This years AGM generated a vortex of content, laid out below. Each section has a link (where available) to ISDA content, any downloads and the original source material. 

There is big focus on margin given that by the end of 2019 many firms in the market will be obliged to exchange Initial Margin.

This also leads into an two announcements, one aligned with LinkLaters and the other with Allen & Overy. Both law firms have forged partnerships to tackle the upcoming documentation tidal wave for the 2019 IM deadline.

An ISDA survey on margin paints an interesting picture of the scale of assets now placed to cover credit exposure, for both cleared and non-cleared products.

And finally to recognise the focus on clearing, the election of new board members to ISDA representing CCPs themselves. 

Use the links to jump into the content.

  1. Getting Ready for IM - Steps to take
  2. ISDA IQ Magazine for April 
  3. ISDA and Linklaters partner for Online Margin Negotiation Tool
  4. Guide to Derivatives Trading on US/EU Venues
  5. IM for Non-Cleared Derivatives Rises by 22%
  6. New paper on Margin for Non-Cleared Derivatives
  7. How is Collateral Used in the Derivatives Market (Animation)
  8. New ISDA Board Members Including CCPs

Getting Ready for Initial Margin Regulatory Requirements: What Steps Do I Need to Take?

Each September until 2020, increasing numbers of entities will be required to meet initial margin regulations as the threshold level for compliance reduces. Preparation for meeting these requirements will take significant time, and will involve intensive work to ensure systems, processes and documentation are in place.

ISDA has published a new fact sheet that sets out the steps firms should take when preparing to comply with regulatory initial margin requirements. These are not necessarily presented in chronological order – the precise order and timing will depend on a firm’s specific circumstances.

STEP 1: Identify in-scope entities early

STEP 2: Make early disclosures to counterparties

STEP 3: Exchange information on compliance

STEP 4: Identify special cases

STEP 5: Establish custodial relationships

STEP 6: Prepare for compliance

STEP 7: Negotiate/execute documentation

STEP 8: Finalize preparations

ISDA IQ Magazine

It’s not possible to predict the future with any certainty. In this ISDA annual general meeting (AGM) issue of IQ, which focuses on the future of the derivatives market, we don’t even try. Instead, we explore some of the challenges market participants face, and the steps that are being taken now to prepare for possible future outcomes.

Technology is a case in point. Innovations are emerging at a fast pace, but we don’t know whether the market will veer towards distributed ledger, artificial intelligence, cloud or something else. From ISDA’s perspective, it doesn’t really matter. What’s important is that the foundations are in place to allow any of these technologies to propagate, thrive and interact. That’s what ISDA’s Common Domain Model is about: it’s an effort to develop a standard digital representation of events and processes that can serve as a common framework for everyone.

The transition from interbank offered rates, or IBORs, to alternative risk-free rates represents another major transformation. The industry is working to an end-2021 deadline, and the process of transition planning is already under way. But firms need to marshal resources and fully engage with this process now in order to be prepared for the future state.

Follow the links below to read in full.

ISDA Partners with Linklaters on Online Margin Document Negotiation Tool

The International Swaps and Derivatives Association, Inc. (ISDA) has partnered with law firm Linklaters to develop an online tool that will allow firms to electronically negotiate initial margin (IM) documentation. The new platform is being built to help facilitate compliance with regulatory IM requirements as a wider universe of buy- and sell-side firms come into scope of the rules.

ISDA Create – IM will provide an efficient means for firms to negotiate IM documentation with a large number of counterparties simultaneously, and to deliver and store the documents electronically. The tool will also make commercial data contained in the IM documentation more easily accessible, along with the metadata associated with the negotiation process. This data can then be used for risk management, resource management and other applications.

The development of the IM tool will run in parallel with the drafting of next-generation ISDA IM documentation for phases four and five of the IM regulation phase-in, scheduled for September 2019 and September 2020, respectively. The new IM documentation will be the first to be supported on ISDA Create, ISDA’s new digital documentation platform. This service will complement the established ISDA Amend platform that helps users exchange information necessary to comply with various global derivatives regulations.

The negotiation of IM documentation can be time consuming, and with a large number of entities potentially coming into scope of the margin rules in September 2020, this will create a significant compliance burden. ISDA Create – IM is intended to help with this process by enabling firms to negotiate their IM documentation completely online in a digital format, which can then be directly consumed by the collateral management, trade reporting and other systems of the firm,said Katherine Tew Darras, General Counsel at ISDA.

Working with ISDA on this global industry wide initiative is a fantastic opportunity to bring technology to bear on difficult collateral management, legal and business issues faced by some of the world’s largest and most sophisticated institutions. Up until now, the industry has struggled with how to capture and update data in an efficient, consistent and high-quality manner – even within in a single institution. But this tool will remove most, if not all, of those issues across the industry, allowing market participants to do more, do it better and at a lower cost,” said Doug Donahue, Derivatives Partner at Linklaters.

The regulatory IM requirements began phasing in from September 2016, initially for the largest dealers only. Each September, the threshold for compliance – based on an aggregate average notional amount (AANA) of non-cleared derivatives – is reset at a lower level, capturing a broader spectrum of firms. Under the global framework established by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, the AANA will fall to €750 billion in September 2019 and €8 billion in September 2020.

The tool is scheduled for rollout in early 2019, shortly after publication of ISDA’s next-generation IM collateral documentation. ISDA has also mandated Linklaters to act as its global counsel in connection with the industry consultation and drafting of the IM documentation.

Benefits of the IM tool:

  • It will allow firms to automate the creation and delivery of IM documentation, and negotiate and execute IM documentation with multiple counterparties simultaneously. This is all done online while providing flexibility to take one or more of these steps offline if required.
  • The system allows standard elections to be made, but also allows firms to customize on a party-by-party basis. There are no restrictions on what parties may agree on a bilateral basis on the platform.
  • The system automatically reconciles both standard elections and bespoke provisions exchanged, and flags the differences in an efficient and easy-to-read way.
  • It allows parties to embed their standard workflow by allowing approvals of deviations from preferred elections to be requested and recorded through the platform, providing an audit trail.
  • The data on the platform is stored digitally, and can be pulled into a firm’s internal systems for storage and/or further use.
  • The platform will: i) make the negotiation process more efficient and less time consuming from start to finish; ii) provide powerful commercial, risk management and resource management functions, data and analytics; and iii) remove the need for any post-execution transfer of data from negotiated documentation into internal systems and the chance for error during such a data transfer.
  • The platform is being built with the ability to evolve over time as market needs change.
  • Other ISDA documents in complementary areas may be added in the future as required by users.

Contrast and Compare With

A&O Partners with IHS Markit and SmartDX to launch Margin Xchange™

Initial Margin (IM) regulations are already impacting about 40 bank groups globally and that number will grow exponentially over the next two years. To assist the derivatives market in processing the high volume of new negotiations and the extension of IM requirements to buy-side entities, we have teamed with Allen & Overy and IHS Markit to launch Margin Xchange™. (Now Discontinued)

Margin Xchange is an online platform that covers all stages of the mass repapering of derivatives contracts required to comply with IM regulations. It provides information reconciliation, document generation, negotiation and execution, case management and a full data export. It not only drives greater cost and time efficiency in the process for agreeing the documents, but also achieves the long-held goal of treating derivative documents as data, by using a document format that is human and machine readable.

Margin Xchange puts the entire process on to a single online platform. It enables counterparties to bulk import and reconcile counterparty data; mass upload and agree their term sheets; generate and customize all IM documents; run all negotiations and drafting; execute by electronic signatures and capture the full audit trail of every negotiation point, internal escalation and sign-off. Crucially, users will be able to record every variable as a data point, rather than text, enabling them to maintain a clear view of progress at every stage during the repapering task, provide higher quality progress reports to regulators and represent the documents as data that can be stored and interrogated in the future with ease.

Margin Xchange combines SmartDX™ data and process management expertise with Allen & Overy’s legal knowledge and track record of tech-enabled solutions to meet clients’ biggest, most complex regulatory challenges.  We are excited that Margin Xchange will allow users to achieve the highest standards of risk management and governance in IM, reduce the time and cost of the repapering exercise and maximize the efficiency of negotiations. It creates a new model for how legal documentation could be drafted, negotiated and recorded in the future.

By Robin Moody, Global Head of SmartDX™

ISDA Publishes Guide to Navigating Derivatives Trading on US/EU Trading Venues
The International Swaps and Derivatives Association, Inc. (ISDA) has published a new paper that analyzes the implications of trading venue recognition between the US and European Union (EU), and flags areas where further alignment of rules is necessary.

The paper – A Practical Guide to Navigating Derivatives Trading on US/EU Recognized Trading Venues – sets out the steps US and EU persons would have to take when trading on an US or EU trading venue, and highlights complexities due to a lack of equivalence for clearing, reporting and registration requirements. It also includes a question and answer section to help market participants navigate the various regulatory requirements related to trading on recognized venues.

The paper finds that while agreement last year between the US and EU on the mutual recognition of derivatives trading venues has removed an important barrier to cross-border trading, a number of compliance challenges remain due to the lack of a global regulatory cross-border recognition  framework. This could result in firms being required to maintain duplicative compliance programs to meet the requirements of both EU and US regulators, for little benefit.

“The agreement on the mutual recognition of trading venues between the US and EU was a big step forward. But the piecemeal, rule-by-rule approach to granting substituted compliance and equivalence creates operational and compliance complexities, and increases costs for derivatives users. We can’t stress enough the importance of regulators looking at overseas rule sets holistically, and issuing broad comparability determinations using a risk-centered, outcomes-based approach,” said Scott O’Malia, ISDA Chief Executive.

The practical guide follows the publication of an earlier ISDA paper, which proposes a risk-based framework for cross-border comparability assessments, based on a set of risk-based principles. If a foreign jurisdiction meets the risk-based principles, ISDA believes a comparability determination should be granted in full.

Publication of ISDA’s practical guide comes on the back of an agreement in October 2017between the US Commodity Futures Trading Commission and European Commission on a common approach for authorized trading venues.

Follow the links below to read in full.

Initial Margin for Non-Cleared Derivatives Rises by 22%, ISDA Margin Survey Finds

The International Swaps and Derivatives Association, Inc. (ISDA) has published its latest Margin Survey, which shows a strong increase in the amount of initial margin (IM) held by the largest 20 market participants for their non-cleared derivatives trades.

According to the latest survey, IM collected by the top 20 firms increased by 22% to $130.6 billion at the end of 2017, compared with $107.1 billion at the end of March 2017. Variation margin (VM) collected by those 20 participants for their non-cleared trades also expanded, rising from $870.4 billion at the end of March 2017 to $893.7 billion at year-end 2017.

The amount of regulatory IM has been increasing since the introduction of margin rules for non-cleared derivatives, with more new transactions subject to the IM requirements. The largest 20 market participants were required to meet regulatory IM requirements in the first phase of implementation from September 2016, and the rules were extended to six phase-two firms in September 2017. All in-scope entities are also subject to VM rules.

The survey finds $73.7 billion in IM was received by the 20 phase-one firms from other parties subject to the margin regulations at the end of 2017, an increase of 58% from March 2017. Discretionary IM received by phase-one firms from parties not in scope of the rules totaled $56.9 billion, a decrease of 6%. As more firms and trades become subject to the IM rules, discretionary IM is expected to continue falling, while regulatory IM is likely to increase further.

IM posted for cleared derivatives transactions also increased over the period. IM posted by all market participants to all major central counterparties (CCPs) for cleared interest rate derivatives and single-name and index credit default swaps totaled $194.1 billion at the end of 2017, a 6% increase versus end-March 2017.

“The margining of non-cleared derivatives and the clearing of standardized trades were both key Group-of-20 goals. The ISDA Margin Survey shows the industry continues to make great progress in meeting those objectives. Use of collateral reduces counterparty credit risk and makes the financial system more robust, but we need to continue to monitor the amount of margin posted to ensure the rules are calibrated appropriately,” said Scott O’Malia, ISDA Chief Executive.

To collect this data, ISDA surveyed the 20 banks with the largest non-cleared derivatives exposures – the so-called ‘phase-one’ firms under the new margin rules. ISDA also used publicly available data on cleared derivatives from two US CCPs, three European CCPs, and two Asian CCPs.

Cleared Open Interest

Follow the link below to read in full.

ISDA Publishes New Academic Paper on Margin Requirements for Non-cleared Derivatives Market

The International Swaps and Derivatives Association, Inc. (ISDA) has published a new academic paper that analyzes the regulatory initial margin framework for the non-cleared derivatives market. The academic paper, sponsored by ISDA, was written by Rama Cont, Chair of Mathematical Finance at Imperial College London.

The paper examines the rationale for the 10-day liquidity horizon applied under the initial margin rules for non-cleared trades, and assesses whether it is appropriate. The 10-day period is double the five days set for cleared trades.

The research argues that using a fixed liquidation horizon of 10 days is not realistic, and does not take the liquidity characteristics of the assets or the size of the position into account. Instead, the paper recommends that the liquidation horizon should depend on the size of the position relative to the market depth of the asset. It also argues that IM should not be based on the exposure of the initial position over the entire liquidation horizon, but on the exposure over the initial period required to set up the hedge, plus the exposure to the hedged position over the remainder of the liquidation horizon.

“The clearing of standardized derivatives was an explicit regulatory objective, but regulators also recognized the importance of a healthy non-cleared market to allow end users to precisely hedge bespoke risks. Now is the time to assess the risk-appropriateness of the regulatory framework, and whether the margin treatment for non-cleared trades is resulting in higher than necessary costs for end users,” said Scott O’Malia, ISDA Chief Executive.

“The framework for calculating initial margin requirements has been imported from existing practices for cleared derivatives, except that regulators have increased the margin period of risk, presumably because there is a perception that non-cleared derivatives are intrinsically harder to close out or unwind if one counterparty defaults. Our study questions the rationale for this approach, and advocates an alternative that takes into account the default management process, as well as the size and complexity of trades,” said Professor Cont.

How is Collateral Used in the Derivatives Market?

Collateral is a backstop that protects market participants and the economy as a whole. The requirement to post collateral is a key reform that makes the derivatives market more transparent, resilient and safe.  

ISDA's new whiteboard animation video explains how collateral is used in the derivatives market, and how it makes the financial system safer.

ISDA Elects New Board Members; Expands CCP Representation on Board

The International Swaps and Derivatives Association, Inc. (ISDA) has announced that four new directors are joining its Board of Directors, as it continues to expand its regional and business diversity.

As part of the move, ISDA is expanding the central counterparty (CCP) representation on its Board to two, and has appointed Daniel Maguire, Chief Executive Officer of LCH Group. Mr. Maguire joins Kevin McClear, Corporate Risk Officer at the Intercontinental Exchange, Inc., who joined the Board last year. Each CCP will serve for a two-year term, on a revolving basis.

The other three elected directors represent different areas of the derivatives business, and are based in three geographical locations. The new directors are:

  • Yutaka Amagi, Managing Director, Head of Global Markets Planning Division, MUFG Bank, Ltd.
  • Marc Badrichani, Head of Americas Sales & Marketing for Markets and Investor Services, J.P. Morgan
  • Jacques Vigner, Head of Strategy, Conduct, Risk and Financial Resources, Global Markets and Corporate and Institutional Banking (CIB), BNP Paribas

“I’d like to welcome Amagi-san, Marc, Daniel and Jacques to the Board. They each bring unique skills and insight to the Board, reflecting their experiences in different parts of the derivatives business. I’m sure they will make an important contribution to ISDA’s work to foster safe and efficient markets,” said Eric Litvack, ISDA Chairman.

“ISDA’s Board continues to expand in terms of its regional and business diversity, and our organization will benefit from the different perspectives our new Board members bring. ISDA is now well positioned to represent all parts of the derivatives market, whether cleared or non-cleared, bilateral or on-venue, or buy side or sell side,” said Scott O’Malia, ISDA’s Chief Executive.

Seven other directors were re-elected. They are:

  • Biswarup Chatterjee, Global Head Electronic Trading & New Business Development, Credit Markets, Citigroup Global Markets
  • John Dabbs, Global Head of Prime Derivatives Services, Credit Suisse
  • Jeroen Krens, Managing Director, Credit, Rates & Emerging Markets, HSBC Bank Plc.
  • Max Nuttall, Head of Global Structured Products & IST Strategy, BP Plc.
  • Will Roberts, Managing Director, Head of Global Rates and Counterparty Portfolio Management, Bank of America Merrill Lynch
  • Neh Thaker, Global Head of FX, Rates and Credit, Standard Chartered Bank
  • Rana Yared, Managing Director, Principal Strategic Investments, Securities Division, Goldman Sachs & Co.

Two directors were also re-appointed:

  • Kevin McClear, Corporate Risk Officer, Intercontinental Exchange, Inc.
  • Axel van Nederveen, Managing Director, Treasurer, European Bank for Reconstruction and Development

“I’d like to thank Diane Genova of J.P. Morgan and TJ Lim of UniCredit, who are both stepping down from the ISDA Board – after 19 years in the case of Diane, and nine years for TJ. They’ve both played an integral role in helping ISDA and the broader industry adapt to regulatory changes and developing industry solutions to help compliance. We wish them the very best for the future,” added Mr. Litvack.

The directors continuing on the Board are:

  • Thijs Aaten, Manager Director Treasury & Trading, APG Asset Management
  • Darcy Bradbury, Managing Director, D. E. Shaw & Co., L.P.
  • Bill De Leon, Managing Director, Global Head of Portfolio Risk Management, PIMCO
  • John Feeney, Head of Conduct, Corporate and Institutional Bank, National Australia Bank Limited
  • Jack Hattem, Managing Director, Global Fixed Income, Blackrock
  • Kieran Higgins, Head of Trading & Flow Sales, Natwest Markets
  • Sian Hurrell, Head of FIC, Europe, RBC Capital Markets
  • Masanobu Ichiya, Managing Director, Head of Derivative Trading Department, Mizuho Securities Co., Ltd.
  • Dixit Joshi, Group Treasurer, Deutsche Bank AG
  • Eric Litvack, Managing Director, Head of Regulatory Strategy, Société Générale Global Banking and Investor Solutions
  • Jason Manske, Senior Managing Director, Chief Hedging Officer and Head of Derivatives and Liquid Markets, MetLife
  • Scott O'Malia, Chief Executive Officer, ISDA
  • Duncan Rodgers, Managing Director, Global Head of ALEM, UK Head of GALM, UBS AG
  • Emmanuel Vercoustre, Deputy CEO & CFO, AXA Bank Europe
  • Tom Wipf, Vice Chairman of Institutional Securities, Morgan Stanley

Biographies of the new directors:

Yutaka Amagi is Managing Director, Head of Global Markets Planning Division at MUFG Bank, Ltd. He also serves as Head of Regulatory Affairs, responsible for the compliance program related to market regulation. Mr. Amagi joined Mitsubishi Bank (now MUFG Bank) in 1991, and has worked in several areas of the organization, including retail banking, FX trading, asset-liability management and markets planning. He also worked in Los Angeles between 2010 and 2014, where he was Head of the Japan Desk, Global Capital Markets, at Union Bank N.A. (now MUFG Union Bank N.A.).

He graduated from Kyoto University.

Marc Badrichani is Head of Americas Sales & Marketing at J.P. Morgan. In this role, he is responsible for managing client relationships and distribution of the firm’s products and services across Markets & Investor Services. He is also a member of the Corporate & Investment Bank Management Committee.

Mr. Badrichani joined J.P. Morgan in October 2005 from Deutsche Bank, where he managed the Solutions Group that developed cross-asset solutions for clients in Europe, the Middle East and Africa. He has held a number of roles since joining J.P. Morgan, including Global Head of Cash Equities, Head of Americas Equities, Head of North America Sales & Marketing for Fixed Income, and Head of Distribution for Northern Europe.

He graduated from École des Mines de Paris.

Daniel Maguire is Chief Executive Officer of LCH Group, a role he has held since October 2017. Prior to becoming CEO, Mr. Maguire was Group Chief Operating Officer, and before that was Global Head of SwapClear, subsequently taking responsibility for LCH’s ForexClear and Listed Rates services and the initiation of LCH’s SwapAgent service. He previously worked in New York, where he built out LCH’s North America operations and led SwapClear’s client clearing franchise. He first joined LCH in 1999.

Mr. Maguire is also a member of London Stock Exchange Group’s Executive Committee.

Jacques Vigner is Head of Strategy, Conduct, Risk and Financial Resources, Global Markets and CIB, at BNP Paribas, and a member of the Global Markets and CIB executive committees. In this role, he is responsible for risk supervision within Global Markets, approving exceptional transactions and new activities, managing financial resources, strategy and development, regulatory watch and projects, and conduct and permanent control. Mr. Vigner joined BNP Paribas in 1998, and has held a number of senior roles during his time at the firm, including Global Head of Structuring, Global Chief Operating Officer and Head of Strategy & Risk for Global Equity & Commodity Derivatives.

He graduated from École Polytechnique and École des Mines de Paris.