For the first time in several years, the start of September has not heralded the extension of initial margin (IM) requirements to a new group of market participants. The scope of the rules had previously widened every September since 2016, requiring gradually more firms to exchange IM. But given the seismic impact of the coronavirus pandemic, regulators recognized the need for a pause in 2020 to allow firms more time to prepare for the next phase.

Following a letter co-signed by ISDA and 20 other trade associations in March, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) moved quickly, announcing a one-year delay for phases five and six on April 3. As the industry letter had made clear, firms were focusing critical resources on business continuity and risk management at the height of the pandemic. Requiring so many new entities to start exchanging IM in that environment would have been extremely challenging.

The BCBS/IOSCO decision to defer implementation has been widely adopted, in recognition of the operational challenges. It is to their credit that regulators in all of the major jurisdictions have already transposed the revised timeline or signaled their intention to do so, providing important certainty to market participants.

Critical as this pause may be, it is no reason to let preparations stall. There might be nearly a full year to go until the new phase-five implementation deadline on September 1, 2021, but this will be the most demanding phase yet, with an estimated 314 entities – representing 3,616 counterparty relationships – set to be affected at the same time. That is far in excess of the numbers that have come into scope in previous years. All entities with an average aggregate notional amount (AANA) of non-cleared derivatives of more than €50 billion will need to be ready well in advance of next year’s deadline if a last-minute compliance bottleneck is to be avoided.

Getting ready for these requirements is a multi-stage process, and some of those stages need to begin long before the go-live date. From conducting AANA calculations and identifying in-scope entities to establishing relationships with custodians and negotiating documentation, preparation involves intensive work to ensure systems, processes and documentation are all in place in good time. Diligent project management is essential.

Negotiation of custodian and trading documents is likely to be the most time-consuming and resource-intensive process of all, given the number of entities involved. It is vital that firms get in touch with custodians at the earliest opportunity to begin the process of getting account control agreements in place. ISDA Create will be an invaluable platform for the electronic negotiation of documentation, reducing inefficiencies and enabling a greater degree of automation.

It is not only phase-five firms that need to be working on this now, however. Phase six will follow on September 1, 2022, bringing into scope all firms with an AANA of more than €8 billion. Our analysis suggests this will equate to a further 775 entities, or 5,443 counterparty relationships. The scale of phase six requires an even longer lead time, so the identification of in-scope entities must begin sooner rather than later.

This is a critical time for the IM regime. Let’s not waste the breathing space that has been granted, but rather use it to make sure the last two phases of implementation are both smooth and effective.

Resources to support the implementation of the IM rules can be found on the ISDA Margin InfoHub.

ISDA will hold a virtual conference on documentation and the legal aspects of IM implementation on October 14. Further details can be found here.