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 Wednesday 26 June 2019

Next Generation IM documentation – Margin Approach


In November 2018 ISDA published its 2018 Credit Support Deed For Initial Margin under English Law and 2018 Credit Support Annex For Initial Margin under New York Law. In January 2019 these were followed by the 2019 Collateral Transfer Agreements for use with Euroclear, Clearstream and bank custodians.

These are commonly referred to as the “next generation” or “new generation” versions of IM documentation.

In earlier Phases (see our earlier blog for further details on Phases), the entities that were generally in scope were large banks and insurance companies. The market was aware that in later Phases (particularly in Phase 5 – 1 September 2020) there would be a wider variety of entity types caught.  Therefore it was decided to revisit the original regulatory initial margin documentation prepared in advance of Phase 1 (1 September 2016) and determine if any updates were required to cater for new entity types (particularly buy-side entities). At the same time, common amendments that were made during negotiations of the earlier documentation were also considered and incorporated where appropriate.

In this blog we are focusing on one of the new concepts included in the next generation IM documentation - Margin Approach.

In Phase 1 IM documentation it was assumed that only regulatory initial margin would be included.

However, the parties may have agreed to some form of non-regulatory initial margin (“Independent Amounts”) in other documentation (e.g. a credit department in a bank may have required non-regulatory IM to be posted). 

The next generation IM documentation aims to address how regulatory and non-regulatory initial margin interact and it provides three general approaches viz:-

  • Distinct Margin Flow (IM) Approach
  • Allocated Margin Flow (IM/IA) Approach
  • Greater of Margin Flow (IM/IA) Approach

Before we look at each of the approaches, it is useful to distinguish between regulatory initial margin (“Margin Amount (IM)”) and non-regulatory initial margin (“Margin Amount (IA)”). 

Margin Amount (IM)

Margin Amount (IM) is the regulatory initial margin posting obligation related to trades in scope for regulatory IM or, to put it more formally, the posting obligation related to Covered Transactions (IM) determined by the Method specified in the Regime Table in Paragraph 13 of the next generation IM documentation (i.e. either SIMM or the Method selected under SIMM Exception).

Margin Amount (IA)

This concerns Independent Amounts under any Other CSA between the collateral-provider and the collateral-taker. The Margin Amount (IA) in relation to the collateral-provider’s posting obligation is the sum of any Independent Amounts included in any Other CSA (e.g. a VM CSA or a 1995 ISDA Credit Support Annex under English law) and any other amounts related to the collateral-provider that may not be defined as an Independent Amount but operate as such.  It excludes any Margin Amount (IM) and any amount related to Exposure (i.e. the mark-to-market risk exposure which would be covered by a variation margin collateral document).  The calculation takes into consideration any collateral-provider’s threshold applicable to the Independent Amount whether expressly defined or otherwise (although it is unlikely that there would be a threshold in the Other CSA).

Now let’s move on to look at the Margin Approaches.  

Distinct Margin Flow (IM) Approach

Where Distinct Margin Flow (IM) Approach is selected, regulatory IM and non-regulatory IM remain separate.

Margin Amount (IM) is covered under the next generation IM documentation. Non-regulatory IM, if any, would remain under any other collateral documentation.

The benefit of this approach is that all regulatory and non-regulatory IM is kept separate. However, there could be an operational burden as two margin calls would be generated.

Allocated Margin Flow (IM/IA) Approach

Similar to the Distinct Margin Flow (IM) Approach, where Allocated Margin Flow (IM/IA) Approach is selected, regulatory and non-regulatory IM remain as two separate flows.  However in this instance only the surplus of Margin Amount (IA) above the Margin Amount (IM) is posted under the Other CSA.

The benefit of this approach is that any excess collateral does not need to be held in a segregated account.  However, once again there could be an operational burden as two margin calls would be generated.

Greater of Margin Flow (IM/IA) Approach

Where this Margin Approach is selected, there is only one collateral transfer which is margined under the IM documentation.  The greater of the Margin Amount (IM) and Margin Amount (IA) is used, after taking into consideration any thresholds.

Any Independent Amounts under any Other CSA are reduced to zero because they are now addressed under the IM documentation.

The benefit of this approach is that there is only margin call.  However, it does mean that Independent Amounts that may have historically been posted under a title transfer agreement (e.g. the 2016 English Law VM CSA) where collateral reuse was possible would now instead be held in a segregated account with no right of reuse.  In addition, the types of collateral that can be posted would need to be in compliance with the relevant regulatory regimes.

It may be useful to note (as outlined in a footnote in the ISDA next generation documentation), that if there is no Margin Amount (IA), the three Margin Approaches would result in the same Credit Support Amount (IM) being determined.

To help illustrate the three Margin Approaches, we thought it might be useful to consider a simplified example.

Example:  Margin Amount (IM) = 20, Margin Amount (IA) = 30, Threshold (IM) = 0.

Margin Approach

Amount posted under IM documentation

Amount posted under Other CSA

Total amount posted

Distinct Margin Flow (IM)

20

30

50

Allocated Margin Flow (IM/IA)

20

10

30

Greater of Margin Flow (IM/IA)

30

0

30

When considering which Margin Approach to use you should take into account both the operational and commercial impact of each one and determine what is most appropriate and achievable for the relevant trading relationship.

Posted by Abigail Harding


Tagged: ISDA RegIM UMR

Category: ISDA negotiation


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