The Challenges of Phase Five Initial Margin

The Challenges of Phase 5 Initial Margin

The Challenges of Phase Five Initial Margin

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On September 1, 2019, Phase 4 brought 23 new groups posting Initial Margin for Uncleared Derivatives. Phases 1-3 brought 20 groups. Today, we have a total of 43 entities posting Initial Margin.  On July 9, 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.  This will give the industry time to meet the challenges of Phase Five Initial Margin.  

New Phases for Initial Margin for Uncleared Swaps

  • Phase 6 threshold now covers entities with more than $8 billion in Average Aggregate Notional Amount (AANA)
    • Observation Period: March 1, 2020 – May 31, 2020
    • The deadline for Initial Margin is September 1, 2021.

Entities Expected in Phase 5 & 6

Phase 5 will bring an estimated 200 entities & Phase 6 500 entities are expected to come into scope next year. Given the large increase in entities, this article discusses the challenges of Phase 5 initial Margin for Uncleared Derivatives.

Focus on the areas tasked with handling the heavy lifting. Use the flow chart in the appendix.    The trick to meeting the challenges of Phase 5 & 6 is to have a game plan agreed to by all relevant parties and begin the process early. 

This article and the attached Roadmap illustrate the decisions for Phases 5 & 6 initial margin and show which business unit will face those challenges.  Consider the roadmap a “Skeleton Key” for Phases 5 & 6. 

Tasks & Tips by Job Function

Compliance Manager

Compliance will lead the charge to determine if the firm is in scope.  Assess if the firm can comply with posting initial margin on uncleared derivatives


  • Calculate AANA for Phase 6 from March-May 2020
    •  Deadline for posting IM September 1, 2021
  • Counterparty Schedule: see schedule attached
  • Post-Settlement Obligation: reprice collateral and post/receive collateral
  • Make sure to check collateral eligibility to avoid Wrong Way Risk

Legal Counsel & Documentation

Agree on Legal Documentation: from custody agreements, and account control agreements to eligible collateral schedules.  Negotiating documents always take much longer than expected: start early. 


Head of Operations

Conduct a frank appraisal of your internal capacity to manage the collateral process or whether you need to outsource to a third party.


Risk Manager

Responsible for minimizing risk throughout the margin process, spotting potential trouble spots and putting robust controls in place so everything works from end to end.


Portfolio Manager

Portfolio Managers & Traders will be involved because securities in your portfolios are going to be posted as Initial Margin (IM).  The posting and receipt of eligible collateral will be a significant consideration.

TASKS & TIPS                                                                                                                                                                                                             

  • Margin calls: in the U.S., initial margin is due on T+1; In Europe IM is due on T+3
  • Eligibility Requirements: what assets are eligible for posting as initial margin?
  • Collateral Selection: which assets should you post? What factors are considered?
  • Collateral Transformation: when should available assets be used to generate eligible collateral?
    • N.B.: If you have a collateral management desk, you’ll want to make sure you’re being financed at the lowest cost possible. 
  • Familiarize yourself with the type of assets that can be posted as IM
  • Securing a view of the portfolio of eligible collateral – or transformable – will put you in a better position to efficiently and optimally post margin.  Tools: i.e., orchestrator
  • Familiarize yourself with Collateral Transformation.
    • This is an opportunity to explore how you can minimize any drag on the performance of your position. 

IT Manager

Your role includes building the tools from which the whole collateral process can run.


  • Begin groundwork for connectivity to custodians, margin hubs, and portfolio reconciliation services
  • Consider processing margin calls via electronic processes, not email.
  • Make sure your process for collateral movements can accommodate growth.
  • Develop a tech solution that ensures your entity can only accept regulatory eligible collateral from counterparties.
  • Counterparty Schedule: see example attached
  • Margin Calls: verify accuracy via connectivity with internal systems calculating same
  • Post Settlement Obligations: Repricing, optimizing & transforming repriced collateral.

Depending on your staffing, resources, etc. consider partnering with a Third-Party collateral manager.  They can provide many of the necessary electronic solutions and integrate them within your front, middle and back-office systems. 

Summary & Conclusion

  • 43 entities came into scope in phases 1-4. 
    • Entities with more than $1.5 trillion in AANA during the observation period. 
  • Phase 5 estimates 200 new entities with greater than $50 billion AANA
  • Phase 6 estimates 500 new entities with more than $8 billion AANA.  
  • Entities with less than $8 billion in AANA aren’t likely to breach the minimum threshold of $50 million in Initial Margin (MTA).
  • The challenges are many, but there are reasonable ways to lighten this load.  Click here to see the roadmap from Post-Observation to Initial Margin.  The map details each job function and which functions are involved at each step.


Roadmap for Phase Five Initial Margin for uncleared Derivatives


Click to Enlarge Roadmap

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