ISDA provided guidance for firms that are preparing to become subject to regulatory initial margin requirements. In a fact sheet, ISDA recommended that firms becoming subject to the rule make initial disclosures to counterparties at least 12-18 months in advance of the relevant implementation date.

ISDA also recommended the following preparatory steps:

  • identify in-scope entities;
  • disclose the status of in-scope entities to counterparties;
  • exchange information with counterparties on compliance;
  • determine if there are any special cases;
  • establish custodial relationships and provide information on all in-scope counterparty relationships;
  • implement the necessary procedures for compliance;
  • negotiate and execute documentation before the implementation date; and
  • complete and test all necessary relationships.

These steps are not necessarily chronological, according to ISDA, and will vary based on circumstances.

Commentary/ Jeff Robins  

Besides providing a useful orientation to the tasks required to prepare for initial margin, a critical purpose of the fact sheet is to highlight the very long lead times that may be involved.

The regulatory framework adopted by the G20 countries seems to signal that three months should be enough time to prepare because market participants are generally required to measure the size of their OTC derivatives during a March through May testing period and then put in place the required documentation by a September 1 deadline (in the U.S., the periods shift after 2019). But as noted by ISDA, market experience and the increasing number of affected parties suggest that preparation times could actually be 12-18 months or longer. Essentially, market participants may need to prepare for compliance a year or more before they actually know that they will be required to comply.

Buy-side market participants that use multiple investment managers should also note that the initial margin phase-in rules require considering a legal entity's total book of OTC derivatives, which is information their managers may not have. These entities may need to establish a disclosure process directly with their dealer counterparties or empower one or more of their managers to conduct the process on their behalf.

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