This Suggested Operational Practices for the OTC Derivatives Collateral Process is not binding and does not constitute legal, accounting, regulatory, financial or any other professional advice. As with all market information and guidance that ISDA disseminates, parties are free to choose an alternative approach.  Parties are responsible for considering their own documentation and the specific terms of any transactions and should satisfy themselves that the Suggested Operational Practices for the OTC Derivatives Collateral Process are appropriate and are properly applied in the context of those transactions to reflect the commercial intention of the parties.

Initial Publication Date: June 14, 2021 

Updated: November 28, 2022

Updated August 20, 2024

This 2021 updated edition of Suggested Operational Practices for the OTC Derivatives Collateral Process (the SOP) substantially revises the guidance that ISDA has previously provided to the market on the operation of collateral agreements, including the 2013 interim updated edition of the Suggested Operational Practices for the OTC Derivatives Collateral Process. This is largely in response to the evolution of regulation governing the collateral management process during the past 8 years.

In response to the financial crisis, the G-20 mandated the Basel Committee on Banking Supervision (BCBS) and Board of International Organization of Securities Commissions (IOSCO) to develop consistent global standards for non-centrally cleared over-the-counter (OTC) derivatives. In September 2013, BCBS-IOSCO published a global policy framework and timetable for OTC derivative margin reform which aimed to reduce systemic risk by ensuring collateral is available to offset losses caused by the default of a derivatives counterparty.

A key element to this is the requirement that financial firms and systemically important non-financial entities exchange Variation Margin (VM) and Initial Margin (IM) to mitigate counterparty credit risk from uncleared OTC transactions. VM ensures that the current value of a derivative is collateralized and was already a standard feature of the OTC market. IM was traditionally less common but is designed to ensure there is a margin "buffer" to protect against potential losses following a change in value of a derivative position occurring between a counterparty closing out a position upon default of its counterparty and the last exchange of VM.

The previous SOP documents were published prior to the finalizing of many global regulators’ rules impacting collateral, including IM.

Approach to the SOP

Working group members from the SOP for OTC Derivatives Collateral Process Working Group, which is comprised of representatives from the industry, including buyside and sellside firms, custodians – both triparty and third party – and vendors and infrastructure providers, developed this SOP.

Origins of the SOP

The 2021 SOP replaces and vacates earlier editions of similar documents, such as the 2013 interim edition of the Best Practices and earlier editions of that document that were published by ISDA in 2010 and 2011.

The original and continuing intent of the document is to demonstrate ISDA’s pro-active commitment to industry improvements based on industry engagement, by establishing a set of suggested practices that may inform the activities and policies of market participants.

The harmonization between industry participants serves to mitigate risks inherent in the collateral management process and also sets expectations and standards for new entrants to the over-the-counter (OTC) derivative market.

This document focuses on OTC derivative trades collateralized on a bilateral basis under the ISDA English and New York law Credit Support Annexes (CSAs) and English Law Credit Support Deed (CSD) or other similar document, such as a Collateral Transfer Agreement (CTA) agreed between two parties. It does not cover OTC derivatives that have been given up to central clearinghouses by clearing members, whether on their own behalf or that of their clients, however when relevant, topics included in this document can be referenced for ETD, Cleared OTC, repo, securities financing and other collateralized products’ processing.

It is important to note that the SOP is the latest in a series of industry efforts by collateral professionals to articulate and enhance collateral management practice.

Since 1998 with the publication of the first ISDA Guidelines for Collateral Practitioners, collateral professionals have sought to improve the collateral process. Following the Long-Term Capital Management crisis, the first real test of the newly-emerging collateral management process in 1999, updated guidelines were published in 2005. Following the financial crisis in 2008 and the Uncleared Margin Requirements (UMR) implemented from 2016 onwards and then the market volatility and economic concerns of the 2020 COVID-19 pandemic, further market efficiencies were necessary.

With developments in the ISDA Clause Library, the ISDA Taxonomy, and the Common Domain Model, along with other digital and technological advancements, automation within the collateral management process will contribute to risk mitigation.

It should be noted that the SOP is not intended to create legal obligations nor alter any existing obligations of the parties pursuant to their bilateral documentation. As market participants continue to discuss and evolve the topics contained herein, this document may be subject to periodic revisions.

Introduction

When onboarding new clients, counterparties and custodians, the process begins with a Know Your Counterparty/Client (“KYC”) review and then importing data to internal trading, compliance, and collateral management systems. It is important to ensure that key procedures are followed and that tasks are completed accurately and in a timely manner, prioritizing where necessary, and aspiring to a one business day turnaround for each step, but no more than three business days.

Adherence to the SOP will ensure that collateral operations teams are in a position to support the collateral process as soon as trading commences following the execution of the ISDA credit support document or other trade confirmation. Both parties should ensure that adequate resources are allocated to the onboarding process to ensure that all procedures are completed in the established timeframes.

For regulatory IM, it is important to first establish if an entity is in-scope for such regulatory requirements based on its gross notional exposure and the application of relevant thresholds. For example, an entity may be in-scope for the UMR IM requirements based on their gross notional exposure, also known as the Average Aggregate Notional Amount (AANA). Secondly, it is important to monitor the entity’s IM thresholds with each of its counterparties to best plan for papering and operational set-up for UMR IM. When calculating both the AANA and IM thresholds, it is critical to consider all applicable regulatory regimes and also the legal entities’ consolidated entities.

1.1: Counterparty KYC and Compliance Review

Before two parties can begin negotiating the ISDA/CSA/CTA/CSD Terms, information must be shared with the swap dealer to complete a KYC review.

When onboarding begins, the KYC process will include providing documents regarding financial status, legal structure, and investment management strategy.

It is incumbent upon both institutions to maintain a current list of KYC contacts. When available, KYC tools and industry-accepted messaging services should be used to ensure that correspondence is recorded in a centralized location and that distribution lists and contacts are regularly maintained by both parties.

Some elements of KYC are mandated for certain types of regulated entities in derivatives product regulations and may be provided through ISDA Protocols (such as the ISDA Dodd-Frank Protocols) and captured electronically via the ISDA Amend platform.

It will also be important to determine whether any regulatory margin requirements apply to the relationship, which may depend on the status of the entity being onboarded, or related entities (such as any guarantor). ISDA has published regulatory margin self-disclosure letters and made these available in ISDA Amend to facilitate provision of the necessary information.

To reduce manual processing and repetitive workflow, industry utilities should be used to share and manage necessary documentation and information, when possible.

1.2: Custodian KYC and Onboarding

Onboarding with custodians, especially when segregating collateral, is a process that is similar with each custodian and yet each custodian may have specific document requirements due to their jurisdictional rules. Similar to counterparty KYC and onboarding, it is important to get a list of all the necessary requirements from a custodian – whether as a pledgor or a secured party – and maintain these documents with any updates. In an effort to reduce the time from start to finish, it is imperative that all parties involved complete requests for information and documents as promptly as possible.

1.3: Exchange of Contact Information - Operations

General contact information for collateral operations should be included in the credit support document.

Each institution should provide a group email address (including relevant internal and external emails that should be on the distribution list), phone number and an initial operations contact to help streamline the data collection process when establishing new accounts.

It is incumbent upon all institutions to maintain a current listing of daily contacts. This should include department managers and, in some cases, credit officers. Where available, industry-accepted messaging services should be used to ensure that distribution lists and contacts are regularly maintained by both entities.

Operations teams for both parties are encouraged to hold an initial meeting to go over specifics of their margining process (structure/model, custodians and their requirements/contact info, software/tech used, release of collateral requirements, etc.)

1.4: ISDA Master Agreements and Credit Support Annex, Collateral Transfer Agreement, and Credit Support Deed

An ISDA Master Agreement and CSA/CTA/CSD should be used to contractually agree collateral terms between counterparties. Long form confirmations are not recommended but may be deemed necessary with some counterparty relationships and one-off transactions.

OTC derivative transactions should not be entered into without a signed ISDA Master Agreement and CSA/CTA/CSD in place, if appropriate, with the counterparty. Once counterparties have executed these agreements, only the economic terms of a transaction will need to be negotiated and documented each time a transaction is completed.

If non-standard terms in a credit support document or long form confirmation will require manual support from collateral operations, the agreement must be reviewed and approved by operations prior to its execution. Each institution’s operating areas are responsible for supporting any manual processes in a controlled and efficient manner.

Additionally, all non-standard processes should be reviewed for effectiveness on a periodic basis.

ISDA Master Agreements and CSAs/CTAs/CSDs for various jurisdictions are available at the ISDA Bookstore.

1.5: Eligible Collateral Schedule

There are two types of Eligible Collateral Schedules (ECS); one with triparty providers and one with counterparties. If a triparty custodian structure is being used, then the ECS data must be included in both the triparty-specific documentation and also in the CSA/CTA/CSD with the counterparty.

If possible, it is beneficial to digitize the data within the ECS, such as using the Common Domain Model (CDM), so that all parties to the document can consume the data into their operating system with limited manual processing to reduce potential downstream operational issues and to expedite onboarding.

1.6: Custodian Control Agreements

Any required Account Control Agreement (ACA), or equivalent document, should be executed along with the ISDA Master Agreement and CSA/CTA/CSD at the onset of a new client relationship. This may be completed via an online negotiation tool.

Prior to executing collateralized trades for new counterparties, each party (including the 3^rd party custodian bank) should countersign and deliver an executed copy of the ACA or equivalent document. The terms therein would apply to counterparties who require segregation of collateral, whether mandated or otherwise, and make reference to the ISDA Master Agreement.

Collateral assets pledged by mutual funds are currently required to be segregated for the benefit of the Secured Party at the fund’s own custodian for mutual funds registered under the Investment Company Act of 1940. Non-cleared margin rules for IM also require segregated accounts, and in some regulatory regimes - with unaffiliated third parties. Without an executed ACA or equivalent document, bilateral swap transactions will not be sufficiently collateralized, creating undue risk for the Secured Party.

Whether within the ACA as an appendix or in a Service Level Agreement, reporting requirements by the pledgor and/or secured party should be included to take effect at time of onboarding.

1.7: Exchanging Standing Settlement Instructions (SSIs)

Standing Settlement Instructions (SSIs) should be exchanged at time of onboarding or at least prior to first collateral delivery.

Each institution should provide authenticated SSIs for all eligible collateral pools covered by the CSA/CTA/CSD. The verification process should be completed before the first exchange of collateral. Institutions are responsible for conforming to their own internal funds transfer policy but as a minimum their process should include a call back to someone other than the individual who originally supplied the SSIs. The call back process also applies to amended SSIs.

A client’s prime broker, custodian, or outsourced operator can provide SSIs on behalf of the client if evidence of delegated authority is received from the client.

Industry utilities are encouraged to be used to distribute, authenticate, and maintain SSIs.

1.8: Tax Documentation Handling

All relevant tax documentation should be put in place during the onboarding process or at least prior to any collateral being exchanged.

The repatriation of interest on cash collateral (or coupons on security collateral) to the Transferor can be delayed or incomplete if the relevant tax documentation is not in place or has expired.

Tax documentation (such as forms W-8 and W-9 in the US and other documents as appropriate in other jurisdictions) should be exchanged between parties to ensure any interest accrued on cash collateral balance or proceeds of security collateral are not subject to withholding tax or any other deductions applicable for other tax jurisdictions. Firms should also implement processes whereby existing tax documentation is monitored to ensure that if the existing tax documentation is due to expire, updated tax documentation can be exchanged ahead of the existing documentation’s expiration date.

In 2010, the Foreign Account Tax Compliance Act (FATCA) was signed into US law. FATCA requires, among other things, foreign financial institutions, such as banks, to enter into an agreement with the US Internal Revenue Service (IRS) to identify their US account holders and to disclose further account details. Given the global nature of derivatives trading, firms should consult their tax professionals to determine if FATCA rules apply in their specific trading circumstances.

1.9: Capturing Legal and Operational Terms on Internal Systems

The terms of newly-signed documents such as the CSA/CTA/CSD, ECS, and/or ACA should be input into internal systems promptly after execution of the agreements and appropriately prioritized relative to expected trading activity.

The relevant terms of new documents which have been entered in the legal documentation system should automatically feed into the collateral calculation system. Where there is no system interface between the legal documentation and collateral systems, the collateral team must have access to copies of executed documents to capture operational terms within the collateral application. As more fully described in ISDA’s Collateral Management Transformation Toolkit: Digital Documentation and Streamlining to Operating Systems, there are operational risk benefits and cost reduction opportunities with both the online negotiation process along with importing data digitally into collateral management operations systems.

Firms should review system capabilities to manage the end-to-end margin and collateral process.  At a minimum, they should support setup and management of legal agreement terms (including eligibility schedules), margin calculation and workflow processing and collateral settlement. Where possible, firms should consider using industry tools which can assist with automating margin call communication. Systems should support the maximum range of collateral eligibility, including pricing, where necessary.

1.10 Coordination of Negotiating Documents

The documents, including the CSA/CTA/CSD, ECS, and ACA, are not mutually exclusive, and negotiating the agreements may be completed concurrently. ISDA Resources:

• ISDA Collateral Management Transformation Toolkit: Digital Documentation and Streamlining to Operating Systems
• ISDA Clause Library
• ISDA Create
• UMR By the Numbers
• ISDA Collateral Management Transformation Toolkit: Onboarding Custodians with Segregated Accounts
• Triparty and Third Party Custodian Checklist
• ISDA Bookstore
• Common Domain Model

Introduction

When calculating exposure for margin calls, it is important to ensure that exposure is calculated on a timely basis, using accurate valuation parameters consistent with standard market practices. The margin requirement calculation will include the mark to market of the specific trades covered by the agreement which is known as variation margin, any independent amounts (IA), or IM, which may be applicable at a trade or portfolio level, the valuation of collateral previously held or posted, and the application of other relevant collateral agreement terms (for instance, threshold and minimum transfer amounts). Note that in some jurisdictions, margin rules may be applied by regulators that overlay or in some cases supersede the contractual provisions agreed by market participants; accordingly, care should be taken to ensure compliance with all applicable rules, and especially to understand the interaction between rules and contractual provisions.

The application of rules and contractual provisions related to netting, the scope of agreement, branches, consolidated groups, and legal entity should be automatically applied so that only trades falling within the collateral agreement parameters are included in the margin calculation.

Adherence to the established guidelines will ensure that collateral operations teams are in a position to consistently apply exposure calculations in accordance with the ISDA CSA/CSD documentation, market conventions and applicable rules. This will help minimize margin disputes and ensure timely exchange of collateral, as well as helping market participants to comply with the relevant rules.

2.1: Variation Margin, Initial Margin, and Independent Amount Calculations

VM, IM, and IA calculations are three different methods for determining counterparty exposure.

VM is a payment collected to cover daily mark to market exposure on trades defined under documentation.

IM is intended to cover exposures that may arise in the period from the default of one party to the time when the portfolio of non-centrally cleared OTC derivative transactions are closed out or replaced within the Margin Period of Risk (MPOR). Regulatory IM (Reg IM or IM) is based on a regulatory calculation such as a standardized initial margin methodology (SIMM) that has been approved by the relevant regulator or a grid/schedule prescribed by a regulator.

VM and IM should be calculated in accordance with the relevant regulatory rules for the specific transactions covered by those rules and also in accordance with the collateral agreement between the parties. Note that some rules may “grandfather” pre-existing transactions and thus not apply to those trades.

IA is a bilaterally agreed between the parties and can be determined in several ways (e.g. percentage of notional amount, fixed IA amount, or any other methodology or approach), and it is not required by regulators.  

2.2: Timing of Inclusion or Exclusion of Transactions from Collateral Calculations

Unless applicable rules or contractual terms state to the contrary, in general, collateral should cover the present value of future cashflows between the parties to a swap, including settlement events that have occurred or will shortly occur until such time as they have been completed[1].

For new trades, all margin requirements should be included in margin calculations on trade date.

VM, where applicable, should include the value of any unsettled cashflows. This would include (but is not limited to) initial premiums, unwind fees, deferred premiums and settlement of swap performance amounts. The payor should not claim or receive credit from a VM perspective for payment of a cashflow until settlement has occurred.

Like VM, IM should include new trades and should be included in the margin calculation until settlement date.

If IA is determined by reference to trades, then the documentation will define in-scope trades, but these will likely include trades entered into before and after the applicable Reg IM compliance date. IA is a counterparty-to-counterparty, or bilateral, negotiated topic, unlike Regulatory VM and IM which is driven by regulatory requirements. The IA requirement may be impacted by the IM threshold, and it should be monitored carefully, especially if it ties to relationships with both a Prime Broker agreement and a non-Prime Broker agreement for the same legal entities.

In the normal course of business, with respect to terminated or matured trades where IA is calculated at the trade level and the confirmation or other relevant documentation is silent regarding the treatment of IA on matured or terminated trades, IA should be available to be returned to the pledging counterparty on the next available settlement day after termination date or maturity date, providing the CSA/CSD states a daily Valuation Date and the period between expiration and settlement of the trade is not prolonged. When in doubt, parties should mutually agree IA handling in the event of an unwind or termination.

IM will generally be calculated at the portfolio level and be able to support the retention of IM in the portfolio until settlement date.

Finally, firms should also maintain the ability to net settle variation margin with IA trade premiums where legal terms allow.

Additional considerations may be included in the process to calculate margin, such as:

• IA requirement vs. IM with a Prime Broker Agreement and a Non-Prime Broker Agreement under the same legal entity
• VM and IA netting, especially with cash settlement
• IA and IM approach (Distinct, Allocated, Greater Of)
• Regulatory IM Threshold monitoring, (ie., under 50m per counterparty relationship)

2.3: Population of Trades to be Included

Unless applicable rules or contractual terms state to the contrary, in general, collateral should cover all derivative product types between two parties as defined by the applicable ISDA Master Agreement and CSA/CSD. It is important to keep populations of covered transactions in specific cohorts when calculating regulatory VM and regulatory IM, especially if both parties plan on ‘grandfathering’ or not including pre-regulatory implementation date legacy trades within a margin calculation.

Any trade that matches a derivative product type that is covered by the ISDA Master Agreement and/or listed in the CSA/CSD should be included in the collateral calculation used to determine whether or not a collateral exchange is required, unless stipulated otherwise by rules or contractual terms. If CSAs/CSDs or rules are ambiguous with respect to foreign exchange trades and lack differentiation between spot and forward transactions, it is common operational practice to exclude spot trades from the margin call calculation; however, it is recommended that parties bilaterally agree the handling of FX spot trades for the purpose of margin call calculation.

2.4: Minimum Transfer Amounts and Rounding

When calculating delivery or return amount for a margin call, it is important to have a consistent process for assessing MTAs and rounding, per the credit support documentation. This will help reduce margin call disputes; when one firm is expecting a margin call to be sent and collateral delivered and another counterparty is not expecting such action.

To ensure that regulatory requirements are met, MTAs that have been agreed in the CSA should be calculated first, and then the rounding can be attributed to that amount. Otherwise, rounding could result in no margin call being sent, even if the exposure is above the MTA.

However, when recalling collateral when the exposure is 0 or has changed position/direction, the full amount should always be returned. No MTA or rounding should be considered. When/If the Exposure towards a Party is zero, a full return can be demanded

ISDA Resource:

• Trade Lifecycle Events for Regulatory Initial Margin
• Approaches to IA and IM

[1] For these purposes we assume in the text that settlement date represents the point where settlement finality occurs, but parties should be aware of and adjust for situations where settlement cycles are elongated.

Introduction

Greater automation of the collateral management process via electronic messaging will standardize the delivery method, content and formatting of margin calls, and will also improve the timeliness and security of call issuance and response. Once a counterparty exposure is calculated for VM, IA, and/or IM, there is a counterparty communication and settlement process that must be followed.

The process to send margin calls and affirm collateral to be pledged can depend on which type of custodian structure that will be used. There are two custodian structures that can support the custody of collateral and the process to settle/transfer collateral: third party and triparty.

• Triparty collateral management/triparty segregation model refers to an agency service where the parties agree to the IM amount and a required value (“RQV”) is sent to the triparty provider to fulfill the collateral requirement.
• Third party custodian services refer to the traditional account structure for segregating margin, whereby a three-way ACA or equivalent agreement is in place among the pledgor, secured party, and custodian. In contrast to the triparty structure, the pledgor, its manager, or an administrator values the collateral, selects the collateral to be pledged along with confirming eligibility and concentration limits, attributes necessary haircuts and provides settlement instructions to the custodian. The custodian only provides settlement, segregation, and reporting services.

With the implementation of Phases 5 and 6 of the UMR, hybrid models combining the services of both triparty providers and third party custodians have been developed. There are different iterations of these models that are specific to relationships established between respective triparty providers and third party custodians, and those operating procedures may not fit with this SOP document.

Industry participants have experienced continued growth in margin call volume along with increased scrutiny of the collateral management process. Drivers for these increases include:

1. the separation of collateral requirements into discrete processes for VM and IM;
2. regulatory-driven bespoke processes for VM and IM with IM segregated at the custodian;
3. the bilateral posting of IM;
4. posting for IA and IM separately;
5. the reduction in thresholds and minimum transfer amounts; and
6. the move away from uncollateralized derivative transactions.

This increase in margin call volumes requires industry participants to further develop their processes to allow for scale while ensuring control. One area of focus is the communication of margin calls and related margin activities (e.g. substitutions, interest processing) between parties and to move from email to electronic messaging to reduce operational, counterparty, and liquidity risks.

This section focuses on OTC derivative trades collateralized under an ISDA CSA/CSD. However, it is intended to provide a foundation that can be leveraged for electronic messaging of other collateralized products and margin call processes in the future.

3.1: Data Availability

It is imperative that the data used in the margin calculation be received into the collateral system in a timely manner allowing for margin calls to be issued as soon as possible.

It is critical to establish firm cut offs for delivery and receipt of trade level details into collateral management systems. All business areas should be made aware of timeframes for the delivery of data and that trades booked after the cut off will not feed into systems and will not be included in the margin call.

Timeliness for mark to market and IA adjustments is key for business and control areas to achieve optimum data integrity. This ensures that there is adequate time for sign-off and validation prior to the marks being published and a margin call being issued.

Calls must be issued by the notification deadlines outlined in the CSA/CSD; however, it is preferable for a call to be issued as early as operationally possible.

The criticality of early and consistent deadlines for margin data within and across firms is likely to become even more acute with the continued growth of margin call volume, as mentioned above, which will require complex calculations to be performed prior to the making of a margin call, and to both ensure compliance with the rule and avoid disputes regarding IM calculations; market participants should be prepared for tighter data delivery timeframes.

3.2: Data Integrity

To ensure that robust processes and controls are in place to monitor data integrity, it is important that the data contained within the margin call, along with the underlying data, is as complete and accurate as possible in order to minimize the risk of call dispute.

Margin call calculations rely on several data sources: trade and exposure data, collateral positions, agreement terms, market data, pricing feeds to calculate collateral values, and instrument data. Firms should have controls in place to measure the accuracy of such data.

For example, it is critical that complete programs monitor and track the receipt of all files and raise warnings and highlight potential missing or incomplete data. Examples of potential data issues might include missed or waived calls, stale or zero MTMs or pricing feeds, and lack of independent price verification.

Portfolio reconciliation, including trade data, is a method to reduce data inconsistencies between counterparties and can help mitigate disputes and counterparty risk. Portfolio reconciliation, including trade data, is a method to reduce data inconsistencies between counterparties and can help mitigate disputes and counterparty risk.

3.3: Content for Exchanged Margin Call

The workflow for the triparty custodian structure includes the prior day’s RQV as the collateral balance and the triparty provider allocating collateral from the pledgor to the secured party. More details regarding this messaging and workflow is available in the ISDA Triparty and Third Party SOP.

For the issuance of exchanged margin calls using the third party custodian structure, the following minimum standard data fields should be included[1]:

OUTGOING MARGIN CALLS

  MARGIN CALL RESPONSE

[1] In an effort to reduce collateral-related disputes and improve data integrity, some industry participants may require fields noted above as optional.

3.4: Data Validation

Before responding to a counterparty’s call, the receiving party should promptly verify the core data elements that make up a margin call.

Parties should verify to ensure their counterparty has performed the correct mathematical calculation to arrive at a call amount. In an effort to mitigate collateral-related disputes, required fields and optional fields noted above, such as exposure, collateral balance, collateral in-transit balance, and the independent amount, if applicable, are recommended.

3.5: Call Response Timing

Where call issuance and settlement of collateral is same day, wherever possible, responses should be received as soon as possible after receipt of the call and no later than one hour prior to closing of the securities market and two hours prior to cash deadlines.

Parties should have the system capability and the procedural framework in place allowing for response time that will ensure delivery of collateral within the timeframes agreed upon in the CSA/CSD.

3.6: Adjustment of Margin Calls

Adjusted (revised) margin calls, when required, should be issued as early as possible during the day. The receiving party should endeavor to review and respond to the adjusted margin call in a timely manner to meet delivery timings in the CSA/CSD on a reasonable efforts basis.

It is recognized that adjusted margin calls may be necessary from time to time due to pricing, collateral or other issues. The parties should work together to provide notification, to respond to these adjusted calls and then deliver collateral on a reasonable efforts basis, even if the notification timing does not meet the formal definition in the CSA/CSD.

3.7: Failure to Respond

Margin call issuance and settlement timing for VM and IM are prescribed by UMR, and there are variances by jurisdiction. In addition, the CSA/CSD will include details regarding margin call issuance and settlement details.

However, from time to time, counterparties may experience technical difficulties preventing them from answering margin calls within the accepted timeframes. Wherever possible, parties should endeavor to communicate the existence of technical difficulties prohibiting call response as soon as possible. A party experiencing technical difficulties does not have good faith grounds to dispute all incoming margin calls for this reason alone - a dispute should still be raised only where there are reasons to believe the counterparty’s margin call is erroneous in some way.

As there is clear guidance regarding the issuance of margin calls and the subsequent delivery of collateral arising from that call, it can be assumed that a failure to respond by close of business on settlement day, or the agreed upon date included within the CSA/CSD, constitutes a failure under the terms of the CSA/CSD. A response to a validly issued margin call should not be delayed by unnecessary requests for additional information. Parties should communicate technical difficulties prohibiting call response as soon as possible.

Introduction

Managing margin calls and collateral requirement disputes effectively will mitigate uncollateralized counterparty risk, and the regulatory requirements associated with VM and IM have increased the need for collateral-related portfolio reconciliation and dispute mitigation programs. The initial process to mitigating disputes is to maintain good records and reconcile data regularly, and this requires a streamlined program that includes governance, reporting and technology.

Portfolio reconciliation is the proactive process of ensuring trade details/exposures and collateral balances remain aligned between counterparties in order to highlight discrepancies that need to be addressed to prevent margin call disputes. Dispute resolution in the collateral process is triggered by a margin call dispute and involves a process to bring accounts back in line to resolve the dispute.

4.1: Portfolio Reconciliation

Portfolio reconciliation is a key function within collateral management that helps the resolution of discrepancies between counterparties prior to disputed margin calls. However, there are challenges associated with instituting a portfolio reconciliation process to support collateral management efficiency. Without an automated in-house or vendor platform, some issues may only come to light when counterparties have a margin call dispute. Manual processes make it more challenging for firms to effectively manage their exposure to counterparties by adding time and inefficiencies to checks and controls processes. Organizations might reconcile trade count and mark-to-market exposures without expanding the reconciliation beyond the basic fields. In addition, without a standardized report or system to enable normalization, it can be very time-consuming to reformat data prior to reconciling.

Moreover, increased volatility and uncertainty can result in increases in margin call and dispute volumes which can put additional focus on business-as-usual collateral management-related functions.

4.2: Collateral Dispute Drivers

In the lifecycle of a dispute, there are two key stages: proactive identification and reactive management. Proactive dispute identification occurs prior to a margin call being sent to counterparties (i.e., before a dispute arises). Reactive dispute management begins when a dispute has been initiated by one of the parties.

In either case, the dispute management lifecycle begins by identifying root causes.

Disputes arise from various issues, such as:

• differences in valuation of the underlying positions;
• collateral discrepancies;
• trade population mismatches, such as trade misallocations to wrong legal entity/client account;
• misinterpretation of terms within collateral agreements; and
• IA and cashflow differences;

4.3 Governance Framework

It is important to establish a governance framework for the dispute management process. All firms should consider establishing collateral policies and procedures that address how to manage disputes, internal and external auditing parameters, reporting requirements and remediating disputes. Governance and internal and external auditing details should be included in the policy, drawing attention to controls, escalation processes, and internal and regulatory reporting.

4.4 Establish Dispute Thresholds

Set thresholds on repeated/expected disputes to prioritize investigations. Firms may want to establish thresholds on repeated disputes. If there are known margin calculation/risk sensitivity methodology differences, firms could put in place procedures to reconcile the account only if it breaches a predetermined threshold to avoid continuous reconciliation of the same issue.

4.5 Leverage Industry Utilities, Implementing Automation, and Technology

Organizations that are still manually processing reconciliations could reduce or eliminate manual reconciliations by leveraging an industry utility and implementing automation.

With the use of utilities, firms could integrate their internal processes and platform to automatically feed results into a margin system. The dispute root cause comment would be visible and consistently displayed to all affected parties in the margin system without having to look at multiple platforms.

Automating the process with a similar workflow to other counterparties that is scalable for the industry may assist with dispute management and reconciliations, increasing efficiency in determining the root cause of variance and leading to a quicker resolution of the disputed call.

Firms can leverage emerging automation technologies to proactively identify disputes as source system data is consumed by the collateral platform. Proactive identification looks for historical patterns and previous-day disputes prior to margin call issuance.

Collateral-related disputes may be decreased or even eliminated and related regulatory reporting burdens may be reduced if both parties adopt a single source of truth or a golden source for documents, trades and margin events.

4.6 Develop Standardized Dispute Reporting

Firms that do not currently or will not use a portfolio reconciliation utility to decrease collateral-related    disputes could contribute to the development of an industry standard dispute report that is based on standardized data fields. This could easily be used to reconcile accounts using internal manual reconciliation tools, as well as external utilities.

ISDA Resources:

• Portfolio Reconciliation, Dispute Management and Reporting Suggested Operational Practices (SOP)
• ISDA Collateral Management Transformation Toolkit: Portfolio Reconciliation and Dispute Resolution
• Triparty and Third Party Suggested Operational Practice

Introduction

Managing eligible collateral is an important aspect of collateral management operations. Referencing pre-Regulatory VM, IA, or IM CSAs/CSDs or the more prescribed details of regulatory requirements due to global UMR and matching collateral that is available with eligible collateral listed in Eligible Collateral Schedules (“ECS”) and CSAs/CSDs is paramount to mitigating counterparty risk management and operational efficiencies.

5.1: Managing CSA/CSD and Eligible Collateral Schedule Documentation

Documenting the eligible collateral details within the CSA/CSD with counterparties and, if relevant with a triparty provider, can be a resource-intensive and time-consuming process. It is important to ensure each counterparty and their respective regulatory regimes are considered along with each entity’s counterparty risk management parameters.

Using electronic means, either by a third party provider or via a counterparty’s or triparty provider’s onboarding solution, can reduce the manual process of email correspondence. Using digital documentation methods can improve the onboarding process and reduce operational risks with manual inputs to collateral management and compliance systems.

In addition, using industry standards, such as the Common Domain Model, to digitally represent eligible collateral may reduce disputes and misinterpretation of collateral posted and received.

5.2: Calculating Haircuts

Both counterparties’ risk management parameters and regulatory regime requirements can dictate the haircut to be applied to posted collateral. Highly liquid collateral will have a lower haircut and a less liquid type of collateral will have a higher haircut.

Operating systems need to be efficient and consistent with the calculation of such haircuts at time of affirmation and also at time of daily valuation.

5.3: Calculating and Monitoring Concentration and Wrong Way Risk Limits

Whether to meet counterparty risk management parameters or regulatory regime requirements, entities need to consider concentration and wrong way risk limits when calculating collateral values. For example, an entity may limit the percentage of collateral that may be posted from a specific industry or geographic region which is a concentration limit. Wrong way risk limits prevent entities from posting collateral that is issued by their own institution.

Although it should be confirmed by both counterparties and, if relevant, the triparty provider, upon onboarding the relationship (and documented accordingly), concentration limits and wrong way risk limits should be calculated after the respective haircut is applied.

Both counterparties should monitor concentration and wrong way risks as part of their daily routine, including when making and accepting collateral proposals and as a general check of their held and posted positions.

5.4: Managing Eligible Collateral Inventory

In order to manage eligible collateral inventory efficiently, whether measuring based on liquidity, capital, or P/L metrics, collateral inventory data must be readily available and easily transmitted to necessary departments, such as Treasury, the front office, middle office, and specifically settlements. Whether the collateral management function is centralized for all collateralized processes or silo’d by product, settlement status and position reporting is imperative to optimal collateral inventory management.

ISDA Resource:

• Consensus List for Operational Implementation of Uncleared Margin

Introduction

In order to settle margin calls, it is important to ensure that appropriate procedures and controls are in place to ensure timely and accurate instruction of collateral movements and to minimize counterparty and custodian risk.  There are two processes for settlement of a margin call: a third party custodian (that may or may not provide segregation), and a triparty custodian that will provide segregation.

6.1: Timing of Instructions for the Settlement of Collateral Movements

Once the collateral type to be delivered has been agreed by both parties, settlement instructions for collateral movements should be issued, including explicit instructions for both deliveries and receipts of collateral, regardless of whether cash or securities are to be settled. Automation should continue, when possible from margin call to response/affirmation, and then with settlement and reporting from the custodian to both the pledgor and secured party.

Procedures should be in place to ensure that instructions for the settlement of collateral movements are effected once the collateral to be delivered has been agreed by both parties. This may involve the release of instructions directly from collateral systems linked to payment systems or the provision of settlement instructions to an independent settlement function for execution.

Instructions should be input to the appropriate settlement systems for both the receipt and the delivery of securities to facilitate matching between both parties to the transfer.

For securities collateral, the pledgor must send a deliver-free settlement instruction message to its custodian while the pledgee must send a receive-free settlement instruction message to its custodian.

For cash collateral, the pledgor must send a payment settlement instruction message to its custodian while the pledgee should send a notice-to-receive message to its custodian; some pledgee custodians will reject incoming cash if they haven’t received a matching notice-to-receive message from the pledgee, while other pledgee custodians will accept incoming cash even if they haven’t received a notice-to-receive msg from the pledgee.

6.2: Triparty Custodian/Provider

The triparty provider carries out other activities, including validating eligibility, monitoring concentration   limits, applying haircuts, collateral valuation, optimization, substitutions, automated settlement of collateral from the pledgor’s own account (called the “longbox”) to the segregated account, and reporting.

Counterparties should send their RQV via electronic messaging such as a custodian portal, SWIFT message or utility provider.

6.3: Third Party Custodian

In contrast to the triparty structure, the pledgor, its manager, or an administrator values the collateral, selects the collateral to be pledged along with confirming eligibility and concentration limits, attributes necessary haircuts and provides settlement instructions to the custodian. The custodian only provides settlement, segregation, and reporting services.

6.4: Reconciliation of Collateral Balances

Where payments are effected in a settlements/payment system which is not embedded within the collateral system, a reconciliation of collateral balances should be performed between the systems on at least a daily basis, including counterparties and custodians.

A reconciliation of collateral balances should be performed at least daily where there is no direct link between the collateral system and the appropriate collateral movement settlement system. All discrepancies should be investigated and corrected promptly.

6.5: Return of Collateral Balance if under MTA

The collateral balance should be returned whenever the exposed party has collateral pledged out.

In the event that exposure between two parties changes direction, and the party previously receiving collateral is now exposed, the full balance should be returned to the pledging party regardless of the Minimum Transfer Amount (MTA.) MTA and rounding amounts do not apply in this scenario.

6.6: Return of Collateral Balance from Segregated Account

When a pledgor requests the collateral balance to be returned from a segregated account or an account established on behalf of the secured party, the secured party may be required to provide communication to the custodian to allow the release of collateral back to the pledgor. This may be particularly relevant to regulatory IM under certain UMR regimes.

As detailed in the ACA between the two counterparties and the custodian, procedures to allow for the release of collateral from the segregated account established on behalf of the secured party back to the pledgor will be included.

There are three models that can be used to process the release of the collateral: dual authorization, single authorization, and a utility model (can be dual or single). It is strongly encouraged to use automated messaging rather than manual processing.

6.7: Reporting: Status Updates, EOD Activity and EOD Positions

Coordinating automated collateral settlement data, such as transfer/settlement updates, End of Day (EOD) Activity Reports, and EOD Positions is important for optimizing collateral inventory, reducing manual operations, and managing custodian risk.

Status updates should be sent by custodians to the pledgor and pledgee in as real time as possible to help prevent collateral settlement fails before EOD.

EOD Activity Reports and EOD Position Reports should be sent by the custodian to the pledgor and pledgee as close to the end of business day as possible, considering settlement locations of securities pledged, substituted, and returned.

ISDA Resources:

• ISDA Collateral Management Transformation Toolkit: Collateral Settlement Automation
• ISDA Triparty and Third Party Suggested Operational Practice
• Suggested Operational Practices for Posting Cash as Initial Margin To Be Reinvested into a Money Market Fund

Introduction

In the event that an agreed-upon collateral transfer is not settled by the collateral transfer date, it is important that all relevant parties are informed, and that there is a procedure in place to quickly resolve any issues. The counterparty risk associated with failed collateral transfers will be mitigated as quickly as possible if both parties have well-defined escalation points and sufficient resources to address the problem.

Identifying the cause of failed transfers and implementing protocols to resolve systematic issues leading to failed transfers will ultimately reduce the total number of fails in the market.

7.1: Identification

Systems and procedures should be in place to actively monitor settlement status of all forms of collateral transfers.

SWIFT or other electronic communication methods can be utilized to automatically update settlement status on collateral transfers. Fail reports generated by these systems should be actively reviewed by a firm’s settlements team. In the absence of an electronic communication method, manual procedures should be implemented to gather settlement status information. Considering the location of settlement, custodians should be encouraged to provide information for failed transactions on as real-time basis as possible. This information should be consolidated and reviewed by the firm’s settlements team.

7.2: Notifications

Once a failed collateral transaction has been identified, the party that has identified the failed collateral delivery should promptly notify the other to allow ample time to resolve the issue.

Both parties should be aware of a failed transaction if the proper identification steps are in place. However, the party that has failed to receive collateral should advise the party that has failed to deliver to ensure that appropriate steps to resolve the fail have been initiated. To ensure that the correct transaction is investigated, the notifying party should supply, at a minimum, the following information: Account Name, Security ID (or cash), and Quantity. If an electronic or automated process is used, include the transaction ID as well. Also, once identified, pending settlements should be noted on outgoing margin calls.

ACAs include reporting and communication provisions enabling the secured party to monitor collateral segregated on its behalf. This communication type defined in the agreement should allow the secured party to easily confirm that the agreed upon transaction has been processed. In the event that a transaction is not processed, the pledging party is responsible for addressing the deficiency, and having the custodian advise the beneficiary immediately upon completion.

7.3: Resolution Timeframe

Failed collateral transactions should be resolved on the day they are identified or the next available settlement date determined by market settlement cycles (excluding JGB or Euroclear transfers).

Once a fail is identified, settlement teams should work to resolve the problem as soon as possible. If the sending party’s movement was not recognized[1], settlement instructions should be exchanged and re-verified. The cause of any recurring settlement issue (incorrect SSI, any settlement flag, problems with custodians/cage/longbox, etc.) should be investigated, and steps should be taken to eliminate these issues going forward.

[1] Sometimes referred to as a “DK” or “Don’t Know” rejection of a movement by a receiving institution.

7.4: Escalation and Reporting

Failed collateral settlements should be recorded on an end of day fails report. This report should be distributed to operations managers and credit officers with escalation procedures in place to address aged fail items.

All failed settlements should be listed on a system-generated fails report available at the EOD. A failed collateral movement may constitute an event of default.

A settlement fail may be an early warning of counterparty distress, and if appropriately notified to the failing counterparty, may initiate the process that ultimately leads to termination of swaps under the ISDA Master Agreement.

7.5: Treasury Market Practice Group (“TMPG”) Fails Charge Handling

Fails Charges, assessed when one party fails to deliver a covered security under a collateral agreement, should be similar to those parties who fail to deliver as a result of a failure to deliver by another party. As a general principle, although SIFMA’s TMPG Fails Charge regime does not technically cover the OTC derivative market, it is the practice of that market to honor the same principles and standards on a voluntary basis.

The government bond cash securities market is interconnected with other markets in which margin calls result in the free-of-payment movement of government securities collateral. In certain government bond cash securities markets, it is convention for a party failing to make delivery of a security to pay a Fails Charge to the other party (for example, under the SIFMA Treasury Market Practices Group "Fail Charge Trading Practice" in the US); however, free deliveries of securities as collateral are typically excluded from such requirements. Where securities cross from one market to the other, this creates a disparity between markets that can lead to a party not at fault for a failed delivery having to pay a Fails Charge to their counterparty in the cash securities market, but being unable to reclaim this from their counterparty in an exempt collateralized market. This disparity is an undesirable disconnect between markets and leads to the cost of fails being inappropriately borne by parties not at fault. Therefore, where this situation arises under an ISDA CSA/CSD or any other agreement including clearing agreements, all parties should voluntarily honor Fails Charge claims, subject to the detailed provisions below Fails Charges as defined by the TMPG and SIFMA (commonly known as "TMPG Fails Charges") that are assessed when one party fails to deliver a covered security to another party.

In spirit, Fails Charges were affected to penalize parties failing to delivery U.S. Treasury securities and thus making that market function inefficient. Fails Charges, assessed when one party fails to deliver a covered security under a collateral agreement, should be a wash to those parties who fail to deliver as a result of a failure to deliver by another party. Within the TMPG/SIFMA "Fails Charge Trading Practice" document, securities that are delivered free of payment, such as the delivery of U.S. Treasuries for margin purposes are specifically exempted. However, to the extent one party delivers a security free of payment to another under a collateral agreement, and that subsequent party fails to deliver the security onwards and is claimed for a Fails Charge under TMPG as a result, the original party failing to deliver the collateral should honor a pass-through claim of the TMPG Fails Charge. The amount of a claim to be cross-honored under the collateral agreement shall not exceed the upstream claim amount.

The decision of one party to honor a claim as a result of a TMPG charge is subject to the determination of the "reasonability" of that claim.

In adopting this SOP, it is not the intent that collateral under ISDA CSAs/CSD should become generally subject to the requirements of the TMPG/SIFMA "Fails Charge Trading Practice" document or any other general requirements relating to cash securities markets.

ISDA Resource:

• Notice of Exclusive Control/Pledgor Access Notice Workflow

Introduction

When an assignment occurs, exposure on the applicable trade moves from one counterparty (pledgor) to another (secured party), while the exposure for the remaining party is unchanged and simply moves from pledgor to secured party. Collateral requirements shift from pledgor CSA/CSD to secured party CSA/CSD. These relevant exposure moves occur one business day after the Novation Trade Date. Effective Date of the underlying transaction is irrelevant for purposes of collateral.

8.1: Pledgor/Transferor/Delivering Party

By stepping out of the trade, the pledgor, also known as a transferor or delivering party no longer has any collateralized exposure to the remaining party as of the Novation Effective Date. All collateralized exposure related to the trade in question should be removed from the portfolio of the pledgor as of the Novation Effective Date plus one.

As an SOP, the settlement fee agreed upon as part of an assignment should be collateralized between the pledgor and the secured party, also known as the transferee or pledgee or receiving party, until the applicable settlement date. If the pledgor removes its position from the portfolio of the remaining party on Novation Effective Date plus one, the exposure related to the settlement fee should remain collateralized with the Pledgee until the applicable settlement date.

8.2: Pledgee/Transferee/Secured Party/Receiving Party

The secured party stepping into the trade will collateralize the full exposure of the swap with the remaining party on trade date plus one of the assignment, subject to its CSA/CSD with the remaining party.

The settlement/fee related to the assignment is collateralized between the pledgee and the secured party until the applicable settlement date.

The transferee will continue to collateralize its new position versus the remaining party following current market standards.

8.3: Remaining Party

The remaining party simply moves the exposure from the pledgor to the secured party. Their exposure on the transaction does not change in an assignment.

The consistent collateralization of the settlement/fee between the pledgor and secured party will result in more accurate calls between the parties. The pledgor should not be hesitant to remove its trades, as its settlement risk will be fully collateralized versus the secured party.

Introduction

The following section outlines suggested operational practices for collateralizing each of the trade events listed.

9.1: New Trades

All new trades are to be included in the collateral calculation on trade date plus one. All upfront fees on new trades should be included in the calculation until settlement date.

All new trades, upfront fees, deferred premium, and corresponding economics should be included in the relevant collateralized portfolios on trade date plus one regardless of effective date to align collateral process with the exposure resulting from the new trade. Parties should not be able to claim that deals are not included in the collateralized deal population on Trade Date plus one because their effective date is Trade Date plus two. All fees referenced in legal documentation, as well as trade economics should be included in overall trade valuation through settlement plus one.

In the case that one party does not recognize a new trade, all efforts should be made by the counterparty to provide evidence of the trade’s existence. As firms move towards electronic confirmations, identifiers used on the relevant electronic confirmation platform should be sufficient to locate trades. For manual confirmations, Front Office correspondence would provide appropriate evidence of the trade’s existence either through a direct messaging platform or trade ticket.

With respect to handling IM related to new trades, please refer to section 2 of this document.

9.2: Unwinds

Exposure related to trades that are unwound should stay in the portfolio through settlement date.

In the case of unwinds, parties should margin all fees through settlement date capturing all remaining exposure. This is consistent with the recommended handling of all fees and final payments regardless of how they were derived. Margin call differences resulting from unwinds are generally due to one party removing economics of the unwound trades from its margin calculation on the unwind date while the other drops the same trade on settlement date. After the unwind occurs, both parties should reflect fees and corresponding economic changes in their exposures in the collateralized portfolio through settlement date plus one. This includes subsequent notional and valuation implications due to partial unwinds.

As previously stated in section 2.2, in the normal course of business, with respect to terminated or matured trades where IA is calculated at the trade level and the confirmation or other relevant documentation is silent regarding the treatment of IM on matured or terminated trades, IA should be available to be returned to the pledging counterparty on the next available settlement day after termination date or maturity date, providing the CSA/CSD states a daily Valuation Date and the period between expiration and settlement of the trade is not prolonged. When in doubt, parties should mutually agree IA handling in the event of an unwind or termination.

9.3: Credit Events

Exposure related to trades that are subject to a Credit Event should remain in the collateralized portfolio through settlement date.

Similar to unwound trades, credit events can cause margin call differences by one party dropping the impacted trades from the collateral calculation on auction date while the other collateralizes through settlement date. In addition, if a trade is live at the time of an applicable Credit Event and then subsequently matures before Auction Date, it should remain in the portfolio until settlement date as the Credit Event occurred before the Maturity Date.

9.4: Trade Compression

Trades that are subject to industry wide trade reducing events should be removed from the portfolio on the day the trade-reducing event occurs. This should be in agreement with governing documentation for the applicable risk reducing process.

All unwound trades should be removed from the portfolio on the execution date of the applicable event. All replacement trades should be booked according to the relevant compression guidelines and subsequent exposure for replacement trades should be included in collateralized exposure on the date following execution.

Introduction

The granting of rehypothecation rights and the substitution of collateral under the ISDA CSA/CSD are standard elements of collateralization where appropriate and permitted by applicable law. The decision to grant rehypothecation rights, usually on a reciprocal basis, is a decision made by both sides to the agreement.

10.1: Tracking of Securities Eligible for Rehypothecation

It is the obligation of the secured party to ensure that all assets, whether eligible for rehypothecation or not, are tracked in accordance with the agreed terms of the ISDA CSA/CSD. Where appropriate this obligation can be assigned to an agent, but responsibility in a bilateral agreement resides with the secured party. The correct reuse rights of secured assets should be checked regularly and Client money/asset rules applied where applicable.

A critical element of the collateral process, especially involving the pledging of securities, is the ability to differentiate between assets that are delivered by a pledgor that has granted rehypothecation rights and those that have been delivered without those rights. If this differentiation is not in place, the risk is that assets may be inadvertently reused inappropriately.

10.2: Reuse of Securities in Appropriately Aligned Settlement Periods

To avoid settlement fails where rehypothecation rights are granted, it is advisable to ensure that the settlement convention of the market where the assets are being reused is aligned with the settlement convention of the ISDA CSA/CSD

The ability to reuse assets, whether through rehypothecation or title transfer rights, opens up the possibility of taking those assets from one set of settlement rules, very specific to the OTC derivatives market, into shorter or longer settlement and recall environments thereby increasing the opportunity for a settlement fail.

It is therefore advisable that the settlement convention of the market where the assets are being reused is aligned with the settlement convention of the ISDA CSA/CSD.

10.3: Substitutions - Recall and Delivery Times

Parties should endeavor to make substitution requests as soon as possible but no later than 4pm local time on trade date in the time zone in which secured party is located. Wherever possible, the secured party should endeavor to return items of posted credit support on the same day in which the secured party receives the substitute credit support but no later than the next local business day, especially when the substitute item uses the same settlement convention and is in the same country.

10.4: Substitutions - Replacement Item in Event of Non Delivery

In the event that the secured party is unable to source and return the pledged asset, unless otherwise agreed by the parties, the secured party must provide an exact ISIN/CUSIP or currency in alignment with agreed legal terms.

If the pledgor requests that specific assets be returned for substitution, the secured party is obligated to deliver collateral with that specific ISIN/CUSIP or currency in alignment with agreed legal terms, which generally is no later than the next local business day after which the substitute credit support item is received.

When using a third party custodian structure, the counterparties may agree to include a provision that substitution requires consent by the secured party. If this is the case, operational procedures must be followed by the counterparties to accommodate this legal requirement. Triparty custodian structures do not require a consent by the secured party and the triparty provider coordinates all substitution operations.

Most collateral agreements do not contractually permit “equivalent” securities or cash to be delivered instead of returning the exact asset that is being substituted. However, a party finding itself unable to return the specific security may discuss with their counterparty the alternative of making a temporary delivery of cash or another security, while continuing working to source the correct asset. Unless the contract provides explicitly for such “temporary alternative collateral”, the other party is not obligated to accept such a request; however, it may be in the best interest of both parties to do so. The recalling party may prefer to hold alternate collateral temporarily to mitigate the credit risk and funding gap to which they would otherwise be exposed; the returning party may prefer to deliver alternate collateral temporarily to mitigate the risk that they might be determined to be in default for non-return of collateral.

Introduction

All collateral cash balances pledged should earn accrued interest as agreed and defined under the terms of the ISDA CSA/CSD. As mentioned in the section 3 – Margin Call Issuance and Response, greater automation of the collateral management process via electronic messaging will standardize the delivery method, content and formatting of margin messaging and interest processing. This will also improve the prompt processing of interest as well.

11.1: Settling Interest (Standard Monthly Interest Calculation)

Interest on the collateral balance is accrued on a daily basis using the CSA/CSD agreed interest rate, spread and on a simple or compounding basis (by calendar or business day).

Interest accrued is typically transferred monthly to the applicable party under most CSAs/CSDs. Notice of the amount to be paid should be sent on the first business day of the month with actual interest settlement occurring as mutually agreed by the parties. Delivery of the interest amount will be made to the pledgor’s original settlement instructions unless otherwise specified.

It is also possible to capitalize the accrued interest where the amount is an adjustment to the credit support amount, this requires no interest settlement. Capitalization reduces the post-month-end interest processing burden on firms, and thus reduces operational risk; it also ensures that interest is compounded into the credit support amount which is then more accurately calculated because it does not ignore accrued but unpaid interest, thus reducing credit risk for both parties.

It is a suggested operational practice for the party receiving interest to raise any differences in the amount received within 30 days of receipt.

If the amount of interest is very small, the two parties may choose to either write off the accrued interest or roll it over to the next interest period.

11.2: Negative Interest Rates

ISDA has published updated versions of the interest rate provisions for cash collateral.[1] In summary, these are designed to clarify that where the relevant floating rate index (eg OIS rates such as SOFR, [EONIA], SONIA, etc.) sets in the market at a negative level, or where a negative spread generates a negative rate, then this negative rate should be used in the Interest Rate and Interest Amount calculations. In 2015, ISDA stated its strong support for the use of market rates, whether positive or negative, for over-the-counter derivatives transactions, reflecting best practice in broader financial markets.[2]

Based on the terms agreed in their CSAs/CSDs, parties should either settle these negative interest amounts in the reverse direction to normal interest settlement or alternatively compound the negative interest into the credit support balance under the CSA/CSD, decrementing it rather than incrementing it, as would be the normal case.

Where parties post collateral into a segregated account, the terms of accrual of interest on any cash posted into a segregated account will depend on the posting party’s arrangements with the custodian bank. Interest amount terms therefore do not appear in IM bilateral documentation.

[1] The ISDA 2014 Collateral Agreement Negative Interest Protocol allows parties to amend existing CSAs to provide explicitly for how negative interest is calculated and paid. The 2016 ISDA Variation Margin CSAs update the prior CSA terms to include additional options for the payment or accrual of negative interest amounts.

[2] ISDA Statement on Negative Interest Rates and the ISDA 2014 Collateral Agreement Negative Interest Protocol, available at: https://www.isda.org/2015/03/12/isda-statement-on-negative-interest-rates-and-the-isda-2014-collateral-agreement-negative-interest-protocol/

11.3: Including Accrued Interest upon Final Return of Collateral

When closing a client relationship and returning collateral, the full amount of collateral should be returned, including any accrued interest.

To avoid having any future payable amount at the end of a client relationship, when returning any collateral balance in full, all interest (capitalized and non-capitalized) should be included at the same time.

11.4: Interest Should be Calculated Using a Standard Formula

Absent specific wording to the contrary in the ISDA CSA/CSD, interest should be calculated using a standard formula. The formula should be (Principal Balance * (Interest Rate/100))/(360 or 365) * number of days relevant to the currency of collateral held.

Market practice is that interest should be calculated using actual days. The formula should be (Principal Balance * (Interest Rate/100))/(360 or 365) * number of days relevant to the currency of collateral held. All decimals should be rounded to 2 places to avoid rounding issues.

Interest is typically calculated on a full month basis but some CSAs/CSDs have been written with non-standard interest period calculations, such as interest is to be calculated to the 20th day of every month. Language should be standardized to allow interest calculations based on a full calendar month basis only. As a suggested operational practice, interest calculations should be from the first day of the month to the last day of the month, with interest accrued up to and including the last day of the month.

11.5: Client Communication

All requests for interest should include the information necessary for a client to be able to evaluate and agree to any interest amount.

Request for interest delivery should be standardized around a single electronic message format. A list of fields to include in the interest message are included in the “Standards for the Electronic Exchange of OTC Derivative Margin Calls”. If the interest statement is sent via e-mail, the body of the e-mail should include the interest period, legal entity, amount of interest (payable or receivable), contact name/phone/email address and wire instructions. The interest statements should include the following data fields:

INTEREST STATEMENTS

11.6 Trade Coupon Considerations

When posting securities as collateral, it is important to track maturity dates and interest coupon paying   dates, and substitutions at prior to these dates may be in the best interest of the pledging entity. Operational procedures should be developed to monitor and effectuate any necessary monthly or quarterly movements.

Introduction

In a third party custodial relationship, an unaffiliated bank, broker dealer or other party operates under agreement with one of the two counterparties and simply provides typical custody and safekeeping services.

In a tri-party custodial relationship, a bank or other party operates under a three-way contract between it and the two derivative counterparties. Among other duties, the tri-party agent releases collateral to each of the counterparties subject to pre-defined conditions.

12.1: Collateral Balance Reconciliation

Where collateral movements are effected in a third party or tri-party system, a reconciliation of collateral balances should be performed between the parties on a daily basis.

Where the pledged collateral balance, whether cash, securities, letter of credit etc., is held by a third party or tri-party, daily balance reconciliation should be performed to ensure risk exposure is minimized.

12.2: Timing of Collateral Balance File for Reconciliation

At the close of each business day or as soon as possible thereafter, the third party or tri-party system should provide, in a standardized electronic format, the information needed to effect a daily reconciliation of collateral balances.

Upon request at time of onboarding with the third party custodian or tri-party provider, at the close of each business day or as soon as possible thereafter, the third party or tri-party system should provide, in a standardized electronic format, the account balance, including daily collateral movements and a breakdown of positions, for each individual client.

12.3: Format of Collateral Balance File for Reconciliation

The format of the collateral balance file for reconciliation should be standardized to maximize efficiencies in the automation of reconciliation.

These SOPs have been drawn up by a wide group of market industry participants over the course of several years and provide a representation of operational criteria which support derivative trading activity.

While OTC derivatives documented under ISDA Master Agreement terms are bilateral contracts, these SOPs recognize that many of the prior reconciliation SOPs have now been codified in regulation and parties should be mindful of where regulatory requirements begin and end and where parties remain free to decide between themselves suitable bilateral parameters for the reconciliations they perform.

This document will be reviewed at least annually by a group of market industry participants associated with ISDA’s Collateral Initiatives, and when updates are made, the date of updates will be noted on the front cover.

While these SOPs are not intended to be obligatory nor are intended to create or alter legal obligations, they seek to incorporate the recent regulations regarding reconciliation where appropriate and create consistency and efficiency in the market.

Document Version: 2.0 

This document should be considered a working document based on the industry’s implementation of the final document published by the BCBS-IOSCO on Margin Requirements for Non-Centrally Cleared Derivatives in September 2013 and the subsequent final Portfolio Reconciliation rules issued be the European Commission (EC) 1, the U.S. Commodity Futures Trading Commission (CFTC)2, U.S. Securities and Exchange Commission (SEC)3, Monetary Authority of Singapore (MAS)4, Hong Kong Monetary Authority (HKMA)5, Hong Kong Securities and Futures Commission (HKSFC)6, and Australian Prudential Regulation Authority (APRA)7. 

Important note and Disclaimer, 

This document does not constitute legal, accounting, or financial advice, and it describes the potential market consensus among swap market participants (including both dealers, buy-side firms and vendors) who participated in the Working Group. As with other guidance and market practice statements that ISDA disseminates, counterparties are free to choose alternate means of addressing the specific facts of their situation. Nothing in the document is contractually binding of any counterparties or amends any ISDA Master Agreement or ISDA Credit Support Documents. 

This document identifies certain regulatory requirements pursuant to the regimes and the jurisdictions identified above. ISDA has not verified any of this information with legal counsel in any of the jurisdictions and market participants are reminded that they are solely responsible for compliance with their regulatory obligations. 

Initial Publication Date: November 17, 2022 

Updated: September 15, 2023

The International Swaps and Derivatives Association, Inc. (ISDA) utilized the following working groups to explore current processes for approaching reconciliation and dispute management for both collateral margin differences and for regulatory portfolio reconciliation obligations within the requirements put forward by BCBS-IOSCO, keeping within the regulatory framework.

• ISDA Portfolio Reconciliation and Reporting SOP (Suggested Operational Practice) working group
• ISDA Initial Margin Dispute Processing sub-working group
• ISDA Data and Reporting U.S. Compliance working group
• APAC Portfolio Reconciliation working group

The working groups’ objectives were to first review previously published ISDA best practice materials from 2008 to 2013 and compare to processes currently in place at organisations today. This enabled the working groups to develop a revised 2022 suggested operational practice for standards which provides guidance to market participants. The 2021 Initial Margin Dispute Processing SOP has been incorporated into this updated resource to provide full coverage of the processes. Initially, the document referenced US and EU requirements. The second edition, published in 2023, includes APAC requirements.

The purpose of this document is to define suggested operational practices that provide a practical approach to enable effective management of portfolio reconciliation processes that are used for collateral or regulatory purposes. The document touches on related business processes and technology considerations including issue identification, workflow and escalation, dispute processing (margin and regulatory), and dispute reporting.

These suggested operational practices may be aspirational for some market participants who are establishing new processes or for those enhancing existing processes to include regulatory or initial margin (IM) procedures. Their consistent accomplishment across the market professional community will lead to a material improvement compared to current operational, compliance and risk management practices and should form a basis for future advances.

Please note: there are various uses of the term ‘dispute’ in the context of portfolio reconciliation. From a collateral perspective, a dispute is commonly understood to be a dispute in the amount of margin that needs to be exchanged.  Margin disputes usually occur because of differences in the underlying portfolio populations or a disparity in the counterparties’ views on associated exposure. However, from a regulatory perspective, the word dispute commonly means a difference in either valuation or parameters. Certain differences are reported to regulators as disputes, which may or may not align with an actual margin dispute. This is an important contextual difference.

Introduction

Proactive portfolio reconciliation using industry utilities is an established best practice for OTC bilateral derivatives. It is such an effective credit risk mitigant that regulators made portfolio reconciliation a requirement in multiple jurisdictions.

Firms establishing or updating their portfolio reconciliation function need to take many items into consideration as they formulate their process. Portfolio reconciliation related procedures will naturally vary somewhat based on the purpose of the reconciliation; however, all reconciliation processes have some common elements.

2.1 Portfolio Valuation Date

Portfolios should be valued and populated as of close of business for the business day immediately preceding the reconciliation date.

2.2 Portfolio Population

The portfolio population that is the target for reconciliation will vary based on the purpose of the reconciliation. Firms should take care to ensure the portfolios they share are aligned to reconciliation purpose to ensure a like-for-like comparison. For example, variation margin (VM) related reconciliations should contain collateralized trade populations that are aligned with the underlying margin agreement. Regulatory reconciliations will require all trades between two legal entities regardless of whether they are collateralized or not. Finally, IM related reconciliations should contain risk arrays related to trades that are subject to an IM margin agreement.

2.3 Understanding Internal Data Flows

Variations in process standards will contribute a significant amount of noise within reconciliations and can generate differences between counterparties. It is therefore important that counterparties understand their internal front-to-back process, along with data and pricing sources, as well as market standards for reconciliations to ensure they minimize inadvertent breaks/exceptions as part of their process.

The timing of trades entering and leaving the portfolio is addressed in the OTC Derivatives Collateral Process. However, counterparties do need to understand their own process and compensate in the shorter term for issues yet to be addressed by IT fixes or changes in market practice.

2.4 Understanding a Counterparty’s Process

Both counterparties should understand the size and nature of their respective teams. In this respect, it is advisable to exchange contact lists including escalation contacts and ensure these are checked and updated at regular intervals (every 6 months recommended.)

Successful reconciliation (that is, a timely and accurate reconciliation), depends on both counterparties working together at the same time and with similar-level of priority. Where counterparties have a good understanding of their own and their counterparty’s practices for timing and booking of trades, as well as valuation and FX conversion practices, the investigation process can be streamlined to focus on true discrepancies.

2.5 Data Standards

Presentation by counterparties of portfolio details for reconciliation in a consistent format and with agreed-upon standards is the foundation for successful reconciliation. There needs to be sufficient data to differentiate transactions; that data needs to be internally consistent within the portfolio (and across products), and the data needs to be in a form that can be readily exported to a reconciliation tool.

Data standards address how trades are represented and how data is presented in the collateralized trade portfolio. ISDA has worked to standardize the different approaches used across the market and to harmonize these into a set of minimum criteria for trade presentation. For collateral disputes, the resulting body of work ISDA Suggested Minimum Market Standards for Collateralized Portfolio Reconciliations should be taken as the minimum entry-level criteria for performing collateralized portfolio reconciliations in the derivatives market, although regulatory requirements for required reconciliations may differ. (Please refer to Section 8 ‘Regulatory Portfolio Reconciliations.’)

2.6 Trade Identifiers

As a result of the G20 Leader commitments from the 2009 Pittsburgh Summit,[1] CPMI, IOSCO and FSB have developed and recommended to global regulators a set of globally harmonized standards[2] (“Global Harmonization Recommendations”). As the Global Harmonization Recommendations are adopted and implemented across jurisdictions, ISDA strongly encourages use of such identifiers including, Unique Transaction Identifier (UTI), and Legal Entity Identifier (LEI), and the Unique Product Identifier (UPI, for portfolio reconciliation (at such time the UPI system is live.))

To facilitate trade matching, each trade in the portfolio should contain the UTI (which may be referenced in the Confirmation). Optionally, counterparties may choose to incorporate or reference any trade or match IDs generated and provided by shared third-party vendors. Each counterparty should also submit their unique internal ID attached to each trade to facilitate internal traceability for error investigation and corrections. This ID should remain consistent for the life of the trade. In the event of a re-booking where the original trade ID is replaced, it is advised to retain internally a reference of the original trade ID and its association with new bookings for matching purposes.

Please note: The UTI has replaced the USI on 5^th December 2022; legacy trades will retain current USI

If a principal tracks their counterparty’s trade identifier, including it in the portfolio data can also facilitate the matching process. Structured trades presented using multiple legs should have an additional common group/structure ID assigned to all legs to facilitate the trade matching process.

Every trade within a portfolio, including structured trades, should have a clearly identified product classification using, at a minimum, an appropriate product class. Once the UPI system goes live, the UPI should be included in the reconciliation file for each trade.

LEIs identifying both counterparties (and trading entity such as an execution agent, if applicable) should be submitted as part of the reconciliation file since these should be captured during the confirmation process.

[1] G20 Leaders Statement: The Pittsburgh Summit (September 24-25, 2009),

[2] CPMI_IOSCO Technical Guidance - Unique Transaction Identifier (UTI).

UTI: ISO 23897

CPMI-IOSCO Technical Guidance - Unique Product Identifier (UPI).

UPI: ISO 4914

FSB designates DSB as UPI Service Provider (May 2019)

The Global LEI System (GLEIS)

LEI: ISO 17442

2.7 File Transmission/Data Security

Reconciliation files should be transmitted by secure means. The principle of secure data transmission is important because of the sensitive nature of the data.

Secure transmission is commonly available through secure email tunnels between counterparties, vendor APIs, SFTP transfer and FpML-supported services. Firms should avoid transmitting reconciliation files via open email as this is vulnerable to security breach. Where email transmission is unavoidable, counterparties should encrypt and/or secure files with passwords. Care should be taken when dispatching sensitive data that it is sent to the correct recipient, and receipt of files by the recipient acknowledged.

2.8 Reconciliation Technology and Solutions

Counterparties should use reconciliation technology for reconciling their portfolios, whether that comprises an in-house solution, or a third-party vendor. Automated solutions significantly reduce the number of resources necessary to reconcile portfolios. Vendor solutions add transparency between counterparties which can make bilateral reconciliations faster, better controlled, and enable more efficient workflow with the added benefit of a coherent process across all counterparties.

OTC Derivative Portfolio Reconciliation is largely carried out today using industry utilities. Such reconciliation compares the two counterparties’ portfolio(s) as of a given business date to identify differences to be investigated.

2.9 Using In-house vs. Third Party Vendor

2.10 Onboarding Considerations for Third Party Vendors

When onboarding a third-party vendor, it is important to recognize that the third party does not take on the regulatory responsibility for the user.

In addition to conducting a thorough third-party vendor review, including privacy and cybersecurity mitigants, the third-party vendor should be using portfolio reconciliation industry standards.

Introduction

For VM purposes, the primary focus of the reconciliation is to prevent VM disputes from occurring and/or to quickly identify dispute drivers when such a margin dispute does occur.

VM exposure calculation is linear, meaning the sum of exposure for all trades in the portfolio equals the Gross Exposure that goes into the margin call requirements calculation.  Therefore, each trades’ contribution to Gross Exposure is very straightforward.

Proactive reconciliation of OTC bilateral derivative portfolio populations and Mark-to-Market’s (MTMs) enables earliest identification of potential issues and maximizes the resolution window.  Portfolio reconciliation is also essential to understand what is driving disputes once they arise.

Independent Amount (IA) reconciliations are typically tied to the VM process. Where complex calculations are used to determine an IA, reconciliations may be done separately.

3.1 Trade Population

To correspond with the objective of the VM reconciliation, the trade population for each portfolio should be consistent with the trade population contemplated by the governing VM collateralisation agreement. Portfolio contents should also be consistent with the trade population and valuations used for calculating exposure for the VM requirement.

3.2 Reconciliation Frequency/Timing

Portfolio reconciliation for VM purposes is typically performed each business day using portfolio snapshots (population and MTM) taken as of the previous close of business date.

3.3 Reconciliation File Fields

From a VM perspective, reconciliation files should include fields identified in the Data Standards in Section 2 (trade identifiers, counterparty and trading entity identifiers and product identifiers), along with enough trade details to properly enable a meaningful comparison of Mark-to-Market values. Fields required vary slightly by product type, but will typically also include trade notional(s) or quantity, currency(ies), start and end date as well as information about the trade underlier floating rate reference, commodity type, credit tranche, etc.

The derivatives market has adopted suggested practices for data presentation for collateral disputes portfolio reconciliation.  ISDA and its members created ISDA Suggested Minimum Market Standards for Collateralized Portfolio Reconciliations – as a guideline of fields to be included in reconciliation files for VM purposes for each asset class.

Common root causes for VM differences appear in Section 5 ‘Collateral Reconciliation Exception Processing.’

Introduction

For IM purposes, the primary focus of the reconciliation is to quickly identify dispute drivers when a IM dispute does occur. Since IM is both collected and paid each day, there are usually two IM reconciliations per relationship each day.

IM exposure calculation is non-linear, meaning the sum of exposure for all trades in the portfolio will not equal the Gross Exposure that goes into the margin call requirements calculation (Pledgor or Secured). Therefore, each trades’ contribution to Gross Exposure is somewhat obscured when the ISDA SIMM^TM is used as the calculation model.

Daily reconciliation for IM enables earliest identification of potential issues, maximizes the resolution window and is essential to understand what is driving disputes once they arise.

4.1 Trade Population

To correspond with the objective of the IM reconciliation, the trade population for each portfolio should be consistent with the trade population contemplated by the governing IM collateralisation agreement. Portfolio contents should also be consistent with the trade population and methods used for calculating exposure for IM requirements.

The regulations specify that you can calculate IM using two different approaches:

• Schedule-based calculation (Grid)
• Regulatory approved model-base calculation, such as the ISDA Standardized Initial Margin Model (“ISDA SIMM^”)

ISDA SIMM is the primary IM Exposure calculation method in use across the market today. As smaller firms come into scope with UMR Phase 6, there may be more entities using the BCBS-IOSCO  Schedule (Grid) method.

ISDA has produced an overview of the two approaches and the challenges involved across both. The material also provides steps taken for the calculations and key implementation considerations. This can be found on the ISDA website, Initial Margin Calculation Methods: ISDA SIMM and GRID.

 For both IM calculation methods, firms will need to identify in-scope transactions including new trades from their respective phase-in date and any legacy trades which could be brought into scope via a lifecycle event. Please refer to the following material available on the ISDA website Margin InfoHub which can assist in this exercise: In-Scope-Products-Chart and Trade Life Cycle Events Guidance.

4.2 Reconciliation Frequency/Timing

Portfolio reconciliation for IM purposes is typically performed each business day using portfolio snapshots (population and sensitivity calculations) taken as of the previous close of business date.

4.3 Reconciliation File Fields

From an IM perspective, reconciliation files should include fields identified in the Data Standards covered in Section 2 along with corresponding details of each trades' applicable sensitivity risk types, tenors and buckets needed to calculate IM using either ISDA SIMM or BCBS-IOSCO Schedule amounts.

Introduction

The following section touches on the valuation differences in collateralized portfolios, in particular potential causes of mismatches in the values calculated by counterparties. ISDA expresses no opinion and makes no suggestions on how a trade or collateral asset is or should be valued and the discussion relating to valuation is strictly limited to the identification of some common causes for valuation mismatch as identified to ISDA by market participants. Other causes of valuation differences not covered in this section may also exist.

5.1 Issue Prevention and Resolution

There are various types of issues which contribute to margin disputes, and these can differ across VM, IM, and IA. To ensure that dispute driving issues are managed effectively, firms need to define their approach to surfacing and managing potential issues. Members of the ISDA working groups identified common root causes that drive disputes. Participants agreed that establishing a common understanding and suggested operational practice around the main drivers of disputes would be helpful. They also agreed that it would be helpful to share information around the common root causes that drive disputes for each margin type.  A table containing common potential root causes appears below. The root cause in question impacts agreement type categories that include an “X” to the right.

5.2 Population Differences

Population issues are common drivers of disputes and can be a root cause driver for VM, IM and IA disputes. They occur when one counterparty includes a trade, and the other counterparty does not. Special types of population differences include legal entity and agreement mis-bookings. A mis-booking means that a trade has been included in an incorrect legal entity or margin agreement by one counterparty. This type of error causes disputes for both the legal entity or agreement that now includes the trade as well as the legal entity or agreement the trade should have been included. The VM reconciliation process is considered the primary process to capture population differences.  This is because while nearly all trades are subject to VM, only a subset of trades are potentially subject to IM. For firms who are in-scope for IM, only those trades executed after the in-scope data are included in the IM portfolio. Population issues related to newly executed trades are a large driver of IM disputes. This is because potential future exposure is at its height when a trade is executed, and that is what IM is meant to cover. New trades are typically executed at or near market price, meaning that their MTM is close to zero and therefore does not have much impact on VM which covers current market exposure. Inversely, population issues related to trades that are nearing maturity or expiration may have a large impact on VM while their impact on IM is negligible. Firms’ procedures should reflect this to ensure that population differences affecting both VM, and IM are prioritized appropriately for investigation. Getting IM trade populations aligned requires awareness of several nuances as delineated in the Section 4 ‘Additional Process Considerations for Portfolio Reconciliation Supporting Regulatory Initial Margin’. However, under IM, there is an additional population difference type. When using ISDA SIMM, there is a possibility that the array of risk buckets and/or sensitivities that one counterparty attributes to a trade will vary from the counterparty they are facing. This is a nuance that firms should recognize because it can occur even when IM in-scope trade populations are well-aligned between counterparties.

5.3 Valuation Differences

Valuation differences are common drivers of both, there are various types of scenarios that cause MTM discrepancies. We split them into multiple buckets because the underlying root cause/mechanism to fix the issues are different. For VM, there can be MTM errors including:

• Stale MTMs that are not up to date, which are generally caused by a firm’s inability to easily value trades daily. This tends to occur more frequently on trades that are very complex or illiquid. When these trades are periodically revalued and the MTM included in the portfolio, they can cause large/unexpected MTM swings.
• Missing or zero MTMs caused by issues with data feeds.

Other VM dispute drivers related to valuation include the following:

• Cashflow differences or cashflow timing differences related to trades where one firm drops a maturing or novated/terminated trade out of the portfolio in advance of the final payment.  That final cashflow will still have an MTM value, so if the trade is no longer included in the portfolio, the portfolio level VM exposure is understated.
• FX Snap Timing disparities occur when firms are located in different time zones and observe FX rates for pricing at their own end of day, thus causing different observations for the same rate. Please refer to ‘Managing Valuation Differences Due to FX Snap Times’ under Section 6 ‘Dispute Resolution & Issue Management’.
• MTM correlation issues occur when the MTM value from one side does not move in an opposite direction to the other side. In situations where recent MTM values are trending in the same direction, especially on new trades, it indicates that one of the counterparties booked the trades backwards.
• Model differences/persistent valuation issues are those where the MTM remains significantly different over a period of 10 days or more. These types of differences tend to be caused by entrenched pricing model differences such as discounting methodology, divergent volatility surfaces etc.

IA calculation discrepancies occur when the payor believes that the caller’s value is incorrect.

5.4 Initial Margin (IM) Differences

As stated earlier, population differences, especially those related to newly executed trades are a key driver of IM disputes. There can be disparities in the sensitivity populations submitted by each counterparty which can also drive differences. There are additional types of dispute drivers that are relevant for IM, in particular:

• Misalignment between counterparties related to the ISDA SIMM silo, risk class and/or bucket for a particular trade can contribute to disputes as it will cause disparities in the underlying sensitivities applied to trades.
  • If an IM exposure difference is the result of misalignment of risk sensitivities being used by each of the two parties, counterparties may bilaterally agree to share risk sensitivities to resolve IM disputes; this process has not become common practice due to the proprietary nature of the data. In some cases, internal procedures require internal authorizations before sensitivity data can be shared with the counterparty. Often, sharing the high-level view of the ISDA SIMM bucket breakdown can highlight where the different risk sensitivities may exist without the need for sharing the underlying sensitivities.
• Model differences occur when one counterparty uses ISDA SIMM and the other uses Grid – this will result in a disparity in the IM Exposure calculation for each counterparty.
• Jurisdictional Differences and Trade Inclusion – For IM, one jurisdiction could define a trade to be in-scope for Uncleared Margin Rules (UMR) and another jurisdiction can define that same trade as out-of-scope for UMR. These categorization differences can impact the IM calculation and may result in an issue being escalated to legal and compliance teams for resolution. It is necessary to ensure each counterparty correctly allocates all in-scope trades under all-inclusive regimes of the IM agreement to the calculation. For both IM calculation methods, firms will need to identify in-scope transactions including new trades from the respective phase-in date and any legacy trades which could be brought into scope via a lifecycle event. Please refer to the following material available on the ISDA Margin InfoHub on isda.org which can assist in this exercise: In-Scope-Products-Chart and Trade Life Cycle Events Guidance.
• Failure to specify a regulator on trades will cause those trades to be excluded from the ‘winning regulator’ calculation.
  • When submitting trade data, a principal and their counterparties should specify a regulator (or regulators) for each trade and each sensitivity. An IM Exposure calculation will be performed for all the submitted regulators, results are compared, and a ‘winning regulator’ is chosen for the end calculation. The ‘winning regulator’ is the one where the resulting calculation results in the highest (i.e., most conservative) exposure value.  Calculating IM Exposure in this manner ensures that all applicable regulators will be satisfied by the overall IM Exposure used on the margin calculation.
• Notional Add-on is a calculation parameter that can be used with ISDA SIMM to increase the calculated exposure for certain types of trades. If there is a difference between counterparties in the Notional Add-on value, or the population to which it applies, it will result in a difference in IM Exposure.
• Index decomposition differences occur when one counterparty has decomposed underlying indices into their constituents before applying ISDA SIMM risk weights and correlations, but the other counterparty has done so at the index level.
• Firms using Grid need to specify Product Class, Notional and Tenor (Rates & Credit) to determine the IM requirement (% of notional) that applies. If any of these fields are misaligned between the parties, it is likely that the retrieved Grid percentage will be different and thus result in a dispute.

5.5 Collateral Differences

Some disputes are driven by variations in the way counterparties process collateral movements or balances.  These types of differences include:

• One firm misses a collateral payment or fails to pay it correctly (e.g., sends the money to the wrong counterparty account) resulting in a failure to receive required collateral.
• Disparity in haircut values applied by the two counterparties to a bond or equity posted as collateral.
• Different treatment of in-transit collateral in the margin requirement calculation between counterparties.

5.6 CSA Term Discrepancy

If the counterparties use disparate values for CSA Terms used in the margin requirement calculation, it can cause inaccurate call amounts and result in a margin dispute. Examples may include:

• Minimum transfer amount
• Rounding
• Threshold
• Base currency

6.1 Internal Organization and Support

Counterparties should have a process in place which reaches across relevant functional areas to resolve issues uncovered as part of the reconciliation process.

Most likely, several functional areas will need to be involved in rectifying different types of breaks. This requires cooperation between the reconciliation function and other key stakeholders including for example, operations, front office, and funding and optimization.

Counterparties should ensure that such lines of communication are established, and procedures are in place to enable timely resolution of breaks and to capture and remedy root causes where these are contributory factors to ongoing breaks.

6.2 Process Transparency

To assist break resolution, a full list of breaks arising from any reconciliation should be available if requested by the counterparty and deliverable to a destination of the counterparty’s choice. This concept holds true, irrespective of technology used to perform the reconciliation.

In principle, counterparties should aim to create a common unified view of results to minimize ambiguity around breaks.

The ability of vendors to standardise reconciliation results across a variety of external sources contributes to efficiency and timeliness of break resolution between parties. Vendors also have an important role in facilitating transparency between parties.

6.3 Effective Issue Prioritization for Break Resolution

Each counterparty should identify their own priorities for break resolution and determine their own workflow and thresholds to address breaks.

Although the UMR regulations do not provide specific details regarding when and how to prioritise differences that lead to margin disputes, the regulations do indicate that regulated entities should have robust dispute resolution procedures in place. The first step to a robust dispute resolution process is to be able to identify, investigate, prioritize, and resolve individual differences. Procedures should be established to ensure differences are addressed before they cause a margin dispute.

As an example, in the HKMA rules under the ‘Dispute Resolution’ section, it states that “An Authorized Institution (AI) should agree with its counterparties on, and document, the mechanism or process for determining when discrepancies in material terms or valuations of non-centrally cleared derivatives should be considered disputes, as well as how such disputes should be resolved as soon as practicable, with a specific process for those disputes that remain unresolved within five business days. Such mechanism or process should provide for the escalation of material disputes to an appropriate level of senior management at the AI.” (Please note ‘escalation’ suggested guidance is covered in section 7.)

Each individual institution will likely adopt their own prioritization approach based upon internal configuration of collateral and reconciliation teams, credit risk appetite, XVA and capital reporting requirements etc.  The application of thresholds on difference vectors (e.g. value, type, or, age) of a difference can be helpful in establishing priority and/or escalation needs.

An example approach could be as follows:

1. Reconcile trade portfolio to ensure portfolio trade populations are aligned. Investigate differences.
2. Investigate large Mark-to-Market differences.
3. For IM, identify large differences in IM Exposure, and prioritise these for investigation
4. Items identified in 2 or 3 above which drive a margin dispute should be prioritised over calculation discrepancies or operational issues that do not appear to drive a margin dispute.
5. Prioritize further investigation of margin disputes which are aged more than 5 days.
6. Review top 10 margin dispute difference drivers and identify root cause of the differences.
7. Develop internal reporting to ensure that Collateral, Operations, Credit, Finance, XVA and Compliance and any other relevant areas are informed accordingly.

6.4 Categorization: Operational Issues vs Discrepancies in Calculations

Whilst it is an individual institution’s determination of how they wish to classify certain types of disputes or causes of disputes, a standard approach can be adopted to add a framework to assist with categorization.

Correct categorization and prioritization of collateral disputes is important for timely resolution. Efficient analysis by the institution’s collateral management team to determine where and how to identify the root cause of a dispute is essential. As a first step, firms should assess if populations are aligned. If the populations are misaligned, then the dispute is an Operational Dispute. If the populations are aligned, the margin dispute is more likely caused by Calculation Discrepancies.

6.5 Operational Differences

Operational Disputes will be escalated to the appropriate operations team for initial investigation which could include the reconciliation file production team (e.g., missing trades), confirmation team or middle office team. The initial objective here is to determine which counterparty is the source of the unmatched trade and to resolve the issue by ensuring the trade is included in the appropriate portfolio as early as the same day via an updated margin call or by at least the next day to correct the problem.

When the reconciliation process establishes there is an internal system problem or operational process issue which causes trade breaks, it is expected that such a counterparty will work in good faith to resolve the underlying data issue in a timely fashion.

It is not considered acceptable practice for a counterparty to enter placeholder bookings or trades to account for trades or exposures which they otherwise cannot systemically feed into their portfolio.

6.6 Calculation Differences

Calculation Disputes will be escalated to the appropriate team for initial investigation. This could include operations, compliance, front office, and credit/risk.

6.7 Managing Calculation Differences Due to FX Snap Times

According to ISDA members, many valuation differences are due to the use of misaligned FX exchange rate timings in the trade valuation process. These are commonly referred to as ‘snap times’ - when one counterparty values their trades using an FX conversion rate that is not ‘snapped’ at the same time of day as the other counterparty’s ‘snap time.’ The issue is more prevalent when counterparties face each other across different time zones and the market influences a reasonable shift in FX rates between the end of day ‘snap’ cut-off times.  It is important to track when counterparties conduct their valuations and FX snaps, and then those discrepancies can be more easily identified.

Operationally, at both the portfolio and trade level, exposure differences driven by FX snap time disparity between the counterparties may cause many false positives, especially in times of market disruption.  Sometimes, FX snap timing is the main cause of margin disputes. This difference is problematic since neither counterparty can change their FX snap timing. In this case, firms may periodically agree to move the other counterparty’s margin amount to avoid long running disputes.  Firms who track FX snap timing for their counterparties can more easily determine when this is the driver of a margin dispute and then act accordingly.

Taking the following suggested approaches could also assist in minimizing FX snap timing differences:

• Follow a regional model where FX rates are applied based on the region where the risk in managed.
• Daily validation of own business centre FX snaps times VS major financial centres FX currency pairs to identify potential difference drivers and false positives.
• FX snap times and rates incorporated in reconciliation data shared with counterparties to understand and validate differences.
• Some ‘third party’ vendor reconciliation services will offer a dispute breakdown categorisation criterion which will allow firms to identify the type of break and if its origin is FX based and if the root cause is FX timing.

6.8 Break Management and Interaction with Counterparties

Counterparties should track the progress of resolving agreed breaks, and they should have clearly identified between themselves which of the counterparties is assigned to action a particular break. The other counterparty should support this process by providing documentation, confirmations, or any other information requested by its counterparty in a timely manner and no later than one business day following a request by the other counterparty.

Counterparties need to work together in a coordinated manner, and this is an area of mutual responsibility; the resolution time for any difference or margin disputes will depend on counterparty responsiveness.

6.9 Root Cause Analysis and Issue Tracking

Counterparties are encouraged to establish workflow processes to identify, assign, investigate, prioritize, and resolve issues. A key aspect of issue investigation is root cause identification. Monitoring root causes and their trends over time can help identify consistent operational issues or counterparty issues that need to be escalated internally or externally for resolution.

Issue status, root cause and age should be tracked for each counterparty to ensure all issues are appropriately managed. Large organizations may wish to track root causes by underlying product class to facilitate better communication with operations and front office teams.

Internal reporting and escalation needs should also inform issue tracking and root cause procedures.

7.1 Issue and/or Dispute Escalation Thresholds

Application of threshold levels in procedures to certain difference or dispute types may be a useful mechanism to ensure that significant issues or disputes are escalated at the appropriate time and to the appropriate stakeholders.

The diagram below (Figure 1) is an illustrative example received from members who introduced procedures for IM dispute monitoring during UMR Phases 1 to 4. Similar approaches could be adopted for both VM and IM disputes. Such thresholds need to be set according to each firms’ internal requirements.

Please Note: ISDA is not prescribing, endorsing, or suggesting any thresholds; the specifics in [brackets] are examples and, if chosen to be adopted, should be amended and applied using individual risk assessment.

Level 1 items would be higher risk and prioritized to be addressed first. Additional layers could be applied to the level of risk of the counterparty faced for the individual difference; a tiered system could be used to categorize these into a similar structure to ensure these have the required level of urgency.

7.2 Internal Issue and Dispute Reporting & Escalation Process Recommendations

Institutions need to consider their individual stakeholders and understand the appropriate content and frequency that information needs to be made available to each stakeholder. A general example could be:

Intra-day

• Issue status to operations, including portfolio reconciliation team heads
• Root causes statistics to portfolio reconciliation and collateral management team heads
• Dispute reporting to collateral management
• Dispute reporting to credit/risk
• Dispute reporting to funding and optimisation

End of Day

• Dispute reporting to collateral management
• Dispute reporting to credit/risk
• Dispute reporting to funding and optimisation
• Dispute reporting to XVA desk
• Dispute reporting to business function COO

These reporting processes will help ensure that issues are monitored and escalated accordingly, especially those which are more significant.

Internal escalation processes should include additional weekly and/or monthly reporting to ensure consistent monitoring of potential issues, discrepancies, and disputes. Reporting snapshots to internal stakeholders should be structured and contain pertinent information (such as dispute amount, direction, age and frequency of dispute with a particular counterparty). Note that root causes and dispute trends should also be disclosed to relevant stakeholders to ensure appropriate visibility of apparent risks.

Additional measures could be applied to regularly coordinate teams to monitor and escalate disputes. As an example:

On a weekly basis or when determined appropriate, a dispute escalation forum could be held to review material disputes with key governance stakeholders. Stakeholders could include business partners from operations, compliance, credit/risk, and XVA. All such meetings should be documented to ensure appropriate record keeping of relevant decisions, actions, and outcomes. Disputes breaching materiality thresholds would be tracked through this forum following a prescriptive path of escalation decisions which starts with clearly defined entry points to escalation (i.e., as defined by threshold) and conclude with clearly defined closure points to escalation, which may involve either a resolution of the underlying root-cause driver or an agreement to conclude further escalation actions. Through coordination with stakeholder groups, it is possible to administer all necessary risk control actions in association with those agreed thresholds.

In addition, periodically, executive heads from each stakeholder group would be required to acknowledge any large or long running disputes to evidence their awareness of said disputes.

7.3 Issue resolution tracking

Counterparties should ensure that their adherence to established procedures is recorded showing when the issue was first noted, what investigation steps were undertaken, by whom and when. Resolution and escalation steps as well as interactions with counterparties, should also be recorded as applicable. Information of this type provides a valuable audit trail to evidence adherence to processes.

Overview

Previous sections have focused on reconciliations related to collateralized trades. This section focuses on regulatory reconciliation for counterparties subject to these reconciliations. Regulatory reconciliation requirements apply for both collateralized and non-collateralized trades.

Some counterparties have compliance obligations related to regulatory portfolio reconciliations.  For instance, in the US, all CFTC registered swap dealers are required to perform portfolio reconciliation with all their counterparties on a regular basis (frequency is dependent on the type of counterparty and the portfolio size). While most US based buy-sides do not have a similar direct compliance obligation, they may find that if they do not agree to perform reconciliation, dealers will not trade with them. Similarly for MAS all (OTC Derivatives Intermediaries), APRA (Covered Entities), HKSFC (Licensed Corporation) are required to perform portfolio reconciliation with all their counterparties on a regular basis. However, in the EMIR and HKMA rules, most financial counterparties do have a direct regulatory obligation to reconcile their portfolios. Thus, all counterparties should be cognizant of their own regulatory obligations as well as their counterparties.

Regulatory requirements regarding the timing to resolve breaks is specified, typically based on the principal counterparty type and the type of counterparty being faced.

As an example: In the Singapore rules MAS (SAF04-G09) Portfolio Reconciliation 6.2 it states “An OTCD Intermediary should determine the scope and frequency of portfolio reconciliation with a counterparty, taking into account the risk exposure profile, size, volatility and number of non-centrally cleared over-the-counter derivatives transactions which the OTCD Intermediary has with that counterparty”. The rules then continue to go on to state specific frequencies based on portfolio size.

Frequency of reconciliations is dependent on this along with the size of the portfolios between the counterparties.

A summary of the CFTC, EMIR and SEC Regulatory Portfolio Reconciliation Requirements is located in Appendix I.

A summary of the HKMA, HKSFC, MAS and APRA Regulatory Portfolio Reconciliation Requirements is located in Appendix 2

Therefore, you must monitor portfolio size to ensure reconciliation is at the right frequency. Firms who are following established suggested operational practices for collateral reconciliations, such as reconciling daily and include their non-collateralized trades, will automatically be compliant with the required strictest reconciliation frequency.

Regulatory requirements related to trade level valuation differences are generally identified using the VM reconciliation assuming that non-collateralized trades between the counterparties are also reconciled as separate portfolios, if applicable.

Regulatory reconciliations have many of the same requirements in terms of issue identification and process as collateral-based reconciliations. Sections 5, 6 and 7 of this document, apply generally to regulatory reconciliations as well. The principles of each section can be applied to forming regulatory reconciliation procedures, but tolerance levels should reflect regulatory requirements in terms of valuation differences and/or disputes that need to be reported. (Please refer to Section 10 ‘Regulatory Disputes Reporting’). Procedures should also address resolution time frames required for various  types that apply per counterparty type.

8.1 File Formats and Recommended Inclusion of Reconcilable data Fields

Under Regulatory portfolio reconciliation obligations, for reconcilable fields each of the regulatory rules sets out its own mandatory and optional data matching requirements. For example, in EU regulations, Article 13 of RTS on OTC derivatives, states that such terms shall include the valuation attributed to each contract and should also include other relevant details to identify each particular OTC derivative contract, such as the effective date, the scheduled maturity date, any payment or settlement dates, the notional value of the contract and currency of the transaction, the underlying instrument, the position of the counterparties, the business day convention and any relevant fixed or floating rates of the OTC derivative contract.”

The “valuation attributed to each contract” as referenced in bold above can be split into 3 components. It is considered these to be the key terms that should be used at a minimum to identify breaks:

1. MTM valuation
2. Legal Entity Name (leading to MTM valuation break)
3. Unmatched Trades details (leading to MTM valuation break)

In the HKMA, HKSFC, MAS and APRA Regulatory Portfolio Reconciliation Requirements state that the ‘material terms and valuations’ are reconciled.

The following covers the key material terms required for regulatory reconciliations for SEC and CFTC:

SEC 240.15Fi-1(l) states that “The term portfolio reconciliation means any process by which the counterparties to one or more security-based swaps:

(1) Exchange the material terms of all security-based swaps in the security-based swap portfolio between the counterparties;

(2) Exchange each counterparty's valuation of each security-based swap in the security-based swap portfolio between the counterparties as of the close of business on the immediately preceding business day; and

(3) Resolve any discrepancy in valuations or material terms.”

CFTC 17 CFTC 23.500 specifies that:

(i) Portfolio reconciliation means any process by which the two counterparties to one or more swaps:

(1) Exchange the material terms of all swaps in the swap portfolio between the counterparties.

(2) Exchange each counterparty's valuation of each swap in the swap portfolio between the counterparties as of the close of business on the immediately preceding business day; and

(3) Resolve any discrepancy in material terms and valuations.

…and that (g) Material terms means the minimum primary economic terms as defined in appendix 1 of subpart I of part 23 of this chapter.

However, it is suggested that counterparties share a wider range of contract details for reconciliation to enable effective pairing of trades for field comparisons.

8.2 ISDA Protocols, Amendment Agreements and Adherence

ISDA has developed and published several Protocols pertaining to regulatory portfolio reconciliation, dispute resolution, and disclosures to expedite documentation updates and communication with and among counterparties. ISDA Protocols allow for both counterparties to efficiently communicate with one another and amend previously executed documents or to put new documents in place.

The Protocols address many issues, and they allow counterparties to agree certain elections regarding portfolio reconciliation with each other, as an example:

EMIR Protocols allow counterparties to efficiently comply with the (Sender or Receiver) obligation and establish counterparty classification. If a firm is adhering as a ‘Sender’ and the other counterparty also adheres as a ‘Sender’, then typically an exchange of data takes place and both counterparties are obligated to undertake portfolio reconciliation independently. ‘Receiver’ status can be elected, and data will be sent from the counterparty to be reviewed, and any discrepancy found must be communicated to the ‘Receiver’ counterparty within 5 days, otherwise the data will be deemed affirmed.

Under ISDA Protocols, there is a mechanism provided for a change of its status from ‘Receiver’ to ‘Sender’ or vice versa, but this is available only by bilateral written agreement between the counterparties (consent not to be unreasonably withheld or delayed). This may require counterparties to change the platform/vendor of choice as the portfolio reconciliation process evolves.

Each counterparty should carefully review the Protocols in the context of applicable regulations between them and their counterparties to determine what information is required and applicable.as elections. The Protocols can be accessed via the ISDA website and are listed here:

The ISDA 2013 EMIR NFC REPRESENTATION PROTOCOL

ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

ISDA March 2013 Supplemental D-F Protocol

ISDA 2020 UK EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

ISDA 2021 SBS Protocol

ISDA 2021 SBS Top Up Protocol

Each of the ISDA Protocols has a related FAQ on the ISDA website that covers common questions and advice such as:

• What the protocol does and how to adhere to it.
• When in some circumstances counterparties may wish to change information within the protocol, for examples amending Portfolio Data Sending Entity and Portfolio Data Receiving Entity status in the future.
• How to become a Sending Entity in respect of some of my counterparties and a Receiving Entity in respect of others.
• How to understand change of status with multiple counterparties.
• Whether or not counterparties must execute portfolio reconciliation terms for the applicable jurisdiction (US domiciled counterparties who are not CFTC registered swap dealers do not technically have to execute schedule 4 covering portfolio reconciliation).

If required, please access the FAQ section within each of the respective protocol areas of the ISDA website using the links provided throughout this section.

For the HKMA, HKSFC, MAS and APRA regions, Amendment Agreements were developed by working groups of ISDA member institutions for implementation of the risk mitigation standards set out in the respective rules for margining and risk mitigation for non-centrally cleared derivatives. The agreements enable parties to bilaterally agree terms to reflect the portfolio reconciliation and dispute resolution requirements imposed by the individual rules. The Amendment Agreements can be accessed via the ISDA website and are listed here:

Amendment Agreement relating to HKMA Risk Mitigation

Amendment Agreement relating to Hong Kong SFC Risk Mitigation Requirements

Amendment Agreement relating to Singapore MAS Risk Mitigation Requirements

Agreement and FAQs relating to APRA Risk Mitigation Standards

8.3 CFTC, SEC and HKMA 10% Valuation Dispute Differences: Operational Approaches

Within the CFTC and SEC Portfolio Reconciliation 17 CFR § 23.502[1], and 17 CFR 240.15Fi-3[2], valuation discrepancies that are identified as part of the portfolio reconciliation process by US registered Swap Dealers (“SD”) or Major Swap Participants (“MSP”) and Security-Based Swap Dealers (“SBSD”) or Major Security-Based Swap Participants (“MSBSP”) must be resolved.

A difference between the lower valuation and the higher valuation of greater than 10 percent of the higher valuation are considered to be discrepancies. There is no absolute value threshold to this requirement, and therefore, every such valuation discrepancy of 10 percent or more must be treated as a dispute, even if the dollar value may seem immaterial. This can result in very high volumes, and as most of the discrepancies are due to counterparties’ FX snap times not aligning with one another. According to ISDA members, in these cases, those specific discrepancies usually resolve themselves within 2-4 days.

Firms that face non-US SDs, SBSDs, MSPs, and MSBSPs may be faced with unanswered requests for information because their regulatory requirements are not as prescriptive. In those cases, the US SDs, SBSDs MSPs, MSBSPs must still track the discrepancies and attempt to resolve any such differences.

Firms that face other US SDs, SBSDs MSPs, MSBSPs along with other types of counterparties not covered by reconciliation and dispute management regulation should use automation to track issues and prioritize those that could cause the greatest counterparty risk. Examples include:

• Tagging each discrepancy with a date
• Identifying root causes of discrepancies
• Creation of messages to counterparties with issue to be researched and resolved
• Streamline reporting for internal and regulatory purposes

Within the HKMA CR-G-14 (section 4.4) In relation to portfolio reconciliation Authorized Institutions (AI) must include material terms for all transactions ‘In case of a discrepancy in valuation, a difference between the lower valuation and the higher valuation of more than 10 percent of the higher valuation needs to be reconciled.’

As an additional note, the HKMA rules also say “The valuation reconciliation threshold of 10% could be applied at the netting set level. Once the 10% threshold is exceeded, all the transactions in the netting set portfolio need to be reconciled. Nevertheless, this does not preclude an AI from applying a reconciliation threshold at the transaction level which is agreed with its counterparty taking into account the risk profile of the portfolio.”

[1] 17 CFR §23.502  https://www.law.cornell.edu/cfr/text/17/23.502.   Please also refer to Definitions in §23.500 as relevant.

[2] 17 CFR 240.15Fi-3 and definitions in 15Fi-1.

9.1 Break Management with Counterparties and Interaction with Internal Stakeholders

Counterparties should track the progress of resolving agreed breaks and should have clearly identified between themselves which of the counterparties is assigned to action a particular break at any one point in time. Counterparties should expect to provide information to facilitate break resolution promptly within one business day of receiving a written request to do so. Inter-alia this may include providing confirmation copies, relevant IDs, or any other information requested and available relating to a trade under investigation.

Counterparties should have a process in place which reaches across relevant functional areas to efficiently resolve issues or root causes uncovered as part of the reconciliation process.

Several functional areas may need to be involved in rectifying different types of breaks. This requires co-operation between the reconciliation function and, for example, collateral, operations, front office teams.

Counterparties should ensure that appropriate lines of communication are established, and procedures are in place to enable timely resolution of breaks and to capture and remedy root causes where these are contributory factors to ongoing breaks.

Counterparties should have formal escalation procedures in place to address important or aged issues. Escalation procedures should focus on timeframes and process for communicating with cross-departmental escalation process in place internally, for example operations, credit/risk, and front office. Escalation points should be available and communicated to the counterparty where appropriate.

Where breaks are not being resolved within agreed timeframes, the reasons should be clearly communicated internally and to the counterparty, with appropriate action being taken to remedy the underlying cause.

9.2 Counterparty Responsiveness and Asymmetric Benefits/Challenges

Timely response by both counterparties to a request for investigation of breaks is an area that firms should give priority to and should be adequately resourced to support, especially given short resolution timeframes required under regulatory requirements.

Counterparties may agree to alternative timeframes between themselves for responding to requests for break investigation and for agreeing a course of action to resolve those breaks, mindful of regulatory requirements either counterparty may have.

Unless otherwise required by regulatory obligations, counterparties should identify and raise queries by the next business day, and break investigation/resolution, wherever possible, should occur within 5 business days.

Overview

The regulatory reporting requirements for the CFTC, NFA, SEC, US Prudential, EMIR, HKMA, MAS and APRA are referenced below. Users of this document should review the various regulations that apply to them and their counterparty relationships to determine the applicable regulatory requirements and develop relevant regulatory dispute reporting procedures.

10.1 US: CFTC (including NFA Requirements as delegated by the CFTC) Reporting Requirements

Each swap dealer and major swap participant shall promptly notify the Commission and any applicable prudential regulator, or with regard to swaps defined in section 1a(47)(A)(v) of the Act, [1] the Commission, the Securities and Exchange Commission, and any applicable prudential regulator, of any swap valuation dispute in excess of $20,000,000 (or its equivalent in any other currency) if not resolved within:

(1) Three (3) business days, if the dispute is with a counterparty that is a swap dealer or major swap participant; or

(2) Five (5) business days, if the dispute is with a counterparty that is not a swap dealer or major swap participant.

Further Information can be found in CFTC Portfolio Reconciliation 17 CFR Part 23

[1] This is a reference to Security-based swaps agreements, which are swaps, regulated by the CFTC, that have underliers that may be securities, including exempt securities, where the SEC has recordkeeping and anti-fraud authority.

10.2 NFA Reporting Requirements

The CFTC delegated certain responsibilities related to dispute reporting to the National Futures Association (NFA) in 2016 and specifies requirements for swap valuation disputes that must be reported by SDs and MSPs.[2]

[2] For further information see the following publications:

• Notice I-17-13 July 20, 2017 Effective date of Interpretive Notice to NFA Compliance Rule 2-49: Swap Valuation Dispute Filing Requirements
• 9072 - NFA COMPLIANCE RULE 2-49: SWAP VALUATION DISPUTE FILING REQUIREMENTS (Board of Directors, May 18, 2017, effective January 2, 2018.)
• Notice I-19-11 March 28, 2019 Reminder: Filing requirements for swap valuation dispute notices under NFA Compliance Rule 2-49 apply to all swap dealer Members

10.3 US: SEC Requirements

Each security-based swap dealer and major security-based swap participant shall promptly notify the Commission, in a form and manner acceptable to the Commission, and any applicable prudential regulator of any security-based swap valuation dispute in excess of $20,000,000 (or its equivalent in any other currency), at either the transaction or portfolio level, if not resolved within:

(i) Three business days, if the dispute is with a counterparty that is a security-based swap dealer or major security-based swap participant; or

(ii) Five business days, if the dispute is with a counterparty that is not a security-based swap dealer or major security-based swap participant.

Amendments. Each security-based swap dealer and major security-based swap participant shall notify the Commission, in a form and manner acceptable to the Commission, and any applicable prudential regulator, if the amount of any security-based swap valuation dispute that was the subject of a previous notice made pursuant to paragraph (c)(1) of this section increases or decreases by more than $20,000,000 (or its equivalent in any other currency), at either the transaction or portfolio level. Such amended notice shall be provided to the Commission and any applicable prudential regulator no later than the last business day of the calendar month in which the applicable security-based swap valuation dispute increases or decreases by the applicable dispute amount.

Further Information can be found in 240.15Fi-3 Security-based swap portfolio reconciliation[3] and SEC Statement on Submitting Security-Based Swap Valuation Dispute Notices.[4]  In the Statement on Submitting Security-Based Swap Valuation Dispute Notices, SEC Staff has made available two alternative options[5] for satisfying the requirements in Rule 15Fi-3(c), both of which involve submitting a security-based swap valuation dispute notice as a PDF attachment.

The first option is to submit the notice using the Commission’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”).  EDGAR includes two form types, SBS DISPUTE NOTICE (for filing an initial submission of a dispute) and SBS DISPUTE NOTICE/A (for filing an amendment for a previously submitted dispute). Instructions for submitting both form types are now included in the updated EDGAR Filer Manual, Volume II: “EDGAR Filing,” Version 59 (September 2021)[6].  The second option is to submit the notice by email to a dedicated email address. That email address is SBSDISPUTENOTICES@sec.gov.

In an ISDA call with SEC Staff on 19 May 2021 about SBS Portfolio Reconciliation, when discussing valuation disputes, SEC staff agreed that following existing processes and requirements under the CFTC portfolio rule and related existing NFA guidance will satisfy the SEC rule requirements as well; this includes that calculations and notices will apply to portfolios that may include swaps and SBS (mixed portfolios) and that an SBS may not be the driver of a dispute of which they may be notified. Staff caveated that they wanted to go through the rule one more time, to double check that there are no issues, but did not expect any. The SEC subsequently provided guidance on reporting portfolio reconciliation valuation disputes in the updated EDGAR Filing Manual Volume II published September 2021.[7]

Regarding where notices need to be sent to the SEC and in which format, SEC provided guidance in the updated EDGAR Filing Manual Volume II:

“Exchange Act Rule 15Fi-3(c), adopted on December 18, 2019, requires security-based swap dealers and major security-based swap participants (together, “SBS Entities”) to provide the Commission with notices of certain valuation disputes with their counterparties. In accordance with this rule, EDGAR will be updated to include the following two new form types:

• SBS DISPUTE NOTICE: Security-Based Swap Entity Valuation Dispute Notice
• SBS DISPUTE NOTICE/A: Amendment to a Security-Based Swap Entity Valuation Dispute Notice

The new submission form types are accessible by selecting the 'Online Forms' link on the EDGAR Filing Website. Additionally, filers may construct XML submissions for these submission form types by following the "EDGARLink Online XML Technical Specification" document available on the SEC's Public Website (https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications).”

[3] https://www.ecfr.gov/current/title-17/chapter-II/part-240#240.15Fi-3

[4] https://www.sec.gov/tm/Security-Based-Swap-Valuation-Dispute-Notices

[5] https://www.sec.gov/tm/Security-Based-Swap-Valuation-Dispute-Notices

[6] https://www.sec.gov/info/edgar/specifications/edgarfm-vol2-v59.pdf

[7] From page 7, EDGAR Filer Manual Volume II https://www.sec.gov/info/edgar/specifications/edgarfm-vol2-v59.pdf

10.4 EMIR Requirements

Article 15 of the EU commission delegated regulation states that financial counterparties shall report to the competent authority designated in accordance with Article 48 of Directive 2004/39/EC any disputes between counterparties relating to an OTC derivative contract, its valuation, or the exchange of collateral for an amount or a value higher than EUR 15 million and outstanding for at least 15 business days.

Further Information can be found in European Commissions published C (2012) 9593 final – Article 15.

10.5 HMKA Requirements

To facilitate early identification of disputes relating to material terms by the MA, an AI should report to the MA any material disputes in excess of HKD 100 million (or its equivalent in any other currency) if not resolved within 15 business days.

With respect to the exchange of margin, the HKD 100 million threshold is applied to the AI’s disputes with its counterparty on VM and IM (separately).

Further information can be found in HKMA Supervisory Policy Manual CR-G-14

10.6 MAS Requirements

To enable the Authority to monitor disputes involving significant amounts that may cause disruptions to the market, an OTCD Intermediary should report promptly to the Authority any dispute that exceeds S$25 million which remains unresolved beyond 15 business days.

Further information can be found in MAS Guideline No: SFA04-G09

10.7 APRA Requirements

An APRA covered entity must notify APRA of disputes that are material either in dollar value or period of time outstanding. An APRA covered entity must clearly document and regularly review the criteria used to determine when a dispute is reported to APRA.

Further information can be found in Australia Prudential Standard CPS 226.

Definition of Suggested Operational Practices Table

[1] https://www.law.cornell.edu/cfr/text/17/240.15Fi-3

[2] Section V, https://www.govinfo.gov/content/pkg/FR-2020-02-04/pdf/2019-27762.pdf

[3] https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants [4] https://www.law.cornell.edu/cfr/text/17/240.15Fi-5

Suggested MMS for collateralised portfolio reconciliation - Edition Five - May 2024

Document Version: 1.0

This document should be considered a working document based on the industry’s interpretation of the minimum standards set forth in the final policy framework on Margin Requirements for Non-Centrally Cleared Derivatives published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) in March 2015 and the subsequent final rules issued by the European Commission, the U.S. Commodity Futures Trading Commission (CFTC), and the U.S Prudential Regulators.

Important note and Disclaimer,

This document does not constitute legal, accounting, or financial advice and the document describes the potential market consensus among swap market participants who participated in the Margin and Collateral Processing Working Group. As with other guidance and market practise statements that ISDA disseminates, parties are free to choose alternate means of addressing the specific facts of their situation. Nothing in the document is contractually binding of any parties or amends any ISDA Master Agreement or ISDA Credit Support Annex.

Creation Date: October 15, 2019

Updated: November 22, 2022

The International Swaps & Derivatives Association, Inc. (ISDA) utilized the ISDA Margin & Collateral Processing Working Group to engage market participants and develop suggested standard operating practices for the implementation of two-way Initial Margin (IM) exchange and segregation requirements put forward by BCBS-IOSCO[1].

The working group’s objectives were to firstly educate IM in-scope entities and secondly facilitate a suggested operational practice for ISO15022 standards for triparty providers and third party custodians removing the need for market participants to instruct custodians via fax/custodian web portals.

The Purpose of this document Suggested Operational Practices for Settlement, Release, and Updates and Reporting of Triparty and Third Party Segregated Collateral is to define recommended business and technology considerations associated with implementation of the new IM rules, focusing on the implementation of the collateral segregation requirements. Users of this document will include, but not be limited to, triparty providers, third party custodians, secured parties and pledgors and their administrators, utilities and infrastructure providers, and collateral management technology providers. The document has been categorised into two main components; 1) Triparty and 2) Third Party as summarized below:

• Triparty collateral management/triparty segregation model refers to an agency service where the parties agree to the initial margin amount and a required value (“RQV”) is sent to the triparty provider to fulfill the collateral requirement. The triparty provider carries out other activities, including validating eligibility, monitoring concentration limits, applying haircuts, collateral valuation, optimization, substitutions, automated settlement of collateral from the pledgor’s own account (called the “longbox”) to the segregated account, and reporting.
• The pledgor, secured party, and triparty provider enter into an Account Control Agreement (ACA) or equivalent agreement including a Collateral Eligibility Schedule.
• Third party custodian services refer to the traditional account structure for segregating margin, whereby a three way Account Control Agreement (ACA) or equivalent agreement is in place between the pledgor, secured party, and custodian. In contrast to the triparty structure, the pledgor, its manager, or an administrator values the collateral, selects the collateral to be pledged along with confirming eligibility and concentration limits, attributes necessary haircuts and provides settlement instructions to the custodian. The custodian only provides settlement, segregation, and reporting services.
• With the implementation of Phases 5 and 6 of the Uncleared Margin Rules, hybrid models combining the services of both triparty providers and third party custodians have been developed. There are different iterations of these models that are specific to relationships established between respective triparty providers and third party custodians, and those operating procedures may not fit to this SOP document.
• ISO15022 standards for both messaging and reporting that a triparty provider and a third party custodian will be able to consume/provide to in-scope IM entities. It also covers related systems enhancements that each in-scope IM entity will have to incorporate into development plans.

[1] Final policy framework on Margin Requirements for Non-Centrally Cleared Derivatives (March, 2015) http://www.bis.org/bcbs/publ/d317.pdf

1.2 Regulatory Summary

1. IM must be exchanged on a gross basis.
2. IM must be segregated from the proprietary assets of the Pledgor.
3. In some regulatory regimes, the Secured Party shall always provide the Pledgor with the option for individual segregation, i.e. collateral posted will be segregated from assets collected from other posting counterparties.
4. IM collected shall be immediately available to the Secured Party in the event of the Pledgor’s default.
5. IM collected must be subject to arrangements that fully protect the Pledgor to the extent possible under applicable law in the event that the Secured Party enters bankruptcy.
6. Assets posted to satisfy IM requirements must be highly liquid.
7. IM should not be re-hypothecated, re-pledged or re-used.

This document has been categorised based on the main components of the various triparty collateral management arrangements specified below, with the view to provide guidance on messaging, reporting and other considerations in preparation for industry compliance with the Working Group on Margin Requirements (WGMR) final framework for bilateral OTC derivatives margin requirements.

Triparty and Third Party

• Standardised ISO15022 messaging
• Standardised reporting

In addition to those mentioned below, further relevant assumptions and dependencies related to each suggested practice have been provided along with the description of the suggested practice in Section 5 of the document. The assumptions listed in this document are subject to change and periodic revision.

• Triparty providers perform collateral valuation, optimization, and substitutions, check collateral eligibility, concentration limits, and haircuts, and segregation and reporting, as documented in an agreement for the control on the account (e.g. Account Control Agreement (ACA) or equivalent agreement) and the Eligible Collateral Schedule.
• Third party custodians will support the account arrangement needed to comply with the regulatory margin requirements.
• Third party custodians will accept pledge/release instructions from in-scope entities directly from pledgors and secured parties or from utilities or administrators on behalf of the entities’ required to post IM with proper documentation, such as a Power of Attorney.
• Triparty providers will accept triparty instructions from in-scope entities directly from pledgors and secured parties or from utilities or administrators on behalf of the entities’ required to post IM with proper documentation, such as a Power of Attorney.
• Triparty providers, third party custodians, pledgors, and secured parties will adopt a market standard messaging infrastructure for settlement, release, and reporting.
• When intermediaries or service providers are used, a Power of Attorney or similar document may be necessary.
• A pledgor establishes a segregated account on behalf of the secured party. The collateral is delivered and returned from and to a main account to the third party segregated/collateral account.
• Both pledgors and secured parties need to ensure they manage custodian risks, including accessing intraday data and EOD reports along with initial and ongoing due diligence.

4.1 Triparty SOP

4.2 Triparty Workflow

4.3 Third Party SOP

4.4 Third Party Workflows  

Definition of Suggested Operational Practices Tables

4.1 Triparty SOPs

4.2 Triparty Workflow

Triparty workflows include exchanges of margin calls along with sending triparty providers the Required Value (RQV).

1. Counterparties agree to the initial margin. Undisputed IM call delta for day T = (IM requirement for day T) – (Last agreed RQV).
2. Counterparties translate this into an RQV of collateral to be transferred (on a gross basis.) RQV for day T = (Last agreed RQV) + (Undisputed IM call delta for day T).
3. They then send the message to the triparty provider or log onto the triparty provider’s portal to enter the RQV for processing.
4. The triparty provider assesses the amount of collateral that needs to be moved based on the current collateral value compared to the RQV and selects the collateral based on the pledgor’s preferences to be moved from the populated long box of the pledgor to the account of the secured party. During the business day, this process can be continued in real-time, and allocation updates are made available to both the pledgor and the secured party. Because both parties agree to the eligible collateral to be posted and received within the eligibility schedule document, the triparty provider is able to allocate positions without the need for day to day selection or affirmation.
5. Collateral reports, including allocation updates, are available throughout the day. Position reports are available at the end of the day.

One-sided messaging from the Secured Party may be used if supported by the triparty provider.

Note: Matching services may be conducted via email (based on authenticated message), Triparty provider portal, or utility provider.

Triparty provider reports can be provided via email, FTP, SWIFT messaging, or a utility platform, taking into account of technical limitations.  

4.3 Third Party Custody – SOPs

[1] MT296 may be used, but it has not been formalized per ISITC market standards and not all custodians support MT296 messages.

4.4 Third Party Workflows

Pledge Collateral

Both counterparties agree to the initial margin and affirm the collateral to be transferred.

With the third party structure, pledgors establish  accounts on behalf of the secured party at a custodian for margin segregation, and the pledgor instructs the custodian to move collateral to the segregated account on behalf of the secured party.

Please note: there could be different custodians for the house/main account and the segregated account.

Release of Collateral

With the third party structure, an authorization of release is necessary to move excess collateral back to the pledgor. In the ACAs or equivalent agreements, there are two methods of release – dual authorization (both parties instruct and authorize), and single (only the secured party instructs/authorizes), and this reference in the ACA or equivalent agreements can impact workflow and settlement instruction details.

Updates and Reporting

In most cases, settlement updates and EOD Position reporting is sent from the custodian(s) to both the secured party and the pledgor. However, in a hybrid model between a triparty provider and a third party custodian working together on behalf of the pledgor or the secured party, it is important to confirm which provider is responsible for settlement updates and EOD reporting.

Triparty and Third Party

It is possible that within a counterparty pair, one counterparty may pledge via triparty and the other via third party.

SWIFT Messages

When a non-defaulting party needs to notify their custodian that their counterparty has defaulted, a Notice of Exclusive Control is sent by the secured party or a Pledgor Access Notice is sent by the pledgor.

It is imperative that this notice is sent by the secured party or pledgor and received by the custodian in a timely manner to reduce any unnecessary counterparty risk and the account is locked down from the defaulting party.

While each custodian may have a different workflow once the notification is received and each custodian may request the notification to be sent via SWIFT MT599, fax or email, or portal with or without an accompanying phone call, it is important that secured parties and pledgors have an operational procedure in place.

Creation Date: August 2020

[1] Each custodian may have a different name for this document, such as Pledgor Termination Notice instead of Pledgor Access Notice.

The secured party or pledgor should ensure that their notice instructions include the details of securities/cash to be transferred out of the account with proper delivery instructions.

Once the custodian has been notified, additional procedures may take place, such as notifying the non-defaulting party, locking down the account to the non-defaulting party, and managing corporate actions and income events.

This document is intended as an information resource only; it does not contain legal advice and should not be considered a guide to or explanation of all relevant issues or considerations in connection with the impact of margin rules on derivative transactions. You should consult your legal advisors and any other advisor you deem appropriate in considering the issues discussed herein. ISDA assumes no responsibility for any use to which any of these materials may be put.

Document Version: 1.0

This document should be considered a working document based on the industry’s interpretation of the minimum standards set forth in the final policy framework on Margin Requirements for NonCentrally Cleared Derivatives published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS-IOSCO) in March 2015 and the subsequent final rules issued by the European Commission, the U.S. Commodity Futures Trading Commission (CFTC), and the U.S Prudential Regulators.

Important note and Disclaimer,

This document does not constitute legal, accounting, or financial advice and the document describes the potential market consensus among swap market participants who participated in the Cash as Eligible Collateral Sub-Working Group. As with other guidance and market practise statements that ISDA disseminates, parties are free to choose alternate means of addressing the specific facts of their situation. Nothing in the document is contractually binding of any parties or amends any ISDA Master Agreement or ISDA Credit Support Annex.

Last update: November 6, 2019

Creation Date: August 15, 2019

Executive Summary

The International Swaps & Derivatives Association, Inc. (ISDA) utilized the ISDA Margin & Collateral Processing Working Group’s Cash as Initial Margin Sub-Working Group to engage market participants and develop suggested standard operating practices for posting cash as initial margin with the intention to reinvest into another form of eligible collateral such as a money market fund using automated/straight-through processing (“STP”) workflows.

The working group’s objectives were to discuss the potential methods to effectuate cash to be accepted as initial margin and reinvested to a money market fund using a Third Party Custodian (“TPC”) segregated account structure. Triparty provider structures will not be included in this document.

The Purpose of this document Suggested Operational Practices for Posting Cash as Initial Margin – To Be Reinvested into a Money Market Fund (“SOP”) is to define recommended business and technology considerations associated with implementation of the new IM rules. Users of this document will include, but not be limited to, secured parties and pledgors and their administrators, utilities and infrastructure providers, third party custodians, and collateral management technology providers. Although the group discussed the two workflows – posting cash as initial margin to be reinvested into a money market fund within the segregated account and also posting a money market fund directly from main account to the segregated account, the focus of this SOP is posting cash and reinvesting into a money market fund.

The first edition of this document will focus on money market funds as a reinvestment, and additional types of eligible collateral may be considered in the future.

Regulatory Overview

Cash and money market funds are both listed as eligible collateral for IM within global regulatory regimes, however the Margin and Capital Requirements for Covered Swap Entities^[1] (“USPR rule”) and the Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants[2] (“CFTC rule”) (collectively, “US rules”) require cash to be reinvested to eligible collateral “within a time period reasonably necessary to consummate such purchase after the cash collateral is posted as initial margin.”

Further, while not required by any other regulatory regime, reinvesting cash into a money market fund may also reduce custodian risk in the event of a custodian bankruptcy because cash posted as collateral is attributed to the custodian’s balance sheet and securities such as money market funds are not.

[1] 80 Fed. Reg. 74840 (November 30, 2015)

[2] 81 Fed. Reg. 636 (January 6, 2016)

This document has been categorised based on the main components of the workflow: posting cash to be reinvested into a money market fund using automated/STP workflows.

Posting Cash to be Reinvested

• Standardised ISO15022 messaging
• Standardised reporting

Although discussed in the working group, posting money market funds directly from a main account to a segregated account may be detailed in this document in the future. Due to potential challenges with recordkeeping on behalf of the pledgor and the secured party by the custodian and the transfer agent and lack of clarity regarding procedures in the case of a pledgor default, the workflow will not be included.

In addition to those mentioned below, further relevant assumptions and dependencies related to each suggested practice have been provided along with the description of the suggested practice in Section 4 of the document. The assumptions listed in this document are subject to change and periodic revision.

• Custodians will support the account arrangement needed to comply with the regulatory margin requirements.
• Secured parties and pledgors and their administrators, utilities and infrastructure providers, third party custodians, and collateral management technology providers will adopt a market standard messaging infrastructure for margin call affirmation, allocating applicable haircuts, settlement, release, and reporting.
• For firms that utilize a memo pledge recordkeeping process, market standard messaging infrastructure will be used.
• Margin calls and collateral affirmations will take place upstream of the settlement, status, confirmation, release, and reporting SOPs. Cash to be reinvested within the segregated account will be affirmed with haircut considerations, if applicable.
  • Cash as Initial Margin to be reinvested into money market funds within the segregated account.
    • When reinvesting into a money market fund, this workflow ensures the beneficial owner/secured party is kept in the records of the custodian performing the sweep reinvestment and the transfer agent will maintain the recordkeeping of the custodian purchasing money market fund shares not including details regarding the pledgor or secured party.
    • Sweep times/cut-offs for cash to money market fund workflows within a segregated account will be determined by the custodian and money market fund.
• Collateral settlements as cash and then transformed to a money market may create a mis-match with custodian position/holdings reports and collateral management systems and may also create challenges with STP of collateral release messaging. It is recommended to:
  • Track both collateral settlements along with collateral held; or
  • Track the collateral settlement and perform an ‘internal transfer’ or ‘internal substitution’ that will change the cash posted, accounting for a haircut if necessary, to the money market fund cusip collateral value.
  • Use settlement instructions corresponding to cash messages (MT202/MT210).

Definition of Suggested Operational Practices Table

4.1 Cash as Initial Margin to be Reinvested - SOPs

4.2. Third Party Workflows

Pledge Collateral

Both counterparties agree to the initial margin and affirm the collateral to be transferred.

With the third party structure, counterparties set up accounts at a custodian for margin segregation, and the pledgor instructs the custodian to move collateral to the segregated account on behalf of the secured party, and the custodian reinvests the cash to a money market fund previously agreed to by both the pledgor and secured party.

Please note: there could be different custodians for the house/main account and the segregated account.

Release of Collateral

With the third party structure, an authorization of release is necessary to move excess collateral back to the pledgor. In the ACAs, there are two methods of release – dual authorization (both parties instruct and authorize), and single (only the pledgee instructs/authorizes), and this reference in the ACA can impact workflow and settlement instruction details. Before cash is returned to the pledgor, the custodian must liquidate the money market fund shares to cash.

SWIFT Messages

The ISDA Collateral Asset Definitions standardize the descriptions for the most commonly used collateral assets in various jurisdictions, reducing operational and legal risks in the use of collateral and providing a more streamlined method for including assets in collateral arrangements. The Definitions are structured as a series of tables covering the most commonly used assets in more than twenty jurisdictions. The Definitions are designed for incorporation into any form of collateral agreement, including both ISDA Credit Support documentation and non-ISDA forms of collateral agreement. ISDA anticipates publishing future editions of the ISDA Collateral Asset Definitions, updated to reflect changes in the published definitions and to include additional assets.