It’s been a long journey. Six years ago, the largest 20 dealers began exchanging initial margin (IM) as part of the first phase of regulatory IM requirements for non-cleared derivatives. Earlier this month, hundreds of smaller entities followed suit, marking the sixth and final phase of the regulatory rollout. Despite the number of in-scope entities – by far the largest in a single phase – the September 1 implementation deadline occurred without significant market disruption, reflecting the hard work and determination of all involved to get this done. But the journey doesn’t end here: ongoing compliance threshold monitoring, new entities coming into scope and additional jurisdictions adopting IM requirements mean the margin rules will continue to be a priority into the future.
The fact the September 1 deadline passed without any major disorder can be attributed to a variety of factors: wide engagement and outreach programs, availability of educational resources and knowhow from previous phases, improved resource planning and critical regulatory flexibility – including the decision to split the final phase into two stages (phase five and six) and delay implementation by a year in light of the pandemic.
Firms were also able to rely on a variety of tried-and-tested solutions to help with compliance. These include ISDA’s regulatory-compliant credit support documentation and eligible collateral templates, the ISDA Standard Initial Margin Model – an industry-wide tool that eliminates the need for each firm to develop its own margin calculation methodology – and the ISDA Create online document negotiation platform.
That’s not to suggest it was all plain sailing. The sheer number of entities coming into scope meant there were inevitably delays and bottlenecks, particularly in the custodian onboarding process. Fortunately, a large proportion of phase-six counterparty relationships were below the IM exposure threshold of €50 million per counterparty group – ISDA estimates the proportion to be between 78% and 85%, depending on the methodology used to calculate IM. As well as not having to exchange collateral with those counterparties, regulators have stated that documentation, custodial and operational requirements for each relationship also won’t apply until the threshold is breached.
However, those firms will need to monitor their IM exposures (or their clients’ exposures) with each counterparty on an ongoing basis and move quickly to meet documentation and custodial requirements if the €50 million level is approached with any trading partner. On top of this, entities will need to continue to run annual calculations to determine if they exceed the threshold for compliance, now set at €8 billion in aggregate average notional amount of non-cleared derivatives. New entities will inevitably come into scope over time.
There will also be ongoing waves of newly in-scope entities as additional countries implement their own margin rules and/or introduce policy changes (such as delivering certainty on the enforceability of close-out netting) that widen the application of margin requirements.
There will be other changes too. The increase in daily margin calls, settlement volumes and collateral disputes as a result of the margin rules has created an incentive for firms to automate their collateral management processes – an ongoing development that will increase efficiency over time. In response, ISDA has published a series of collateral management transformation toolkits to help firms identify opportunities to improve their collateral management in key areas, including collateral settlement automation and portfolio reconciliation and dispute resolution.
It all means the industry’s journey to exchange IM on non-cleared derivatives is far from over. Over the six phases of regulatory IM rollout, and the introduction of variation margin requirements in 2017, ISDA has worked to support the industry with critical documentation, industry tools, advocacy, education and operational coordination. Even though the phase-six deadline has passed, we will continue with that effort. It’s not the end – it’s just the end of the beginning.