ISDA has drafted documents to be used by swap dealers and major swap counterparties to inform end-users of their right to demand that their initial margin be segregated out from the dealers’ pools of assets, a requirement embedded in Dodd Frank. This sounds great for treasurers looking to eliminate any last vestige of counterparty risk in deals where they elect to use their exemption from central clearing.
But ISDA warns that end-users – or any counterparty that wants its IM segregated – have to set up an acceptable tri-party custodian account before they do any deals under this arrangement.
The IM segregation requirement went into effect in January but is phased in: for end users without an existing collateral agreement with a dealer or MSC, it kicks in on May 5; otherwise it kicks in on November 3.
According to a recent briefing on the status of ISDA’s project by Derivatives Risk Solutions, “Notification of the right to segregate must be given annually and must identify one or more third party custodians which are acceptable to the SD/MSP as a depository for IM as well as provide indicative costings of the price of segregation (to the extent that this information is available). For its part, the SD/MSP must obtain confirmation from its counterparty of receipt of the notification and an election to segregate or not.”