regulatory compliant VM and IM terms.

UPDATE: On 18th March it was announced that the implementation date would be postponed by 9 months to 1st September 2016 and VM requirements would be implemented on a phased basis - 1st September 2016 for covered entities whose AANA exceeds EUR 3 trillion and 1st March 2017 for all other covered entities.

Posted by Abigail Harding


Tagged: ISDA negotiation ISDA OTC derivatives ISDA Credit Support Annex

Category: ISDA negotiation


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