A Solution for the IM Big Bang

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

With everything else going on, it’s tempting to shove something with a September 2020 deadline to the back of the line. That’s not an option when it comes to initial margin (IM) requirements. With over 1,100 small firms expected to come into scope, each needing to put IM documentation and systems in place, an early start on compliance efforts will be critical. Even then, the industry faces a very real capacity challenge. That’s why we’re leveraging our 30-year track record in providing the global standard for legal documentation by launching ISDA Create – IM, a new digital platform that automates the negotiation and execution of IM documents.

The service, which was developed with Linklaters and went live last week, allows firms to deliver IM documentation to multiple counterparties simultaneously and then negotiate and execute those documents online. This will massively reduce the time and resources it takes to negotiate margin documentation. Importantly, it also allows firms to capture and store structured legal data – essential as the derivatives market moves to new technologies to drive efficiencies.

Those who follow ISDA’s work will know that we’re approaching the September 2020 IM ‘big bang’ on a number of fronts. Last year, we published analysis showing that the vast majority of newly in-scope entities will have to go through the costly exercise of complying with the IM regulatory requirements, but won’t actually be expected to post any margin due to the small size of their exposures. We believe recalibrating the phase-five IM compliance threshold from the current €8 billion in non-cleared derivatives notional to €100 billion will exclude those smaller, non-systemically important entities and will more appropriately align the rules with the policy objective of reducing systemic risk. Our latest issue of IQ magazine explores this issue in more detail.

Nonetheless, even if the €8 billion threshold is recalibrated to a more appropriate level, the September 2020 deadline will still capture a large number of firms, far in excess of those that would have had to comply with the rules up until that point. That’s why ISDA Create – IM is so important. The negotiation of new IM documentation can be complex and laborious, and the whole process has to be repeated for each and every counterparty. Enabling firms to negotiate with multiple counterparties simultaneously through a digital platform will make the process much quicker and more efficient, helping to reduce the potential for bottlenecks. Importantly, sales and trading desks will also be able to pull information from the platform in real time to check which relationships have regulatory compliant documentation in place.

Since the launch of the beta version last September, more than 70 firms have been testing ISDA Create – IM, making this a true industry wide endeavor. Many have their eyes on the September 2019 phase-four deadline, and want to have the platform up and running for the coming round of negotiations. Feedback from those users has resulted in the addition of new features and functionality, such as the ability to negotiate umbrella agreements. Further enhancements will be made over time, with development work guided by our user advisory group of buy- and sell-side firms.

One obvious area for development is to extend ISDA Create to cover other ISDA and related documentation. Having started with ISDA IM documents to help compliance with regulatory requirements, variation margin documentation and the schedule to the ISDA Master Agreement are likely to be the next immediate areas of focus. But the ultimate aim is to develop a whole suite of digital documentation that can be negotiated and executed on ISDA Create.

The derivatives markets are changing, with a greater focus on automation and cost reduction. Legal standards and documentation need to keep pace with these changes. Initiatives like ISDA Create, as well as our work on the ISDA Common Domain Model and smart contracts, build on ISDA’s foundation as the provider of global legal standards and documentation to create a more efficient derivatives market.

Watch a video on ISDA Create – IM.

Watch a video on future development for ISDA Create.


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