12.05.2016
By Rob Daly

Variation Margin Deadline Spurs Standardization

A penny worth of restraint when writing, or updating, a credit support annex, could be worth a pound of confidence, according to the International Swaps and Derivatives Association.

In preparation for the new variation-margin rules that go into effect on March 1, 2017, the industry organization has issued a guidance note regarding the use of the ISDA Variation Margin Credit Support Annex.

ISDA published the latest version of its protocol in mid-August to help its members comply with the looming margin regimes.

Scott O'Malia, ISDA

Scott O’Malia, ISDA

“The new margin rules for non-cleared derivatives represent a huge change for the market, and will require firms to make important changes to their derivatives documentation to ensure they comply with the requirements in each jurisdiction,” said Scott O’Malia, CEO of ISDA at the time in a prepared statement. “That could involve hundreds if not thousands of collateral agreements for large derivatives users.”

The industry body updated the protocol in mid-November so that it includes terms for the European EMIR regime.

Although the new rules still offer counterparties a wide scope in writing bespoke contracts, ISDA believes that there are beneficial trade-offs if counterparties adopt standard collateral terms and its ISDA Variation Margin Protocol, such as reducing potential margin disputes like valuation differences.

Among the organization’s suggestions include limiting the range of cash or securities as eligible collateral, have the collateral denominated in a single or limited number of currencies, using market standard interest rates on posted collateral, remove thresholds for variation margins so that the current exposure if fully collateralized, calculating daily valuations, and notifying counterparties of margin calls.

ISDA acknowledges that one size does not fill all and that some collateral terms many not support the use of standard terms. completely. However, wide adoption of the protocol could improve price discovery and overall market transparency, according to ISDA officials.

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