As of September 1, 2022, regulatory initial margin (IM) requirements will apply for the first time to hundreds of global counterparties that belong to a consolidated group for which the average aggregate notional amount (AANA) of derivatives transactions exceeds €8 billion, or a similar amount in local currency. This compliance date is commonly referred to as ‘Phase 6’, since it is the sixth global compliance date for the phase-in of regulatory IM requirements since September 1, 2016.
ISDA estimates that more than 775 counterparties with an excess of 5,400 relationships may become subject to regulatory IM requirements in Phase 6. More than 800 of those relationships may need to exchange IM in the near-term following September 1, and therefore should be actively preparing at this stage.
Preparation for regulatory IM is complex and resource intense, involving the bilateral negotiation of new IM documents, the establishment of custodial accounts, and operational preparation for collateral management processing – including margin calculation, margin call communication, allocation, and affirmation, collateral settlement and reporting. It is imperative that a group of counterparties that anticipates it will exceed the AANA threshold for Phase 6 and is likely to exceed the IM threshold of €50 million (or similar in local currency) notifies its counterparties and begins preparation.
ISDA provides and supports documentation and mutualized solutions to help parties prepare for Phase 6, including:
IM Documentation
2018 IM documents (commonly referred to as credit support annexes (CSAs), including five basic forms of documents for different governing laws and the Euroclear and Clearstream platforms) are available for bilateral industry use and for negotiation on ISDA Create. Template collateral schedules were published in 2019 to ease the negotiation of eligible collateral schedules.
In 2020, ISDA published three sets of guidance documents to support firms using the 2018 IM documents: (1) a high-level ‘where to begin’ document, which outlines the different documents available and use cases for each; (2) annotated versions of each 2018 IM CSA, which explain how the elections in each document work; and (3) an in-depth users guide to all of the 2018 IM CSAs, which explains how they work, provides a detailed explanation of all points that need to be bilaterally negotiated, and sets out the differences between the various forms of IM document.
ISDA SIMM®
The ISDA SIMM® has been broadly and almost universally adopted by firms and accepted by global regulators for the calculation of regulatory IM since its launch in 2016, providing significant savings and efficiency. Phase 6 firms can license and implement the model themselves or work with one of the 49 vendors licensed by ISDA to provide SIMM-related services.
ISDA Create
ISDA Create’s IM module launched in January 2019, providing an efficient documentation framework for bilateral negotiation of the 23 regulatory IM templates that were published by ISDA to support the IM regulation phase-in. The platform allows firms to automate the creation and delivery of IM documentation, and negotiate and execute IM documentation with multiple counterparties simultaneously while capturing, processing and storing data from these documents.