Monitoring Your Initial Margin Exposure

As you may have read, the Basel Committee and IOSCO have agreed to a one-year extension of the final implementation phase of the margin requirements for non-centrally cleared derivatives[1]. This means implementation for Phase 5 firms will be split, with some entities not falling into scope until September 1, 2021.

Much of the focus is on the changed timelines but, to be clear, entities with an aggregate average notional amount of non-centrally cleared derivatives greater than €50bn are still expected to comply by September 2020. Entities with between €50 billion and €8 billion of non-centrally cleared derivatives must be compliant with the requirements by September 2021, a one-year delay.

“Regulators remain committed to this vision and are unlikely to be sympathetic to those who do not use the extra time wisely.”
While the additional year will come as a relief to many firms, it should be noted that time is still of the essence, and the additional time should not be wasted. Further, there is a more strategic vision at stake for firms to consider. Regulatory initial margin is part of a much wider mission to ensure greater efficiency and stability for derivatives markets from documentation through to post-trade processing. Regulators remain committed to this vision and are unlikely to be sympathetic to those who do not use the extra time wisely.

We believe that firms should view collateral as an asset rather than a cost and should strive for an accurate bird’s eye view of what the regulations mean for them. This strategic view will give them the opportunity to explore how collateral can be monetized as an asset, with best practices in place to address challenges across the margin and collateral eco-system. IHS Markit has solutions to support our clients at each phase of their requirements, including threshold monitoring, management of collateral workflow, performance of initial margin calculations and back-testing. We will continue to maintain close engagement with regulators to ensure our solutions remain fully in line with regulator expectations.

In our view, it is critical for all potential in-scope firms to closely monitor their Initial Margin exposure against their counterparties to ensure they have a better understanding of how close they are to the $50 million regulatory threshold and how quickly they are expected to breach the threshold and need to be compliant with the regulation. Firms that may choose to rely on counterparties to perform this calculation should also periodically validate it independently.

Our Initial Margin monitoring service, powered by our industry-leading market data and analytics and using the standard ISDA Standard Initial Margin Model (ISDA SIMMTM) provides an accurate and flexible way for firms to monitor their Initial Margin exposures. Customers will have full flexibility in selecting the frequency of the calculation and setting the thresholds. The service is designed to seamlessly evolve into a complete Initial Margin calculation service as thresholds are met.

For more information and to discuss these latest developments, please contact us: [email protected]

[1]https://www.bis.org/press/p190723.htm

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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