A week after the September 1 initial margin deadline, a counterparty risk manager at a large US bank was reliving the frantic preparations, and the chaos of the go-live – perhaps as a form of catharsis. After venting about everyone from custodians to lawyers, he trained his gaze on the next deadline – March 1 – and his mood became grimly resolute.
From this date, financial counterparties will have to post daily margin to cover the mark-to-market exposures of their non-cleared derivatives trades. Tens of thousands of client documents would have to be amended to comply with the new rules – a seemingly impossible task, he warned, given the shambolic handling of the September margin deadline that had involved only a couple of dozen big banks.
The only way to hit the March deadline, he said, would be for clients to give up bespoke terms in their existing collateral agreements – known as credit support annexes (CSAs) – and instead use the new, more standardised CSA published by the International Swaps and Derivatives Association earlier this year.
"There can be no negotiation. For anyone," he said, with Churchillian resolve. "We don't have the lawyers or the time. It has to be one CSA – the same CSA – for everyone. And everyone just has to hold their nose and sign it. Because if they don't, there's no chance we're going to get through this in time. And the lesson from the regulators is no-one is getting a delay," he said.
A month and a half later, with work on the repapering exercise in full swing, Risk.net asked how this approach was going. He sighed: that earlier conversation belonged to a different age, with different rules.
"It didn't survive the client contact phase," he admitted.
For the most part, clients have looked either to amend their existing CSAs to become compliant, which takes time and creates valuation differences, or copy-and-paste their existing CSA and use a regulatory-compliant version of that for new trades post-March 1. Dealers have tried to convince clients to make some changes while the documents are open – such as moving to a cash-only CSA or, even better for banks, restricting this to a single currency, which makes valuations much simpler and helps from a leverage ratio and net stable funding ratio perspective.
But for the most part, clients have clung to their existing terms, as they have every right to do. After all, many have a fiduciary duty to their own clients to get the best terms possible.
Therein lies the problem. No matter what might seem the most sensible course of action from a bank or systemic perspective, it's a bilateral market, so clients have to be convinced as well. And try as banks might to convince customers to give up their hard-won CSA terms, it's very difficult to change their minds.