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 Thursday 28 April 2016

2016 ISDA Credit Support Annex for Variation Margin under New York Law published

On 14th April 2016 ISDA published the 2016 Credit Support Annex for Variation Margin under New York Law (“2016 NY law VM CSA”).  This is the first in a suite of new collateral agreements expected to be published in the near future and ISDA is considering issuing one or more protocols to facilitate the amendment of existing CSAs so they can comply with the new margining requirements. 

Why are the new collateral documents necessary?

In October 2011 the Working Group on Margining Requirements (WGMR) was formed to develop a consistent global standard for margin requirements for uncleared OTC derivative transactions.  This ultimately led to the publication of the Margin requirements for non-centrally cleared derivatives final policy in March 2015 by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).  Regulators in various jurisdictions have since set about creating their rules based on these global recommendations. 

In the EU, the recommendations of the WGMR are being implemented through Regulatory Technical Standards (RTS) under EMIR.  The final draft RTS were published and adopted by the European Banking Authority on 8th March 2016 and have been submitted to the European Commission for their approval. They require collateral arrangements to be in place for new uncleared OTC derivative contracts.  The requirement to collateralise certain products (e.g. certain equity options) is still under review and therefore the implementation date for these products has been extended.

For the largest market players, the new margin requirements will come into effect from 1st September 2016 and are being implemented on a phased basis.

Their implementation in Europe will be phased in as follows:

Covered entities belonging to a group whose aggregate month-end average notional amount  of uncleared derivatives exceeds:

Variation margin (VM) implementation:

Initial margin (IM) implementation:

EUR 3 trillion

1 September 2016

1 September 2016

EUR 2.25 trillion

1 March 2017

1 September 2017

EUR 1.5 trillion

1 March 2017

1 September 2018

EUR 0.75 trillion

1 March 2017

1 September 2019

EUR 8 billion

1 March 2017

1 September 2020

Below EUR 8 billion

1 March 2017

Not applicable

Therefore, many entities that have not been required to put in place collateral arrangements in the past will now have to post/collect variation margin.

Key changes from existing 1994 ISDA Credit Support Annex under New York Law

The requirements in relation to variation margin are similar to what many market participants are already used to i.e. transfers made on a net basis to cover exposure.  The new initial margin requirements will require parties to post IM on a gross basis and for such IM to be segregated from the proprietary assets of their counterparty.  In both cases the arrangements will be on a bilateral basis (i.e. both parties posting).

Under the 1994 ISDA Credit Support Annex under New York Law (1994 NY Law CSA) both IM and VM were typically documented under the same CSA.  The new 2016 NY law VM CSA has been designed purely for variation margin and therefore a number of terms have been updated in the latest version.

As the new requirements only need to apply to (i) new trades entered into on or after the relevant implementation date or (ii) existing trades that are materially amended after this date, the concept of Covered Transactions has been introduced to make it clear which Transactions are covered by the VM CSA.   However, some parties may agree to move all trades to the new 2016 NY law VM CSA rather than having two CSAs in place covering different portfolios to trades.

The interest provisions in the 2016 NY law VM CSA have been significantly updated – mainly to deal with negative interest rates.

Other regulatory driven amendments have been incorporated including valuation haircuts, reducing the collateral transfer timings and provisions relating to collateral which becomes ineligible.

In addition to the recently published 2016 NY Law VM CSA, ISDA is currently working on updated versions of the English Law CSA (for VM), the New York Law CSA (for IM), the English Law Credit Support Deed (for IM) as well as other collateral agreements including those governed by Japanese Law.  

So, as we can see, there are a lot of changes to the collateral environment with relatively little time left to implement them.  Good luck!

NOTE: The points discussed in this blog are general and often viewed from a European perspective. The final draft EMIR RTS have not yet been approved by European Commission and therefore could be subject to change. Please refer to your own advisers for precise requirements which may apply to your firm.

Posted by Abigail Harding

Tagged: ISDA negotiation OTC derivatives ISDA Credit Support Annex Collateral CSA

Category: ISDA negotiation

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