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Initial Margin: Five key considerations for Phase 4 and 5 firms

13 December 2018

With the first three waves of the initial margin requirements for non-cleared derivatives instruments complete, the focus has moved on to the final group of firms that will come into scope in September 2019 and September 2020. Preparations for meeting the mandatory exchange of initial margin take time and involve significant effort to ensure that systems, processes and documentation are in place. We recently hosted a series of initial margin roundtables across Europe (London, Paris, Amsterdam) in conjunction with BNY Mellon, ISDA, Allen & Overy and Margin Reform to discuss preparations among Phase 4 and 5 firms.

Here are our top five takeaways:

  1. Time is of the essence but many firms are underprepared

We know from the earlier phases that firms need 12-18 months to get their systems, processes and documentation in place to exchange initial margin. Given that Phase 4 and 5 firms need to be compliant in nine and 21 months respectively, there seems to be a distinct lack of urgency. From managing the initial margin calculations and OTC collateral to the requirement for legal repapering, firms need to take action now to meet the deadlines. However, many firms are yet to put a plan in place for how they will manage the new requirements.

2. Initial margin is on the backburner as firms wait for regulatory relief

It is clear from our discussions that some Phase 5 firms are banking on regulatory relief. As Isda and a number of other industry bodies are advocating for regulators to increase the threshold from $8 billion of aggregate average derivatives notional amount to $100 billion, many firms are pushing out their plans for compliance. If all aspects of advocacy are successful across regulators globally, the number of entities impacted by the final phase will reduce from over 1,100 to just 100.

Yet, even if regulatory relief is introduced - and that is by no means a given - there is a more strategic vision at stake. Regulatory initial margin is part of a much wider mission to deliver greater efficiency to the derivatives markets from documentation through to post-trade processing.

3. Counterparties to the rescue for margin calculations?

The buyside made up a significant proportion of our roundtable delegates and many stated that they might rely on their counterparty to perform the margin calculations. This could be a viable option for some asset managers but local regulators still need to approve this approach so it cannot be relied upon at this stage.

There is also a range of potential issues to iron out. Would this approach lead to a conflict of interests? Would banks agree to take on additional liability? Would the buyside be required to periodically validate the margin calculations provided by their counterparties? How would they manage the difference in methodologies across counterparties? Which party is responsible for model governance - model approval, benchmarking, back-testing and monitoring?

All of these questions would need to be addressed before such an approach could be approved. In the meantime, the buyside needs to actively explore other options should they not be able to rely on their counterparty.

4. Phase 1 and 2 firms are not immune from the latter phases of initial margin

Phase 1 and 2 firms may have passed the first hurdle of complying with Uncleared Margin Rules, but the final two waves of compliance will require these firms to scale up their technology solutions. As Phase 4 and 5 firms come into scope, the larger, earlier phase firms will need to cope with a significant increase in the volume of bilateral relationships, estimated to be in excess of 9,500. If they don't have flexible, scalable technology in place, Phase 1 and 2 firms could find themselves negatively impacted by these later phases.

5. Firms should view collateral as an asset rather than a cost

Firms need a holistic view of how they can address all the challenges in the margin and collateral eco-system. The initial margin regulations impact a wide range of workflows. Whether it is meeting the challenge of legal repapering, performing the initial margin calculations or managing OTC collateral, firms need to have a bird's eye view of what the regulations mean for their specific firm. This strategic view will give them the opportunity to explore how collateral can be monetized as an asset.

We are planning to hold another series of initial margin roundtables in early 2019 across Europe and North America to continue these discussions. If you are interested in finding out more, please email For more information on our solutions for initial margin, please visit:

Nosheen Amir-Ebrahimi, Managing Director, Co-Head, Derivatives Data and Valuation Services, IHS Markit

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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