Group Co.
ISDA has been tracking industry progress on a weekly basis since the beginning of the year. The data shows that more than three quarters of outstanding credit support annex (CSA) agreements have now been amended. That represents a big jump from the 30% just before the original variation margin ‘big bang’ implementation date of March 1 – which, in turn, represents thousands of hours of complex bilateral negotiations with counterparties to agree the changes. We have provided this information to regulators across the globe, and they are keenly interested in the progress that has been made.
Scott O'Malia
But with the variation margin forbearance period set to end on September 1 in some jurisdictions, including the US, there’s little time left to make changes to the remaining 20-25% of CSAs. Along with the end of forbearance, other jurisdictions – Australia, Hong Kong, Switzerland and Singapore – are due to require compliance with their variation margin requirements from September 1.
Given the progress made over the past few months, it might seem like there’s time aplenty to complete the job. But the second phase of the initial margin requirements is also due to take effect on September 1 – which means that phase-one and phase-two banks will be finalizing their initial margin documents, and phase-two firms will be implementing the necessary systems changes. It should also be noted that the ISDA SIMM has been updated to include additional risk factors relating to cross-currency swaps, inflation swaptions and collateralized debt obligation tranches. ISDA SIMM 1.3 was undertaken at the request of the Federal Reserve Bank, and we’re also going through the annual recalibration process and the results will be shared with global regulators. All of this means there will be competing demands for limited resources during the coming summer months.
The scale and complexity of the variation margin repapering exercise has been immense. The March 1 deadline captured banks, asset managers, insurance companies and hedge funds across the US, European Union, Japan and Canada. While the vast majority of those entities already posted variation margin on their non-cleared derivatives, the rules required certain specific changes to be made to collateral documents in order to comply with the rules. ISDA estimates more than 150,000 CSAs needed to be amended – and all changes had to be negotiated and agreed by each pair of counterparties.
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