The International Swaps and Derivatives Association (ISDA) published April 14, 2016 the first in a series of documents to help market participants comply with new margining requirements for non-cleared derivatives. Most corporates needn’t worry about the new rule directly; however they will have a related obligation in disclosing to counterparties how the rule applies to them.
Margin rules for uncleared swaps approved late last year by the prudential regulators and the Commodity Futures Trading Commission (CFTC) were among the last substantive requirements to be put in place for entities using over-the-counter (OTC) derivatives. In the US they go into effect September 1 for swap dealers and major swap participants (MSPs), and March 1 for all other market participants who do not qualify for the margin exemption.
“ISDA’s legal working groups have focused on amending collateral documentation to comply with new margining requirements for the past two years,” said Katherine Darras, ISDA’s acting general counsel, in a statement. “The recent publication of final rules by some national regulators has enabled the group to finalize the first document, allowing market participants to make the necessary changes ahead of implementation.”
Those qualifying for the exemption include corporate end users using the swaps for hedging purposes. Market participants that must comply by September 1 will have to draw up and incorporate new credit support annexes (CSAs) before executing new trades; CSAs determine counterparties’ margin obligations on a transaction. ISDA’s new document, the 2016 Credit Support Annex for Variation Margin (New York law), enables parties to negotiate collateral terms that comply with variation margin under the new rules.
“What is critical to know for corporate treasurers, who might read about ISDA’s documentation in the news or hear about it from dealers, is that they won’t have to draw up new CSAs as a result of the new margin rules,” said Christina Norland, head of global regulatory solutions at Chatham Financial. “That’s a big change for a lot of financial end users. Luckily for corporate end users, they will still be able to transact under their existing CSAs.”
As a result, corporates needn’t bother with the new ISDA documentation.
However, they will have to provide their counterparties with representations as to how the margin rules apply to them, and ISDA anticipates releasing a self-disclosure letter template—anticipated over the next few months—that will disclose regulatory classification status of the corporates’ entities to their counterparties under margin rules globally.
ISDA notes that the New York law variation margin CSA represents the first in what will be a series of documentation releases to help firms implement uncleared derivative margin rules. Over the coming months it plans to publish more documents, including UK and Japanese law versions of the variation margin document, CSAs for initial margin, and a protocol to facilitate the amendment of existing contracts to comply with the new requirements.