How to approach the Uncleared Margin Regulation Project
The Financial Sector Conduct Authority has finalised and published the regulations for the margining of uncleared OTC derivatives transactions, as Joint Standard 2 of 2020 (‘margin rules’). Here is a guide on how to approach the task of repapering your relationships with in-scope entities.
1. Classify your counterparties: The margin rules apply to ‘providers’ who enter into uncleared OTC derivatives with a ‘counterparty’ or a ‘foreign counterparty’. The first step is therefore to classify your own institution in terms of these definitions, and then systematically contact each client with whom you transact in OTC derivatives (usually those who have an ISDA in place) and ask them to classify their institution in terms of the margin rules definitions.
2. Initial margin: Once you have classified your clients, determine if any of these will be liable to exchange initial margin with you (this will require you and your clients to calculate the ‘average aggregate gross notional amounts’ over the three-month period, as specified in the margin rules).
3. Gap analysis: Once you have a list of clients who will be in scope of the margin rules, do an analysis to see which of these clients already have a Credit Support Annex (‘CSA’) in place. There are several choices to make here:
a) Ascertain whether, operationally, you want to retain the original CSA to govern trades done prior to effective date of the margin rules, and sign a CSA which would be compliant with the variation margin rules for trades done after the effective date for the margin rules. This would mean you would have two CSAs in place for variation margin.
b) Or, you could opt to replace your existing CSA with a new margin-compliant CSA and have one CSA govern all trades (even those legacy trades which have been entered into prior to the effective date of the margin rules). This would mean you would only have one CSA in place for variation margin.
4. Repapering: In order to ensure that your CSA is compliant with the margin rules, you can either replicate an existing CSA and amend it in order to make it compliant with the variation margin rules, or you could sign a new variation margin CSA (‘VM CSA’), as published by ISDA. If both you and your client are in scope for initial margin, an initial margin CSA will need to be signed (this is separate to and in addition to the VM CSA).
5. Time frames: The variation margin rules will be effective from 6 months after the effective date of the margin rules (yet to be announced by the regulator), unless you belong to a group whose aggregate month-end average gross notional amount of OTC derivatives for March, April & May 2020 exceeds R30tr, in which case the variation margin rules will apply from the effective date. The requirements for initial margin will be phased-in over a period of years depending on what your group’s aggregate month-end average gross notional amount of OTC derivatives for March, April & May of each year is, and whether this amount breaches the stipulated regulatory thresholds.
DeriviDoc is busy assisting some of its clients in preparing for the margin rules, so if your firm needs any assistance with this project, please contact us to discuss your requirements.