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 Wednesday 11 January 2017

Are you clear about the uncleared margin rules?

From 1st March 2017, many market participants will be required to have in place regulatory compliant collateral documentation for trading in non-cleared OTC derivatives.

Broadly speaking whether or not you are required to be compliant will depend on your classification under the rules applicable to you.  Under EMIR, if you are a Financial Counterparty (FC) and Non-Financial Counterparty above the clearing threshold (NFC+) then the collateral requirements apply. For large dealers (“Phase 1” entities) the requirement to post variation margin and initial margin came into force in the US and Japan from 1st September 2016 and will apply to Phase 1 entities subject to EMIR from 4th February 2017.

Other in-scope entities will be required to post variation margin from 1st March.  Initial margin requirements will be phased in from 1st September 2017 to 1st September 2020.

How can I be compliant?

There are a number of ways.

New CSA Method:

  • If you do not already have a Credit Support Annex in place under your ISDA Master Agreement then you will be required to negotiate a new one.  In these instances most parties will use one of the new 2016 ISDA Credit Support Annexes for Variation Margin.  English, New York and Japanese Law versions are available.

  • Parties may also decide to execute a new VM CSA even if they already have an existing collateral arrangement in place.  Under the Covered Transactions provision in Paragraph 11/13 of the VM CSAs you will state when the VM CSA “goes live”. Generally speaking parties will either seek to apply the VM CSA from 1st March 2017 or make reference to the date of the ISDA Master Agreement so that all trades are captured by the new CSA. In the first case parties may decide to select a date before 1st March to stagger their implementation dates in order to reduce the operational burden/risk of a “big bang” approach.

Amend Method:

The existing 1994/1995 CSA is amended in order to make it regulatory compliant.  It is important that you know the existing terms you have in your CSAs and are able to identify the amendments that are required by regulators (e.g. daily valuations, zero Thresholds). 

Replicate and Amend Method:

The existing 1994/1995 CSA continues to apply for existing trades but a second 1994/1995 CSA is created and amended to make it regulatory compliant.  This second CSA would only cover new trades.

There are benefits and drawbacks to each method. 

Where it is agreed that only one CSA will apply following the implementation date, the operational burden is reduced as there are fewer CSAs in place and therefore fewer calls.  However, there may be a pricing impact of updating or amending collateral terms that apply to existing trades which will need to be discussed by the relevant front office representatives.

Where two CSAs apply, there should be no pricing impact as the new CSA will have no outstanding trades before the implementation date. However, there are additional operational burdens.

You will need to assess what it more important to you but also need to bear in mind your counterparty’s decision and operational constraints.

Negotiation process

Either parties will enter into bilateral negotiations to amend their existing CSAs or enter into new ones or they may use the ISDA 2016 Variation Margin Protocol (VM Protocol). 

In August 2016, ISDA published the VM Protocol to help facilitate the documentation requirements.  The VM Protocol is a two step process.  First the parties need to adhere and then they are required to submit questionnaires with their elections with each of their adhering counterparties.  A VM Protocol CSA is only created when the replies to the questionnaires match.  Each of the methods outlined above are available via the VM Protocol.


With very little time left before parties are required to be regulatory compliant, it is key to start discussions with your counterparties as soon as possible. Knowing in advance the negotiation approach and repapering methods that you are able to accept are likely greatly to increase the speed at which negotiations can progress.

NOTE: The points discussed in this blog are general and often viewed from a European perspective. Please refer to your own advisers for the precise requirements which may apply to your firm. 

Posted by Abigail Harding

Category: ISDA negotiation

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