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Update: Relief for Compliance with Variation Margin Requirements

The margin requirements for non-centrally cleared derivatives set out minimum requirements for the amount, types, frequency and method of exchange of collateral securing payment obligations on non-centrally cleared derivatives contracts. Taking into account the legal and operational challenges, regulators have phased in the requirements, imposing earlier adoption of both the initial margin regime and variation margin regime on larger swap dealers beginning September 1, 2016 followed by broader market adoption for the Variation Margin requirements for all financial institutions on March 1, 2017. Recently, considering complexities in implementing the rules by March 1, 2017, regulators have issued statements offering compliance relief or relaxing enforcement.  

Transitional period, relief or guidelines

It is a legal obligation to exchange variation margin from the 1st March 2017. However, it has been recognized by authorities across the US, European Union and by IOSCO that there are operational challenges in meeting this deadline. Major financial institutions, smaller financial firms, buy-side firms, asset managers, pension funds, and insurance companies, may not yet have well-developed infrastructures to calculate and exchange margin by March 1, 2017.

There will be no enforcement action against an entity that does not comply with the March 1 Variation Margin Requirements subject to a good faith effort to complete necessary credit support documentation. Each entity must use its best effort to continue to implement compliance without delay following March 1, 2017. In other words, all counterparties are expected to make every effort to move into full compliance at the earliest possible date.

  • CFTC provided a time-limited relief whereby enforcement action will not be recommended against a Swap Dealer provided it’s acting in good faith uses best efforts and applies existing Variation Margin.


  • The Federal Reserve and OCC provided flexibility to comply with the March 1 Variation Margin Requirements. For parties with significant exposure, they must comply with March 1 Variation Margin Requirements. Per statement issued “Priority should be given to compliance efforts by covered swap entities based on the size of and risk inherent in the credit and market risk exposures presented by each entity. A covered swap entity is expected to comply with the variation margin requirements of the final rule with respect to swap entities and financial end user counterparties that present significant exposures as of March 1, 2017.” For other entities, they are expected to make every effort to move into full compliance at the earliest possible date, no later than September 1st, subject to monitoring.  Unlike the CFTC, the Federal Reserve and OCC do not specifically provide that trades booked between March 1, 2017 and September 1, 2017 be margined in accordance with the Variation Margin requirements.     


  • European Supervisory Authorities (ESAs) expect competent authorities to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation. Each European country’s Banking Authority is expected to follow ESA’s guidance on enforcement.
    • France (Authorité des Marchés Financiers and Autorité de contrôle prudentiel et de resolution), Germany (Federal Financial Supervisory Authority), and Spain (Comisión Nacional del Mercado de Valores) will apply a risk-based approach to supervision subject to monitoring.
    • UK (Financial Conduct Authority, Bank of England, and Prudential Regulation Authority) and Ireland (Central Bank of Ireland) will apply a risk-based approach to supervision conditioned on best efforts and a realistic and detailed plan.

Why giving the industry more time to comply?

  • High Volume of Credit Support Annex (CSA): The Compliance process involved agreeing to new documentation with counterparties or negotiating amendments to existing documents, which, in most cases, is the ISDA CSA to the ISDA Master Agreement. Each CSA that covers the trading relationship with respect to non-centrally cleared derivatives had to provide (or be supplemented to provide) for the exchange of Variation Margin. Given the broad scope of in-scope entities and in-scope products, the first challenge is the high number of agreements.


  • Time to draft and negotiate CSAs: The volume of complex, substantive questions that need to be addressed between asset managers and their dealer counterparties often requires consultation across representatives from legal, operations, credit/risk and the front offices.


  • ISDA 2016 Variation Margin Protocol (ISDA Protocol) Readiness Limitation. Due to some complexity created by the ISDA Protocol, many clients decided to amend and execute compliant CSAs bilaterally. The bilateral route is being used to complete CSAs for minor changes needed, CSAs requiring major changes and CSAs needed to cover historically uncollateralized trading (mostly FX transactions).


  • Difficulty to onboard clients into existing umbrella agreements. Some asset managers have been trying to move clients into existing umbrella agreements. The affected clients are largely those that use derivatives for FX products, primarily for hedging. 

What are the main challenges (still) lying ahead?

  • Minimum Transfer Amount (MTA) for multi-managers: The purpose of MTA (set at $500,000) is to allow parties to reduce the operational burden of exchanging sums of collateral when exposures move only slightly. Regulators interpreted MTA as applying at the client level (i.e., the legal entity) rather than at the eligible master netting agreement level. However, MTA is usually applied at a CSA level, rather than a legal entity level. For situations where multiple asset managers are managing the same fund, the new rules require the limit to be monitored at the legal entity level. This required the development of a process to allocate the MTA limit and monitor the utilization of the limit going forward.


  • Non-Netting Accounts Identification: The rules require determinations as to whether netting will be respected for the counterparty. Given that the rules require to look at individual client status with respect to netting (i.e. the bankruptcy regime applicable to the entity type), it is not sufficient to look only to the jurisdiction to determine whether or not a client is netting or non-netting. The determination of non-netting accounts is a client by-client process. Clients for which a netting opinion cannot be obtained must use non- standardized terms. Non-netting language was published by the industry late January 2017.


  • Operational Challenges: Once CSAs and account control agreements are put in place, the next step is to operationalize changes to CSAs. “Among other things, the terms of the CSA need to be extracted, translated into collateral management systems and uploaded; upgrades to collateral management software need to be provided and tested; automated processes for collateral calls require significant initial work to onboard clients; custodial set-ups need to be implemented; for clients with multiple netting sets within a single account (i.e., for clients who have separate netting sets for pre-March 1 and post-March 1 transactions), special operational support is required; processes for responding to collateral calls, including identifying securities to be delivered or returned, need to be set; custodian cut off times for wiring funds or securities need to be established.”


  1. http://www.cftc.gov/PressRoom/PressReleases/pr7531-17 (issued February 13, 2017; ends prior to September 1, 2017)
  2.   https://www.federalreserve.gov/newsevents/press/bcreg/20170223a.htm (issued February 23, 2017; ends prior to September 1, 2017)
  3.   https://www.esma.europa.eu/press-news/esma-news/esas-publish-statement-v... (issued February 23, 2017)
  4.   SIFMA AMG Requests Relief from March 1, 2017 Variation Margin Implementation (issued December 16, 2016) http://www.sifma.org/issues/item.aspx?id=8589963951
  • Key Takeaways

    • The repapering of legal agreements to govern the newly required collateral terms for Variation Margin, includes restricted forms of eligible collateral, MTAs, T+1 settlement of collateral, regulatory specified haircuts and zero threshold.


    • This should remain a top priority for financial institutions, buy-side firms, asset managers, pension funds, and insurance companies.µ


    • Dealers may still be forced into difficult prioritization decisions to comply with the relief’s conditions and ensure full compliance at the earliest possible date. As each regulator issued its own specific “relief” language, special attention need to be paid and require an analysis on a case-by-case and entity-by-entity basis. 
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