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 Wednesday 30 May 2018

Is it time to start planning for initial margin regulatory requirements?

While many participants in the market are nowadays familiar with the variation margin (VM) requirements for non-cleared OTC derivatives, few have yet to be involved in regulatory requirements for initial margin (IM).

Variation margin is taken to cover market risk arising from daily changes in the value of uncleared swap transactions. Initial margin is a broader measure of a party’s current and potential risk exposure between its last margin exchange and the liquidation of positions following that party’s default or insolvency. It can therefore be seen as a collateral buffer.

The first entities (“Phase 1” entities) were required to start posting regulatory IM from 1 September 2016 (or 4 February 2017 under EMIR).  On 1 September each year until 1 September 2020, more entities will come into scope for regulatory IM.

By way of example, the implementation dates for IM under EMIR are outlined below.

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

Initial margin implementation:

Phase 1

EUR 3 trillion

4 February 2017

Phase 2

EUR 2.25 trillion

1 September 2017

Phase 3

EUR 1.5 trillion

1 September 2018

Phase 4

EUR 0.75 trillion

1 September 2019

Phase 5

EUR 8 billion

1 September 2020


Below EUR 8 billion

Not applicable

The entities in scope for the upcoming Phase 3 deadline are still considered to be relatively large entities and therefore few in numbers.  As the AANA thresholds decrease, more and more entities will be required to start posting regulatory IM.

Only when both parties are in scope do the regulatory requirements apply.  Where one party would be in scope at a lower tier than the other, the implementation date when margin is required to be exchanged would be on the date applying to the party on the lower tier. 

Therefore, while entities in earlier phases only need to put in place arrangements for new entities as they come into scope, entities in later phases have a larger job as they need to put in place arrangements for entities in all past phases as well as the ones in their phase (e.g. entities coming into scope in Phase 4 will need to repaper all entities in Phase 1, 2, 3 and 4).

Add to this the increase in volume and the work required in upcoming phases (particularly Phases 4 and 5) is no small feat.

Therefore it may be useful to start considering what may be required sooner rather than later for this purpose. 

In April 2018, ISDA published a handy guide (Getting ready for Initial Margin (IM) Regulatory Requirements) outlining 8 steps to consider.

These steps are:

  • Step 1: Identify in-scope entities early
  • Step 2: Make early disclosures to counterparties
  • Step 3: Exchange information on compliance
  • Step 4: Identify special cases
  • Step 5: Establish custodial relationships
  • Step 6: Prepare for compliance
  • Step 7: Negotiate/execute documentation
  • Step 8: Finalise preparations

While each of the steps is important to consider, I would like to focus on Step 1 and Step 5.

Step 1: Identify in-scope entities early

Knowing which entities are in-scope is key in order to be able to plan and resource any repapering work appropriately.  Much of the initial groundwork is likely to have been completed when market participants undertook the work required for variation margin compliance.  Therefore you are likely to have a good idea of the entities that may be in scope for IM.  However, as the calculations for AANA are generally undertaken based on information during March, April and May of each year, it may not be possible to confirm the precise population until after this observation window closes. 

Step 5: Establish Custodial Relationships

IM is likely to require the involvement of a custodian.

There are a number of custodians who are available in the market.  Some already offer regulatory IM custodial arrangements and more are likely to do so in later phases.  You should consider which custodian you would like to use for your IM requirements (or if your existing custodial arrangements can be extended). Another consideration is whether a third party or tri-party arrangement is most appropriate.  You should also be aware that your counterparty may select a different custodian to yours and that you may also be required to undertake certain steps in order to “link-up” to their custodian.

The initial onboarding with a custodian including Know Your Customer (KYC) requirements can take much time so undertaking this work early should make the process a lot smoother in the long run. 

It may also be useful to note that while the regulatory deadlines are 1 September, custodians often have an earlier deadline to complete the relevant account set up (often late June/early July).


Undertaking these steps late in the day could mean that while the relevant IM bilateral documentation has been negotiated and executed, the operational side is not complete and therefore the parties are unable to trade until they are.

Posted by Abigail Harding

Tagged: ISDA negotiation ISDA ISDA Credit Support Annex RegIM Marginrules

Category: ISDA negotiation

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