2019 collateral transfer agreement for initial margin

Trade Life-Cycle Events IM Guide

Phase five im guidance documents.

• US uncleared margin rules require calculation of the average daily aggregate notional amount, whereas other jurisdictions typically use a month-end average.
• If a firm's final average aggregate notional amount (AANA) is above $8 billion, which is the material swaps exposure (MSE) threshold for Phase Five compliance, then the firm will need to notify its counterparties of its in-scope status as soon as possible.
• ISDA provides various methods for self-disclosure, which include ISDA's IM self-disclosure letter (see Legal Update, ISDA Publishes 2018 Information Letter for Initial Margin ) and ISDA's voluntary early multilateral IM self-disclosure exercise .
• Firms that think they will fall into scope for US margin rules should calculate their AANA and notify counterparties even if US regulators provide certainty about whether documentation, custodial, and operational requirements apply to counterparty relationships below the $50 million IM exchange threshold (see Legal Updates, BCBS and IOSCO Margin Guidance: Legacy Swaps Amended Solely for Benchmarks May Be Exempt from Margin Requirements and CFTC Chairman Proposes Relief from Phase Five Initial Margin Requirements for Uncleared Swaps ).
• Calculate its indicative AANA at the consolidated group level to determine which entities are likely to be in scope for Phase Five IM requirements, even if the party is not likely to meet the IM exchange threshold; and
• If the indicative AANA calculation suggests in-scope status for Phase Five, disclose Phase Five qualification to counterparties as early as possible.

Release on IM Market Fragmentation

• Eligible collateral.
• Settlement timing.
• Treatment of inter-affiliate transactions.
• Model-testing requirements.
• Product scope requirements.

Template Collateral Schedules

Derivatives subject to non-cleared margin rules.

PLC US Finance, PLC US Law Department

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Regulatory Margin – June 2022 Update

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In anticipation of the phase-in of Phase 6 initial margin (IM) on 1 September this year and noting the recent publication by the Indian regulator of variation margin (VM) rules, we set out below a few notable recent developments which may be of interest to market participants:

• Passing of China’s Futures and Derivatives Law: The PRC Futures and Derivatives Law (the “ FDL ”) was passed on 20 April 2022 and will come into effect on 1 August 2022.  The FDL will provide, for the first time at the national legislation level under PRC law, express recognition for the enforceability of close-out netting provisions and the single agreement concept.  The general market consensus is that China will become a “clean-netting” jurisdiction with the coming into effect of the FDL.        Market participants currently relying on exemptions in their home margin rules from exchanging regulatory margin when trading with PRC counterparties will have to consider how the PRC’s switch from a “non-netting” jurisdiction to a “clean-netting” jurisdiction will impact those trading relationships.   At the moment, market participants are awaiting the publication by ISDA of the PRC-law netting and collateral opinions and the outcome of ISDA’s advocacy efforts in various jurisdictions for a “transitional relief” to give market participants sufficient time to prepare for the exchange of regulatory margin with PRC counterparties.
• Indian VM regulations: On 1 June, the Reserve Bank of India (RBI) published the Master Direction – Reserve Bank of India (Variation Margin) Directions, 2022 (the “ RBI VM Regulations ”), which will come into effect on 1 December 2022.  The RBI VM Regulations apply directly to “Domestic Covered Entities” when they trade certain “Non-centrally cleared derivatives (NCCD)” with another Domestic Covered Entity or a “Foreign Covered Entity”.  Certain thresholds (based on group Average Aggregate Notional Amount of outstanding NCCDs) apply in determining whether an entity is a Domestic Covered Entity or a Foreign Covered Entity.   Notably, branches of foreign banks operating in India are, to the extent that they meet the relevant AANA thresholds, considered as Domestic Covered Entities. VM between two Domestic Covered Entities are required to be exchanged using eligible onshore collateral.  VM between a Domestic Covered Entity and a Foreign Covered Entity may be exchanged using certain offshore collateral in addition to the eligible onshore collateral.  Substituted compliance may be applied to an NCCD transaction between a Domestic Covered Entity and a Foreign Covered Entity when the relevant criteria are met. Market participants with derivatives operations in India should, to the extent they have not already done so, start considering any re-papering and operations set-up required to comply with the RBI VM Regulations.
• Lessons learned in relation to Korean margin rules compliance: Following the publication by ISDA of the 2021 Korean Law Security Agreement for Initial Margin (IM) and the KRW Collateral (IM) Addendum for use with the ISDA 2019 Collateral Transfer Agreement for Initial Margin (IM) (CTA), and by the Korea Securities Depository of the form of initial margin account control agreement (ACA), the market has been progressing on repapering their margin documentation entered into with Korean counterparties.  A few lessons learned are: i) whether market participants should consider having the ACA prevail over the CTA given that parties will have negotiated their preferred provisions in the ACA; (ii) given the inability to post cash collateral where KSD is the custodian, market participants can consider using the cash leakage rider for IM documents published by ISDA; and (iii) whether it is favourable to have two CTAs put in place with one covering onshore collateral custodied with the local KSD custodian and the other covering more generic collateral.

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" below.

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A Practical Guide to the ISDA Regulatory Initial Margin Documents: Quickly understand and easily negotiate the market standard IM agreements Paperback – September 2, 2021

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• The ISDA 2018 Credit Support Deed for Initial Margin (IM) (Security Interest — English law)
• The ISDA 2018 Credit Support Annex for Initial Margin (IM) (Security Interest — New York law)
• The ISDA Clearstream Collateral Transfer Agreement (2019)
• The ISDA 2019 Clearstream Security Agreements (Luxembourg Law)
• The ISDA 2019 Euroclear Collateral Transfer Agreement
• The ISDA 2019 Euroclear Security Agreement
• The ISDA 2019 Bank Custodian Collateral Transfer Agreement for Initial Margin
• The ISDA 2019 English Law Security Agreement for Initial Margin (IM)
• The ISDA 2019 New York Law Security Agreement for Initial Margin (IM)
• Print length 192 pages
• Language English
• Publication date September 2, 2021
• Dimensions 6 x 0.44 x 9 inches
• ISBN-10 1739954300
• ISBN-13 978-1739954307
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• Practical Law

ISDA® Publishes 2018 Credit Support Annex for Initial Margin

Practical law legal update w-017-2355  (approx. 6 pages).

• September 1, 2019 (phase four) for counterparties with an average aggregate notional amount (AANA) of more than $0.75 trillion.
• September 1, 2020 (phase five) for all counterparties that are not otherwise subject to an exemption.
• The 2016 IM CSA (see Legal Update, ISDA Publishes 2016 Phase One Credit Support Annex for Initial Margin ).
• The 2016 Credit Support Annex for Variation Margin (New York Law) (2016 VM CSA) (see The ISDA Master Agreement: 2016 Variation Margin Credit Support Annex (New York Law) Paragraph 13 Checklist ).
• The ISDA 1994 Credit Support Annex (1994 CSA) (see Practice Note, The ISDA Master Agreement: Negotiating the ISDA Credit Support Annex (CSA) ).
• Amendments to the provisions relating to dispute resolution, secured party rights, notice of exclusive control, pledgor rights, custody arrangements, and minimum transfer amount in the "General Principles" section of the 2018 IM CSA.
• the "Allocated Margin Flow (IM/IA) Approach" (where "IA" is the "independent amount");
• the "Distinct Margin Flow (IM) Approach;" and
• the "Greater of Margin Flow (IM/IA) Approach."
• The addition of definitions for "Margin Amount (IM)" (referring to IM), "Margin Amount (IA)" (referring to independent amounts), and "Margin Approach" (referring to the counterparties' choice of one of the three margin approaches) in the 2018 IM CSA.
• The addition of Australia, Hong Kong, and Singapore to the regime table in Paragraph 13 of the 2018 IM CSA.
• The removal of provisions relating to "Retrospective Effect" in the Standard Initial Margin Model (SIMM™) Exceptions portion of the regime table and related definitions in Paragraph 13 of the 2018 IM CSA.
• The addition of "Fallback to Mandatory Method" and "Mandatory Method" in the SIMM Exceptions portion of the regime table and related definitions in Paragraph 13 of the 2018 IM CSA.
• The removal of the exhibit to Paragraph 13 providing for the addition of new regimes.
• Amendments to the eligible collateral (IM) schedule.
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Regulatory Margin – June 2022 Update.

June 13, 2022 by Balaram Adhikari

In anticipation of the phase-in of Phase 6 initial margin (IM) on 1 September this year and noting the recent publication by the Indian regulator of variation margin (VM) rules, we set out below a few notable recent developments which may be of interest to market participants:

• Passing of China’s Futures and Derivatives Law:  The PRC Futures and Derivatives Law (the “ FDL ”) was passed on 20 April 2022 and will come into effect on 1 August 2022.  The FDL will provide, for the first time at the national legislation level under PRC law, express recognition for the enforceability of close-out netting provisions and the single agreement concept.  The general market consensus is that China will become a “clean-netting” jurisdiction with the coming into effect of the FDL.        Market participants currently relying on exemptions in their home margin rules from exchanging regulatory margin when trading with PRC counterparties will have to consider how the PRC’s switch from a “non-netting” jurisdiction to a “clean-netting” jurisdiction will impact those trading relationships.   At the moment, market participants are awaiting the publication by ISDA of the PRC-law netting and collateral opinions and the outcome of ISDA’s advocacy efforts in various jurisdictions for a “transitional relief” to give market participants sufficient time to prepare for the exchange of regulatory margin with PRC counterparties.
• Indian VM regulations:  On 1 June, the Reserve Bank of India (RBI) published the  Master Direction – Reserve Bank of India (Variation Margin) Directions, 2022  (the “ RBI VM Regulations ”), which will come into effect on 1 December 2022.  The RBI VM Regulations apply directly to “Domestic Covered Entities” when they trade certain “Non-centrally cleared derivatives (NCCD)” with another Domestic Covered Entity or a “Foreign Covered Entity”.  Certain thresholds (based on group Average Aggregate Notional Amount of outstanding NCCDs) apply in determining whether an entity is a Domestic Covered Entity or a Foreign Covered Entity.   Notably, branches of foreign banks operating in India are, to the extent that they meet the relevant AANA thresholds, considered as Domestic Covered Entities. VM between two Domestic Covered Entities are required to be exchanged using eligible onshore collateral.  VM between a Domestic Covered Entity and a Foreign Covered Entity may be exchanged using certain offshore collateral in addition to the eligible onshore collateral.  Substituted compliance may be applied to an NCCD transaction between a Domestic Covered Entity and a Foreign Covered Entity when the relevant criteria are met. Market participants with derivatives operations in India should, to the extent they have not already done so, start considering any re-papering and operations set-up required to comply with the RBI VM Regulations.

Lessons learned in relation to Korean margin rules compliance:  Following the publication by ISDA of the 2021 Korean Law Security Agreement for Initial Margin (IM) and the KRW Collateral (IM) Addendum for use with the ISDA 2019 Collateral Transfer Agreement for Initial Margin (IM) (CTA), and by the Korea Securities Depository of the form of initial margin account control agreement (ACA), the market has been progressing on repapering their margin documentation entered into with Korean counterparties.  A few lessons learned are: i) whether market participants should consider having the ACA prevail over the CTA given that parties will have negotiated their preferred provisions in the ACA; (ii) given the inability to post cash collateral where KSD is the custodian, market participants can consider using the cash leakage rider for IM documents published by ISDA; and (iii) whether it is favourable to have two CTAs put in place with one covering onshore collateral custodied with the local KSD custodian and the other covering more generic collateral.

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” below.

For further information, please contact:

Chin-Chong Liew , Partner, Linklaters

[email protected]

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On July 26, 2023, the Commodity Futures Trading Commission (“CFTC”) proposed an amendment (“Proposal”) to, among other things, expand the universe of eligible collateral for the CFTC’s initial margin (“IM”) requirements for uncleared swaps. The Proposal would result in swap dealers that are not subject to prudential regulation being able to use a broader range of money market funds (“MMFs”) and similar funds as collateral to meet their uncleared swap IM requirements under CFTC Regulation 23.156(a)(1)(ix).

Under existing rules, securities issued by MMFs cannot be used as eligible IM if the MMF engages in transferring assets through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, and similar arrangements. By eliminating this restriction, securities issued by MMFs that use repurchase or similar arrangements would qualify as IM collateral.

Many MMFs available in the institutional marketplace use repurchase or similar arrangements as part of their strategy and, therefore, those shares do not currently qualify as eligible IM collateral.

In January 2020, the CFTC’s Global Markets Advisory Committee (“GMAC”) created a subcommittee focused on margin for uncleared swaps, which ultimately issued a report with recommendations on how to fix certain issues with the CFTC margin rules. GMAC voted to adopt the report, and recommended that the Commission adopt the subcommittee’s recommendations.  One of the recommendations was the elimination of the asset transfer restriction in paragraph (C) of the CFTC Regulation 23.156(a)(1)(ix), which disqualifies the securities of funds that transfer their assets through repurchase or similar arrangements. If adopted as proposed, the restriction on the use of securities of money market and similar funds that transfer their assets through repurchase or similar arrangements would be eliminated.

Comments on the Proposal must be submitted within 60 days after the Proposal is published in the Federal Register (which has not yet occurred at the time of this writing).

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