US IM Rules: Start Phase Five Calculations Now

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.

We know a large number of small, non-systemically important firms will come into scope of initial margin (IM) requirements in September 2020. Less well known is that, under US rules, financial end users potentially subject to the phase-five implementation will need to start running aggregate average notional amount (AANA) calculations from next week to determine if the rules will apply to them.

Globally, firms are just wrapping up AANA calculations to determine their eligibility for phase four, which kicks in this September. The rules stipulate the calculation must be made using non-cleared derivatives exposures from March, April and May this year. But, under US rules, the phase-five calculation period runs immediately afterwards – June, July and August 2019. For all other jurisdictions, the calculation period for phase five is March, April and May 2020.

That means those financial end users that may be subject to US IM requirements – either directly or through their US counterparties – need to spring into action now. Unlike most of the world, US regulations require the calculation of the average daily aggregate notional amount (other jurisdictions typically use a month-end average). So, from Monday June 3, firms will need to identify all AANA covered products, convert the notional amounts of those non-cleared transactions to US dollar, and then add the notional amounts together.

This has to be repeated each day over the three-month interval. At the end of the calculation period, the total should be divided by 64 (the total number of business days) to arrive at the final AANA. If that number is above $8 billion – the threshold for phase-five compliance – then firms will need to notify all their counterparties that they are in scope as soon as possible.

ISDA has provided a number of ways to do this – an ISDA initial margin self-disclosure letter can either be sent to counterparties bilaterally or electronically via ISDA Amend to other ISDA Amend participants. Alternatively, firms can participate in ISDA’s multilateral IM self-disclosure exercise, which involves the relevant information being shared with other contributing entities from all IM phases.

It’s critical firms that think they will fall into scope of US rules start calculating their AANA and then notify their counterparties. This is irrespective of a recent statement from the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. In other words, these steps still need to be followed even if US regulators provide certainty that documentation, custodial and operational requirements will not apply to counterparty relationships below the $50 million IM exchange threshold.

To help firms that may be subject to the phase-five implementation under US rules, ISDA has published a note that summarizes and explains the requirements for US AANA calculations. Getting up to speed with these requirements is a priority – June 3 is only a few days away.

In the meantime, ISDA will continue working with national regulators to ensure there’s unambiguous clarity that small, non-systemically important firms with counterparty relationships below the $50 million IM threshold don’t have to meet operational, documentation and custodial requirements. We strongly believe this is necessary to ensure the rules better align with the key policy objective of mitigating systemic risk.

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