Phase 3 of the implementation of initial margin (IM) requirements for non-centrally cleared derivatives formally began on 1 September.
This continues a long-term process launched in response to the global financial crisis of 2008-2009, when the G20 agreed to a financial regulatory reform agenda covering the over-the-counter derivatives markets and market participants.
As noted in a recent paper published by ISDA, the Basel Committee on Bank Supervision and International Organisation of Securities Commissions (BCBS-IOSCO) subsequently developed and finalised their “Final Framework on Margin Requirements for Non-centrally Cleared Derivatives”.
This sought to establish international standards for such requirements, to be phased in over time.
Regulators around the world have since implemented margin requirements for non-centrally cleared derivatives generally in accordance with the Final Framework, but with some critical differences in certain instances.
These rules are commonly referred to as the uncleared margin rules (UMR), and margin collected and posted under UMR is referred to as regulatory margin.
UMR began to be phased-in on 1 September, 2016 for the largest market participants.
The final phases of UMR will occur on September 1 of 2019 and 2020, when a large number of additional counterparties will be brought into scope for IM requirements.
In a recent whitepaper, ISDA said: “The significant number of counterparties coming into scope in the final phases will create an untenable rush of demand on market resources across participants and service providers in a relatively short time period.”
“This in turn will result in significant operational and technology builds that must be undertaken to meet the swell of demand. Further complicating matters is the number of contractual agreements, which are often heavily negotiated, that must be put into place.”
Though, Amy Caruso, CCO for DTCC Euroclear GlobalCollateral, commented: "We expect compliance with the third wave of initial margin rules to be a much smoother process when compared with the previous two waves.”
She added: “The additional time given to prepare has no doubt been of great help to industry participants, allowing firms to review their documentation processes and infrastructure well in advance of the deadline.”
“Furthermore, the industry grew to understand the challenges pertaining to IM compliance based on the invaluable experience resulting from the previous waves, so Phase 3 has not presented unexpected obstacles thus far.”
Caruso concluded: “It is likely that Phases 4 and 5 will have a greater impact as they will bring into scope a larger number of firms when they are due in September 2019 and 2020 respectively, based on the initial estimates.”
“We look forward to working with the industry to implement solutions such as the Margin Transit Utility and the Collateral Management Utility, leading to improved settlement efficiencies and collateral optimisation and to help firms overcome any challenges they might face in the run up to the implementation.”
