06 Sep New Thresholds for Initial Margin Phase 5 Uncleared Derivatives
July 2019: In response to industry concerns about readiness, regulators changed the threshold for Phase 5 and added a 6th Phase-in for Initial Margin for Uncleared Derivatives.
Phase 5 Threshold Raised, Phase 6 Added
- Phase 5 threshold now covers entities with more than $50 billion [i] in Average Aggregate Notional Amount (AANA) and will go live on September 1, 2020.
- Phase 6 threshold now covers entities with more than $8 billion in Average Aggregate Notional Amount (AANA) and will go live on September 1, 2021.
The observation period for calculating AANA to determine entities in-scope for Phase 5 was completed on August 31, 2019. The observation period for Phase 6 will be March, April & May 2020.
Entities Expected in Phase 5 & 6
Phases 5 & 6 will bring roughly 700 entities in-scope to post initial margin. To frame that number, Phases 1-3 brought 20 entities into scope and Phase 4 added 23 entities. So yeah, no matter what there is a greater administrative burden ahead.
Can you imagine if they hadn’t increased the threshold for Phase 5 and added a phase 6? Estimating the entities in Phase 5 & 6, roughly 200 entities expected to be in-scope for Phase 5 and another 500 entities will be in-scope for Phase 6.
While that gives the industry some breathing room, let’s break that number down from the Consolidated Group level.
Are Asset Managers in Phase 5 & 6?
Yes, asset managers will be the primary group in Phases 5 & 6. But let’s step back a minute and add some vernacular.
So far, we’ve used the term entity meaning the Consolidated Group. Going forward, we’ll use the term “group”.
Included in a Consolidated Group (Group) are:
- Affiliates or Subsidiaries included in the same Consolidated Financial Statements
- Where the parent holds 80% or more of the outstanding, voting shares.
Currently, 700 Consolidated Groups are expected to be in-scope in Phases 5 & 6. Both phases will include “buy side” Fund Managers & Investment Advisors offering Separately Managed Accounts.
Two other terms used are relationships & segregated accounts. Let’s look at how many relationships and segregated accounts in Phases 5 & 6. From there the reader can estimate their workload over the next to years
How Many Separate Accounts are Expected?
The estimated 700 Groups include: 9,100 relationships & 17,000 segregated accounts.
- Phase 5: 200 Groups, 2,600 relationships and 4,800 segregated accounts.
- Phase 6: 500 Groups, 6,500 relationships and 12,200 segregated accounts.
In buyside terms, let’s use Fidelity as an example of a Mutual Fund:
- The Consolidated group is Fidelity Management & Research, LLC (FMR, LLC)
- The relationship would be the subsidiary operating all of the mutual funds, and
- The segregated accounts would be the individual mutual fund (i.e., Fidelity Convertible Bond Fund).
Staying with Fidelity, let’s breakdown these terms for an Asset Manager:
- The Consolidated Group would still be FMR, LLC,
- The relationship would be Fidelity Strategic Disciplines
- The segregated account would be, for example, Fidelity Equity-Income Strategy
Entities with less than $8 billion AANA, will not need to comply with Uncleared Margin Requirements (UMR).
- This decision was made due to the Minimum Transfer Amount (MTA) of $50 million.
- It was determined entities with less than $8 billion AANA were unlikely to breach the $50 million MTA
The Average Aggregate Notional Amount (AANA)
AANA includes outstanding uncleared derivatives of the Consolidated Group. AANA is calculated using the daily gross notional amounts outstanding. An average is calculated from the daily amounts during the observation period.
What Products Are included in the ANNA?
- Outstanding uncleared derivatives of the Consolidated Group
- Uncleared Interest Rate & Cross Currency Swaps
- Credit Default Swaps
- Uncleared Security-Based Swaps (SBS)
- Security Based Swaps are or swaps based on a stock, bond or other security.
- Deliverable FX forwards & FX swaps
- B.: FX swaps and deliverable FX forwards are included in the calculation of AANA but are exempt from calculating regulatory capital.
What products are not included in the AANA?
- Outstanding derivatives cleared at a CCP
- Listed derivatives (cleared)
For more information regarding calculation of AANA, please see Blog “Calculating AANA for Phase 5 or visit ISDA for their resources on AANA.
Summary & Conclusion
There will be new challenges with Phases 5th 6th. Based on current estimates, there will be four times the administrative work than in phases 1-4.
Read our blog on the Challenges of Phase 5 Initial Margin for Uncleared Derivatives.