Re-papering CSAs for the New Margin Rules
The Basle Committee on Banking Supervision (BCBS) and the International Organization of Securities Commission (IOSCO) have outlined the margin requirements for un-cleared OTC derivatives. These margin requirements are intended to be aligned globally and were due to be implemented by the industry’s largest participants by 1 September 2016. This deadline was met by the US and Japan; however the EU, Switzerland, South Africa and APAC countries have not yet published their finalized rules relating to margin requirements in their jurisdictions. Therefore, the pressure is on, and the EU have given indications that they will finalize their rules by the end of 2016 with planned implementation for the most systemically important entities in January or February 2017. South African regulators are busy with what is hoped to be the final draft of the margin regulations, but there is still no indication as to when these will be finalized and published.
Whilst the final rule-making may still need to be concluded in some jurisdictions, it is not too early to start considering how your institution plans to update or amend the legal documentation to comply with the new margin requirements. This re-papering exercise is likely to be time-consuming and, to some extent manual, and therefore requires advance planning.
There are several steps one needs to consider in contemplating this re-papering exercise:
1. Identify what type of entity you are (in terms of your local jurisdiction’s margin rules) to see what margin rules apply to you.
2. Conduct a gap analysis of your current Credit Support Annexes (CSAs) to see what needs to be added or amended to comply with the new variation margin and initial margin requirements.
3. Decide how you will update your CSAs to be compliant under the new margin regulations. There are several options here:
Amend your existing CSA to include new or amended provisions to align with the margin requirements. This will be a manual process of reviewing each and every existing CSA and then understanding what needs to be amended to align with the new margin rules. If this approach is taken, you will end up with one CSA for all trades which is compliant with the margin rules. This will mean one collateral call under a single CSA. The downside of this approach is that legacy transactions would be subject to the new margin rules.
Replicate and amend the existing CSA in line with the new margin requirements. If this approach is taken then you will have your existing CSA in place for legacy transactions, and the replicated and amended CSA will govern future transactions that have to comply with the new margin rules. The operational impact of this approach is that your collateral management processes would run parallel (one process for the legacy transactions under the old CSA, and another process for new transactions under the new rules subject to the amended terms).
Enter into new 2016 CSAs published for variation margin and initial margin. This will require a new negotiation process to start from scratch. Your existing CSA will remain in place for legacy transactions.
Sign up to the ISDA® protocol for variation margin (recently published by ISDA®) where parties can sign-up to the protocol and in so doing effect multilateral amendments to their CSAs with other parties who sign the protocol. Questionnaires are signed per counter party though, so there is some degree of interaction with each of your counterparties (which is required). Participants in the market are doubtful as to how simple the protocol approach will be, given the many different options and elections that will have to be made in the protocol.
4. Once your documentation is updated and in place to support the new margin requirements, the next step will then be ensuring your collateral management systems can support the new margin requirements and the new terms of the CSAs.
5. Asset Managers may also need to consider their investment mandates with their client and assess whether the terms of these mandates will need to be amended to allow the asset manager to perform margin requirements on behalf of their clients as set out in the rules.
For more information on collateral arrangements, register now for the DeriviDoc course:
This course has recently been improved and updated to include coverage of the following topics:
collateral management in the new regulatory environment focusing on collateral requirements under EMIR, Dodd Frank and the Financial Markets Act
collateral requirements in the cleared and un-cleared space
variation margin and initial margin
main elements of the 2016 VM CSAs.
DeriviDoc can also assist with any necessary re-papering work to help clients get new CSAs in place and in-line with regulatory requirements.
Contact us for further information.