ISDA SIMM™ for buy-side: Are you ready? Part 2. The road to compliance.

The final phases of the BCBS / IOSCO’s uncleared margin rules — phase 4 and 5 — are kicking in as from 1 September 2019 and 2020. In the second of this three-part series, we take a look at the steps you need to take to achieve compliance.

Ready or not, initial margin requirements are coming. And unless you’re compliant in time, you won’t be able to trade bilaterally.

That is why Cassini Systems has put together a 3-part informative series, solely focused on ISDA SIMM™ for buy-side firms. Over the course of three weeks, Cassini Systems will shine a light on the complex world of Uncleared Margin Rules (UMRs). We will delve into what these regulations mean for your organisation as well as outlining some factors to think about as you start planning for implementation of UMRs and SIMM™.

You can catch up with ‘Part 1 of 3: Getting Started’ here

Part 2 of 3: The road to compliance. 

The final phases of the BCBS / IOSCO’s uncleared margin rules — phase 4 and 5 — are kicking in as from 1 September 2019 and 2020. In the second of this three-part series, we take a look at the steps you need to take to achieve compliance.

If you’re caught by phase 4 or 5 of uncleared margin rules (UMR), getting started is only half the battle. Once you get to grips with the key issues, you must formulate a plan and implement it.

While this sounds simple on paper, it’ll probably prove more complex and time-consuming than you’d imagine. For many buy-side firms, initial margin is a new concept. So, to comply, you may have to make fundamental changes to the way you operate.

ISDA estimatesthat, in phase 5, at least 1,000 new asset managers will be caught by the initial margin requirements, creating more than 9.000 new relationships requiring new or amended documentation. Yet, when we asked attendees at a webinar on initial marginwhether they’d started planning how they’ll implement an initial margin model, 28% told us they’re still researching the situation. And, more worryingly, 38% didn’t know which stage their planning had reached.

So how do you make sure you’re compliant with these new rules when the deadline hits in 2019 (phase 4) or 2020 (phase 5)?

Implementing UMR: key milestones.

Broadly speaking, you’ll need to go through the following steps to achieve compliance with phase 4 or 5 of the uncleared margin rules:

  • Exchange self-disclosure information with counterparties
  • Re-paper your agreements
  • Refine your collateral management process
  • Implement an initial margin model that is agreed with your counterparties (typically, this will be the ISDA SIMM)

Let’s look at these steps in more detail.


First things first, you’ll need to let your counterparties know if — and when — you expect your relationship to fall in scope.

Back in 2016, ISDA published a template self-disclosure letter designed to make exchanging self-disclosure information as painless as possible. Nonetheless, ISDA recommends self-disclosing at least 24 months before the implementation deadline. So, if you’re in scope, you should’ve already completed this step.

Putting new agreements in place

In the first part of this series, we explained how, before you can start your repapering efforts, you’ll need to make an important strategic decision.

The uncleared margin rules only apply to trades executed after September 2019 (or, for phase 5, after September 2020). So, you’ll need to decide whether it’s best to keep old and new swaps separate or incorporate everything into a new agreement. Either decision will have its own operational, financial and legal consequences.

But you’ll also have to make another important decision. Will you negotiate bilateral agreements or adopt ISDA’s 2016 variation margin protocol?

According to research by Ernst and Young, most organisations caught by phase 2 (which kicked in in September 2017) preferred the second option. Given the volume, complexity and time required to put bilateral arrangements in place, ISDA’s protocol will probably prove popular with phase 4 and phase 5 organisations too.

That said, the work will be time-intensive, even with this approach. Crucial terms, including eligible collateral, operational requirements such as collateral transfer timings and jurisdictional issues can’t be left to template wording. You’ll have to negotiate them.

ISDA is working on a new tool, called ISDA Create -IM, that will make it possible to negotiate and execute initial margin documentation with several counterparties at the same time. The tool should launch in early 2019, but a date is yet to be confirmed.

Refining your collateral management process

Phase 4 and 5 workflows are very similar to the variation margin workflow, with some key differences.

In particular, you’ll have to segregate posted and collected initial margin for every relationship. This means you’ll have to negotiate separate custodial arrangements and create segregated accounts for collateral you’re calling from each counterparty.

This will generally involve implementing a collateral management system if you don’t have one already or working with an outsourced collateral provider. Obviously, this takes time to set up and test properly.

As we explained in part 1, setting up new custodial arrangements has its challenges, too. You’ll need to factor in time-intensive initial know-your-customer requirements and custodial account setup deadlines. And if your counterparties work with different custodians, you’ll have to take steps to link up.

Implementing an initial margin model

BCBS / IOSCO’s uncleared margin rules require you to calculate initial margin using either a standard grid-based model that was published with the final rules, or an internal model subject to regulatory approval. The standard grid model will almost always (but not universally) generate higher margin requirements than an approved internal model. So, it’s usually undesirable for all but the most exotic trades.

When choosing an internal model, you can define your own model and go through the process of getting regulatory approval and agreeing with counterparties. Or, you can use the ISDA SIMMTMmodel that has been created by ISDA to help the industry achieve consistency of models.

Generating sensitivities may sound like it shouldn’t be too challenging, as you probably already have risk management systems running risk models on your portfolio. That said, the specific sensitivities (bucketing, correlation risk, etc.) don’t necessarily map to those your risk desk produce, and the market data requirements can be challenging. You’ll need to source swap curves, discount curves, spread curves, spread correlation curves, swaption curves, currency curves, repo curves, and the list goes on.

Of course, regulators will need to approve your initial margin model, even if you use the ISDA SIMM.

In the US,  The assessment involves going through governance arrangements, risk management, reconciliation and dispute mechanisms. And the regulators will be keen to see in-depth understanding of the model and how it works. The process can take up to six months.

In the EU and APAC, where regulators have adopted a self-attestation method, you’ll also need to prove how you’re compliant and highlight controls, evidence, gaps and mitigation plans. For this reason, you’ll have to test for accuracy and benchmark to another model, such as a value-at-risk scenario (VaR), before you’re operational.

For several reasons, including the mismatch to internal risk models, market data needs and the need to run the model during the end-of-day collateral management process as well as intra-day, most firms are turning to an external provider to calculate SIMM for them.

Of course, as Cassini is a complete margin analytics platform across all asset classes, we can generate sensitivities and run the SIMM calculations. Or, if you can generate sensitivities yourself, then we can run the SIMM calculation stage based on your risk inputs in the CRIF (common risk interchange format) and other file formats.

When deciding on a technology solution for your SIMM calculations, you should consider the broader use cases beyond just the overnight collateral process. We’ll talk more about this in part 3. But in short you need a solution that can offer pre-trade calculation, optimisation across portfolios, and intra-day notifications.

Wrapping up

And there you have it. A step by step account of what you’ll need to do to achieve compliance with BCBS / IOSCO’s uncleared margin rules by September 2019 or 2020.

At Cassini, we can provide you with a SIMM workflow that can help you take the sting out of complex call and post initial margin calculations, provided you have all the necessary legal arrangements in place. This process gets you to a point where you are compliant with regulations and are exchanging two-way collateral on your uncleared derivative trades.

But now you have to look at the impact that posting all that additional collateral has on your trading and financing.

What if you could also use analytics tools to minimise the impact of UMR collateral? Tools that allow you to find out whether trading bilaterally or going through a clearing house is the most cost-effective option, or what legacy trades it would make sense to include into your new credit support annexes to maximise risk offset?

In the third and final instalment of this series, we look at how you can implement technology and business processes to provide transparency across the trade lifecycle and minimise UMR’s impact across the board

Meanwhile, if you’d like to find out more about phase 4 and 5 uncleared margin requirements, please get in contact and let us know how we can help you.