Time consuming preparations are forcing firms to estimate the number of entities which come under the scope of uncleared margin rules by calculating aggregate average notional amounts (AANA) a year in advance, according to Vanaja Indra, market and regulatory reform director at Insight Investment.
In Europe, AANA must be calculated between March and May of the following year. Firms must disclose to their counterparties the number of their own entities they estimate will come in-scope under the requirements. With these estimated figures, firms must agree with their counterparties how IM will be calculated, any eligible collateral and haircuts, and the minimal transfer amounts.
But the designated three months for calculations doesn’t give firms enough time to be ready for the phase five deadline in September 2020, said Indra, speaking on a panel at the International Swaps and Derivatives Association (Isda)’s annual Europe conference in London.
“[The requirements] give you three months of preparation time and clearly we know that is not enough. I think we are talking about one year preparation for these rules,” said Indra.
“What we are doing, and most of the industry is also, is doing the AANA calculation a year in advance to guestimate who your clients would be for the actual test day and gets them prepared. But that is not to rule out that there could be some surprises come the actual testing period three months before you go live,” she said.
Under the Basel Committee on Banking Supervision (BCSC) and the International Organisation of Securities Commission (Iosco) framework for margin requirements for non-centrally cleared derivatives firms must calculate AANA.
In July Iosco and BCBS split the final implementation phase of initial margin requirements (phase 5) into two deadlines. The first deadline being September 1, 2020 for firms with an AANA equal to or greater than €50bn and less than €750bn. And the second on September 1, 2021 phase 6 would apply to firms with an AANA more than €8bn and less than €50bn.
Earlier in the conference, Isda chief executive Scott O’Malia warned that it could take “18 months to complete all the necessary steps to prepare for the IM requirements” while Commissioner Dawn Stump from the Commodity Future Trading Commission (CFTC) cautioned of the limited resources to comply with the deadlines for the calculations.
“That is a considerable amount of work, and the reality is that there are a limited number of custodians and law firms available for these negotiations,” said Stump. “The industry overall will be capacity constrained to deliver and negotiate with all these various entities. Deadlines have a knack for surprising folks sooner than expected.”
In the US, AANA calculations took place between June – August for phase five. Moderating the panel Tara Kruse, global head of infrastructure, data and non-cleared margin at Isda, said that “from what came out of Tuesday [September 17] there might be a re-do come next March.”
On September 17, Isda responded favourably to proposals by US regulators to split the phase five implementation deadline over two years. This would give smaller, less systemically important firms an extra 12 months to prepare.
There are new players that will come under the scope of the initial margin requirements, but greater communication is necessary between those that must comply with the phase five deadline and their banks, according to Nick Steele, managing director at Barclays.
“I think I know about 40 percent of who I guesstimated were going to be in scope. But that is typically been because we have gone fishing for the data, it is not because people have come and told us, which means we can do some fishing for those that we can guesstimate are in scope, but we can’t be sure, and our estimates are very basic,” he said.
“We need people to come and tell us that they are in scope. What is interesting as well is that so far, I don’t think I have received a single notification through the official methods which is very concerning.
“We have these underlying principles that we are hearing from and we have normal counterparties that we are hearing from. The information by the asset manager has to go through an extra loop about their own clients. We have very little information happening there. So, if you are using asset managers to manage your money, please them as well so they can confirm with us which funds are in scope. That extra loop is causing extra time.”