The IM ‘big bang’ – Not quite plain sailing


The derivatives notionals have been totted up, in-scope entities determined, and now an estimated 250 firms are scrambling to calculate, exchange and segregate initial margin (IM) on their non-cleared derivatives trades from September 1. 

The ‘IM big bang’ has been a long time in the making and has radically altered in range since inception. Initially intended to catch all entities with outstanding derivatives notional of €8 billion and above, this fifth wave of compliance has been split in two and delayed by a year. It means firms with less than €50 billion of derivatives notional will not be caught in the net until September 2022. 

An additional reprieve from global regulators means counterparties with margin exchange amounts below €50 million (or local equivalents) can defer the legal and documentation effort. Acadia – formerly AcadiaSoft – reckons around half of the entities caught in the phase five net will be required to post margin from day one.

By moving some lower-margin in-scope portfolios to so-called ‘threshold monitoring’, BlackRock has cut its immediate phase five repapering requirement by one-quarter. “It has been certainly of benefit for us and, going into phase six, we see this becoming even more of a benefit,” said Mark Persiani, a director for collateral management at BlackRock, on a webinar in May. 

It’s a welcome step towards avoiding the kind of regulatory bottleneck that dogged the first wave of compliance. “It will save the industry a large amount of time and cost without distracting from the policy goals,” said Ryan Winnett, programme director for uncleared margin rules at Barclays, on the webinar.

With its extended prep time and scaled-down cohort, phase five should be plain sailing. In reality, it’s likely to be the usual scramble for the finish line. 

For a start, the 120 firms estimated to be exchanging margin on September 1 are nearly double the total number of entities caught in phases one to four combined. 

What’s more, the 12-month delay granted by regulators in response to Covid-19 disruption was widely squandered. Many firms downed tools on negotiating complex and unwieldy legal documents, risking an all-too familiar 11th-hour rush. 

Firms hoping for a rollback of burdensome model governance requirements – which apply to the buy side in Europe but not in the US – have been disappointed by the slow emergence of new regulatory technical standards. Under current European Union rules, all in-scope entities must seek approval from their national competent authority to calculate margin exchange amounts using the industry’s standard initial margin model, or Simm. 

At this late stage, firms must plan “as if they’ll be subject to the full model approval on ongoing governance obligations, pending any alternative guidance from their local supervisory authority,” said Craig Pearson, co-founder and director of Margin Tonic, also speaking on the webinar. 

There are other outstanding cross-border complications. In the EU, money market funds (MMFs) posted as collateral must be Ucits-compliant. In the US, Ucits MMFs are not eligible collateral for regulatory IM. It means counterparties falling under multiple regimes may not have any MMFs that constitute eligible collateral. It’s not necessarily a huge problem for phase five, says Persiani, but soon could be. 

“Luckily we don’t have portfolios looking to use MMFs, but this will be more of a phase six issue. We have a bit of time to hopefully get the regulators to iron out the kinks in the process.”

The 900 or so firms expected to be caught in September 2022 might be best advised to have a backup plan, just in case. 

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