Chatham Financial wants to ensure that market participants are aware of some recent changes to the initial margin rules. With the upcoming expansion of the scope of the initial margin rules to capture more entities beginning in 2020, regulators globally have taken steps to mitigate the impact of this expansion. Regulators originally planned to implement the initial margin rules over a five-year phase-in period. A market participant currently must have at least $/€750 billion in average aggregate notional amount (AANA) to come into scope for the initial margin rules. The last stage of the initial margin implementation, Phase 5, was scheduled to drop to $/€8 billion in AANA beginning in 2020, but regulators have made two changes to mitigate the impact of this anticipated implementation.
First, the Phase 5 implementation has been split into two phases. Phase 5 will still go into effect on September 1, 2020, but only for firms with an AANA of greater than $/€50 billion. For firms with an AANA between $/€8 billion and $/€50 billion, there is a newly created Phase 6 which will go into effect on September 1, 2021. Smaller firms therefore now have more time to comply with the initial margin requirements. While jurisdictions are still in the process of implementing the split to Phase 5 into two phases, Chatham expects the change to be finalized over the next few weeks or months.
The second recent update to the initial margin rules relates to the requirements to put certain initial margin documentation in place. Unlike the variation margin rules, the initial margin rules provide counterparties with a $50 million threshold before they are required to begin exchanging initial margin. The relief granted allows market participants to delay negotiating initial margin compliant documentation until the amount of initial margin that would be required to be exchanged exceeds that $50 million threshold.
Even if your firm is not in-scope for the initial margin requirements, you may begin (or continue) to see your bank counterparties reaching out for updated representations to determine which initial margin requirements apply to your trading relationship. If you have questions about any of the documents or representations banks are requesting, or if you would like more information on how the initial margin rules apply to you, please contact your Chatham relationship manager.