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Overview: Three different Margin Flow Approaches provided for in an Initial Margin Credit Support Document




It is possible that a counterparty pair may have an existing Credit Support Annex (CSA) which provides for one party to post an Independent Amount of collateral over and above an exposure amount (non-regulatory IA). The same counterparty pair may also require to post an amount of regulatory Initial Margin (regulatory IM). In order to streamline the posting of the non-regulatory IA and the regulatory IM amounts, the initial margin credit support document provides for three different options for counterparties to choose from in terms of how these two amounts may be posted.

 

1.     Distinct Margin Flow Approach

In this method the posting party has two separate and distinct flows of margin:

      i.         Regulatory IM (excess Margin Amount IM over Pledgor’s threshold, calculated and documented under the initial margin credit support document for new trades only)

     ii.         Other non-regulatory IA (sum of Margin Amount IA that the Pledgor is required to post for legacy trades and/or new trades, taking into account any threshold, as documented and calculated under existing legacy documentation).

 

It's an easier method to manage operationally as the IM document would cater for the calculation and transfer requirements of the regulatory IM amount, and the other CSA would generally cater for the non-regulatory IA. It is also useful if you have an IA stipulated per trade (as opposed to applicable to an entire portfolio). 

 

However the two collateral calls will need to be managed separately and distinctly, so from a commercial point of view it is the more expensive approach as the full amount of regulatory IM and non-regulatory IA need to be posted.

 

When posting collateral under the IM document for regulatory IM, collateral eligibility criteria, segregation requirements and timings would be in line with regulations; whereas the non-regulatory IA amount would be subject to the relevant CSA eligibility criteria which may be more flexible than the regulatory IM parameters.

 

2.     Allocated Margin Flow Approach

In this approach the posting party would post regulatory IM as normal, and calculate the non-regulatory IA by subtracting the non-regulatory IA from the regulatory IM exposure amount. Regulatory IM would be calculated and posted first in line with the regulatory IM agreement, with the amount of non-regulatory IA required being offset against the regulatory IM paid and the balance of IA due would be paid in line with the IA agreement. 

 

From a calculation point of view, regulatory IM and non-regulatory IA are calculated in the same way as for the Distinct Margin Approach. Amount of regulatory IM transferred will be the minimum amount due under IM credit support document and the amount of non-regulatory IA is reduced by the margin which is posted as regulatory IM.  

 

From a system point of view, the Allocated Approach is more complex than the Distinct Approach as you need to calculate your regulatory IM before making the margin call calculations on the IA agreement.

 

From a commercial point of view, less collateral is required than under the Distinct Margin Flow Approach as one can reduce non-regulatory IA payments by the amount paid as regulatory IM.

 

3.     Greater of Margin Flow Approach

Calculate regulatory IM exposure under IM document and non-regulatory IA exposure under IA agreement, but only post the amount of collateral which is the greater of the two. The collateral eligibility requirements, timings and methods will be in line with the regulatory IM document (so any collateral posted must be in line with IM eligibility criteria).   

 

From a system point of view, the ‘Greater of’ Approach is more complex than the Distinct Approach as you need to calculate both IM exposure and IA exposure before making the margin transfer in line with the IM agreement.

 

From an operational and commercial point of view, there would be a single margin call for whichever is the greater amount between the non-regulatory IA and the regulatory IM amounts, but posted in line with IM requirements. This means IA amounts would be subjected to more stringent requirements as set out in the IM document.

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