Initial Margin – February 2021 Update

With the start of the new year, we approach the deadline for Phase V (1 September 2021) implementation of Initial Margin (“IM”).

We set out below a few notable recent developments which market participants should be aware of:

  • The Hong Kong Monetary Authority (HKMA) published version 2 of its margin rules on 11 September 2020 further to the conclusion of a public consultation on the revisions. One of the more notable changes relates to the addition of certain conditions to the application of substituted compliance. An authorized institution incorporated outside Hong Kong who wishes to comply with its home rules using substituted compliance can continue to do so and home rules should be followed in their entirety. However, if the home rules cover a different transaction scope, the home rules should at least be applied to the transaction scope in the HKMA margin rules.
  • The Hong Kong Securities & Futures Commission (SFC) has formally gazetted its margin requirements in June 2020. Phase 5 IM (for counterparties with an AANA threshold of HK$375 billion) will be phased in from 1 September 2021 for the period of 1 September 2021 to 31 August 2022. Phase 6 IM (for counterparties with an AANA threshold of HK$60 billion) will apply on a permanent basis from 1 September 2022 onwards for each subsequent 12-month period.
  • Brexit and EU/UK EMIR. From 31 December 2020 (the end of the EU-UK transition period) EMIR became ‘retained’ into UK domestic law under the European Union (Withdrawal) Act 2018 (as amended), subject to certain amendments (UK EMIR). However, as only EU legislation applicable on this date was ‘onshored’, certain changes to the EU margin rules expected in the near future do not automatically form part of UK EMIR. These include the exemption from variation margin for physically-settled FX forwards and swaps, the relief from IM for counterparties with positions between EUR 50 billion and EUR 8 billion, and the relief for single-stock equity options and index options. Is UK EMIR relevant to you and how do the differences from EU EMIR affect your implementation?
  • SEC margin rules. It is expected that security-based swap dealers will begin to register with the Securities and Exchange Commission (SEC) in the fall of 2021, and the SEC’s margin requirements will apply to uncleared security-based swaps entered into by non-bank security-based swap dealers thereafter. Market participants in Asia who face security-based swap dealers and where the trading relationships falls within the scope of the SEC margin rules may need to amend or supplement their trading and onboarding documentation for compliance with the SEC margin rules.
  • CFTC margin rules. The Commodity Futures Trading Commission (CFTC) has published final rules amending how “material swaps exposure” (or AANA under the CFTC margin rules) is calculated, which will impact Phase 6 IM participants. To better align with the BCBS/IOSCO Framework, the observation period of June, July and August of the previous calendar year has been changed to March, April and May of the same year as the 1 September 2022 Phase 6 IM compliance date. Also, rather than looking at the daily average aggregate notional amount of non-cleared derivatives during the AANA calculation period, AANA will be the average of month-end aggregate of notional amount of non-cleared derivatives. CFTC has also amended its margin rules to allow swaps dealers to use the risk-based model calculation of IM of a counterparty that is a registered swap dealer to determine the amount of IM to be collected from the counterparty and to determine whether the IM threshold amount for the exchange of IM has been exceeded.

Linklaters acted as drafting counsel to ISDA on the "Next Generation" IM documentation and has developed for ISDA an online negotiation tool for IM - “ISDA Create”. We have also been working with numerous Asian clients in this area, and we would be happy to assist you with your IM implementation efforts. For a list of FAQs, click "read more".