RECOMMENDATIONS TO

IMPROVE SCOPING AND

IMPLEMENTATION OF  

INITIAL MARGIN

REQUIREMENTS  

FOR NON‐CLEARED SWAPS

REPORT TO THE COMMODITY FUTURES TRADING COMMISSION’S  

GLOBAL MARKETS ADVISORY COMMITTEE BY THE SUBCOMMITTEE

ON MARGIN REQUIREMENTS FOR NON‐CLEARED SWAPS  

May 19, 2020

Adopted by the Global Markets Advisory Committee for CFTC consideration on May 19, 2020. The

views, analyses, and conclusions expressed herein do not necessarily reflect the views of the

Commission or its staff, or the United States government.
Table of Contents

PREFACE.................................................................................................................................... 1

EXECUTIVE OVERVIEW ............................................................................................................ 5

I. REMAINING PHASES OF INITIAL MARGIN FOR UNCLEARED SWAPS:  

BACKGROUND ON IMPACTED ENTITIES.......................................................................11

A. COMPLETED AND REMAINING MARGIN REQUIREMENTS ............................................ 11

B. SMALL FINANCIAL END USERS ...........................................................................................13

1. Key Features ......................................................................................................................13

2. Separately Managed Account Clients – Pensions, Insurance Companies, Pooled

Investment Vehicles and Funds ....................................................................................... 14

3. Seeded Funds .................................................................................................................... 16

C. SWAP DEALERS ......................................................................................................................17

1. Small Covered Swap Entities.............................................................................................17

2. Dealers with Limited Bandwidth ..................................................................................... 18

D. CUSTODIANS......................................................................................................................... 19

II. REMAINING PHASES OF INITIAL MARGIN FOR UNCLEARED SWAPS:  

CHALLENGES AND RECOMMENDATIONS .................................................................... 20

A. ISSUES THAT SHOULD BE ADDRESSED IN IMMEDIATE TERM

(PHASE 5 COMPLIANCE)......................................................................................................20

1. Separate Compliance for Separately Managed Accounts ...............................................20

2. Collateral Eligibility Requirements for Money Market Funds ........................................ 23

3. Seeded Funds – Scoping Issue ..........................................................................................28

4. Small Covered Swap Entities and IM Calculation...........................................................34

5. Documentation and Account Set‐Up – Industry Implementation Issue........................ 37

B. ISSUES THAT COULD BE ADDRESSED IN LATER TERM

(PHASE 6 COMPLIANCE) .....................................................................................................43

1. Separately Managed Accounts – Scoping Issue ..............................................................43

2. Separately Managed Accounts – Implementation Issue.................................................47

3. The MSE Calculation’s Timing Methodology and the Post Phase‐In Compliance  

Periods ..............................................................................................................................48

4. Minimum Transfer Amount (MTA) ................................................................................54

5. Removal of Deliverable FX from MSE Calculation..........................................................58

III. APPENDICES ...................................................................................................................60

A. APPENDIX A – CFTC MARGIN STUDY

B. APPENDIX B – ILLUSTRATION OF CUSTODIAL DOCUMENTATION ARCHITECTURE

C. APPENDIX C – INTERPRETIVE GUIDANCE SCENARIOS

D. APPENDIX D – COMPARISON CHART OF GLOBAL AANA CALCULATION

REQUIREMENTS AND IM COMPLIANCE DATES
    Preface

Global Markets Advisory Committee – Subcommittee on Margin  

Requirements for Non‐Cleared Swaps

As the Commodity Futures Trading Commission’s (CFTC or Commission)

uncleared swap margin rules (the Margin Rules) 1 approach later phases of

compliance, a broad and representative group of market participants—on behalf of

retail and private funds, pensions, insurance companies, institutional investors,

asset managers, and dealers—along with self‐regulatory organizations, market

utilities, and service providers have come together on the Subcommittee on Margin

Requirements for Non‐Cleared Swaps (the Margin Subcommittee) to review the

application of initial margin (IM)requirements to a new wave of market participants

in Phase 5 and Phase 6 and beyond.  

The Margin Subcommittee was established by the Global Markets Advisory

Committee (GMAC) “to examine the implementation of margin requirements for

non‐cleared swaps, to identify challenges associated with forthcoming

implementation phases, and to recommend actions the Commission may take to

mitigate the challenges identified” and consider “regulatory initiatives that may

address such challenges faced by market participants in complying with margin

requirements for non‐cleared swaps.” 2

As the Honorable Commissioner Dawn Stump, sponsor of the GMAC, has

recognized, the remaining phases of the Margin Rules will bring in scope different

types of market participants than did prior phases, with distinct challenges.  While

the remaining phases will dwarf prior phases in the sheer number and types of

impacted market participants, the average amount of margin to be exchanged with

these market participants is expected to be far less.  Indeed, Phase 5’s approximately

200 entrants would cover only 8 percent of the total average aggregate notional

                                                 

1 CFTC Regulation §§ 23.150‐23.161, 17 C.F.R. §§ 23.150‐23.161; see also Margin Requirements for

Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 636 (Jan. 6, 2016).

2 See Request for Nominations for the Subcommittee on Margin Requirements for Non‐Cleared

Swaps Under the Global Markets Advisory Committee, 84 Fed. Reg. 57,706 (Oct. 28, 2019).   
2

amount (AANA) of swaps across all phases, and Phase 6’s approximately 500

entrants would cover only 3 percent of the AANA across all phases.3

  

In light of the unique challenges faced by future phased‐in market participants and

the potential unintended consequences, the Margin Subcommittee delivers the

following report for the GMAC’s consideration.    The report provides some

background on these newly‐impacted market participants, outlines the scoping and

implementation challenges associated with the remaining phases of the Margin

Rules, and provides recommendations for addressing such challenges.  The Margin

Subcommittee respectfully asks that the GMAC endorse our recommendations for

actions to be taken by the Commission to make the Margin Rules more workable

and efficient for entities in the remaining phases without compromising the Margin

Rules’ purpose of reducing systemic risk.    Further, the Margin Subcommittee

respectfully requests that the GMAC urge the Commission to work with other U.S.

and global regulators to undertake actions consistent with those recommended in

the report as necessary and appropriate in the interest of international

harmonization.

The Margin Subcommittee acknowledges and appreciates the CFTC’s recent action

to codify the implementation schedule providing for the Phase 5 and Phase 6

framework referred to above,4 which is consistent with the recommendation issued

by the Basel Committee on Banking Supervision (BCBS) and the International

Organization of Securities Commissions (IOSCO) in July 2019.5  Additionally, in

issuing statements on March 18, 2020 to support that codification, the Honorable

CFTC Chairman Heath Tarbert and other CFTC Commissioners recognized that

unique and extenuating circumstances have arisen as a result of the sudden COVID‐

19 global pandemic, causing market participants to experience tremendous market

uncertainty and volatility and necessitating targeted relief to address impacts from

the crisis.6  Given the heightened challenges arising in the current environment and

                                                 

3 See Initial Margin Phase 5 Report of the CFTC’s Office of the Chief Economist (Oct. 24, 2018), at 4‐

5, available at https://www.cftc.gov/PressRoom/PressReleases/7834‐18 (the CFTC Margin Study)

(Appendix A).

4 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 85

Fed. Reg. 19,878 (April 9, 2020).

5 See “Basel Committee and IOSCO Agree to One‐Year Extension of the Final Implementation Phase

of the Margin Requirements for Non‐Centrally Cleared Derivatives” (July 23, 2019), available at

https://www.bis.org/press/p190723.htm.

6 See, e.g., Statement of the Honorable CFTC Chairman Heath P. Tarbert in Support of Extending

Relief for Initial Margin Requirements for Uncleared Swaps (Mar. 18, 2020), available at
3

after submission of a request letter on March 25, 2020 by the International Swaps

and Derivatives Association (ISDA) and 20 other industry associations, 7 BCBS‐

IOSCO amended its recommended margin framework on April 3, 2020 to push out

each of the Phase 5 and Phase 6 compliance dates by one year (along with the

relevant calculation periods for those phases).8   

The Margin Subcommittee applauds the timeliness of the April 2020 BCBS‐IOSCO

action, which serves as confirmation by the collective international standard‐setting

bodies that it is critical for the industry to be able to divert and dedicate scarce

resources to respond to the COVID‐19 crisis and related market volatility and

liquidity issues without jeopardizing compliance with upcoming regulatory

obligations under uncleared swap margin rules.  Cognizant that BCBS‐IOSCO do

not have the legal power to enact regulations, the Margin Subcommittee strongly

encourages the CFTC and other U.S. and global regulators to formally adopt BCBS‐

IOSCO’s latest recommendation for a push‐out of the Phase 5 and Phase 6

compliance dates 9 in addition to the specific recommendations for addressing

margin‐related issues, as set forth in our report.

Even assuming that the CFTC (and other U.S. and global regulators) will act swiftly

to provide relief in accordance with the April 2020 BCBS‐IOSCO recommendation,

market participants coming into scope for the newly scheduled Phases 5 and 6 and

beyond will continue to face various challenges that are distinct and apart from the

current COVID‐19 crisis.  Put differently, the COVID‐related time extension is not

                                                 

https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820 (pointing out that

“now that many firms’ resources have been appropriately redirected to [COVID‐19] response efforts,”

it is “even more challenging” for market participants to “put required custodial arrangements and

documentation in place” and otherwise get into compliance with IM requirements in the remaining

phases of the Margin Rules).

7 See Letter Re: Margin Requirements for Non‐Centrally Cleared Swaps Margin – Impact of COVID‐

19 on Initial Margin Phase‐In (Mar. 25 2020), available at https://www.isda.org/a/sM7TE/IMPhase5‐

6COVID‐19Letter.pdf.

8 See Basel Committee on Banking Supervision and Board of the International Organization of

Securities Commissions, Margin Requirements for Non‐Centrally Cleared Derivatives (Apr. 2020),

available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.    This BCBS‐IOSCO

recommendation for a revised implementation timeline effectively supersedes the BCBS‐IOSCO

recommendation issued in July 2019.

9 Several jurisdictions, such as Canada, Switzerland, Japan, Singapore (MAS), Hong Kong (SFC) and

Australia, have adopted, or announced an intention to adopt, the latest BCBS‐IOSCO

recommendation.  
4

designed to address the margin scoping and implementation issues anticipated for

Phases 5 and 6 and beyond.  We expect the industry to use the COVID‐related time

extension as it is intended:  to focus on continuing basic, critical operations during

a historic period of market volatility and uncertainty and, to the extent possible as

market conditions stabilize and resources become available, re‐engage in workflows

necessary to comply with uncleared swap margin rules.  The Margin Subcommittee’s

recommendations outline more targeted relief designed to address specific margin‐

related challenges, and we urge the GMAC to support such recommendations for

adoption by the CFTC.   

The Margin Subcommittee commends the GMAC and the CFTC for their continued

focus on issues relating to the Margin Rules and gives special thanks to the

Honorable Commissioner Stump for creating the Margin Subcommittee.    The

Margin Subcommittee also thanks CFTC staff, particularly Warren Gorlick

(Associate Director, Division of Swap Dealer and Intermediary Oversight (DSIO))

and Carmen Moncada‐Terry (Special Counsel, DSIO), whose participation and

contributions were invaluable to the Margin Subcommittee’s work.
5

Executive Overview

The Margin Subcommittee has identified a variety of challenges associated with the

scoping and implementation of regulatory IM requirements in Phases 5 and 6 and

beyond; some challenges are a result of U.S. divergence from the Margin

Requirements for Non‐Centrally Cleared Derivatives issued by BCBS and IOSCO (the

BCBS‐IOSCO framework) while others will require international coordination to

address. 10    After consideration of potential mitigants and regulatory initiatives

which might address such challenges, the Margin Subcommittee is making the

following recommendations, described in more detail in this report, to the GMAC

for further consideration and action by the CFTC for the immediate term and later

term.

Immediate Term Recommendations

Immediate term recommendations are expected to have the most beneficial impact

if adopted prior to, or as of, the Phase 5 compliance date.  The descriptions below for

each recommendation highlight the challenge that the recommendation would

address and how the recommendation could be implemented.  

 Confirm Interpretation that a CSE Can Continue to Trade with an SMA

Client in the Case of an Inadvertent Breach of the $50M IM Threshold  

 Challenge: Unique compliance issues arise where a covered swap entity’s

(CSE) counterparty, such as a pension fund, hires multiple asset managers

to diversify its investments and investment expertise (a Separately

Managed Account Client, or an SMA Client).  For these SMA Clients,

each asset manager will establish on behalf of the SMA Client one or more

separately managed accounts to execute different investment mandates

for risk diversification and other purposes (each such account, an SMA).  

While the regulatory IM threshold amount (regulatory maximum of

$50M) (IM Threshold) will need to be calculated and monitored by the

CSE for the SMA Client in the aggregate, each SMA asset manager will

only know the regulatory IM associated with the transactions that it

independently executes for the SMAs that it manages on behalf of the

SMA Client.  Should the activities of another asset manager or managers

                                                 

10 See Basel Committee on Banking Supervision and Board of the International Organization of

Securities Commissions, Margin Requirements for Non‐Centrally Cleared Derivatives (Apr. 2020),

available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.
6

unexpectedly put the SMA Client’s uncollateralized regulatory IM

exposure in the aggregate over the regulatory IM Threshold with a given

CSE, the CSE may feel it needs to cease trading activity with all of the

SMA asset managers (even those acting under regulatory IM compliant

documentation or within agreed allocations of the regulatory IM

Threshold) unless it has a regulatory interpretation on how to apply IM

requirements to SMAs.    The halting of trading, in turn, could impair

investment activities and harm the underlying SMA Client.   

 Recommendation: So long as the CSE and SMA Client allocate no more

than a total of $50M regulatory IM Threshold across the SMAs, permit a

CSE to treat each SMA separately for compliance purposes. As such, if the

CSE were to inadvertently exceed $50M in uncollateralized regulatory IM

exposure with an SMA Client in the aggregate, an SMA could continue to

trade with the CSE, if (i) the asset manager for the SMA is trading under

regulatory compliant IM documentation; or (ii) the CSE and asset

manager for the SMA have agreed a regulatory IM sub‐Threshold and the

asset manager for the SMA is trading at or below the agreed regulatory

IM sub‐Threshold, provided that the CSE and the asset managers of the

other SMAs of the SMA Client are no longer continuing to trade (absent

other relief) and are working to reduce the aggregate uncollateralized

regulatory IM exposure of the SMA Client back to at or under $50M.   

 Removal of Certain Collateral Eligibility Restrictions on Money Market

Funds

 Challenge: The ability to use redeemable securities in a pooled

investment fund, more typically referred to as a money market fund

(MMF), as eligible collateral in the U.S. has been severely restricted by

the condition that assets of the MMF may not be transferred through

securities lending, securities borrowing, repurchase agreements, and

reverse repurchase agreements.

 Recommendation: Eliminate undue restrictions on the activity of eligible

MMFs to transfer assets through securities lending, securities borrowing,

repurchase agreements, and reverse repurchase agreements.

 Removal of Consolidation Requirement for Seeded Funds  

 Challenge: Certain investment funds are temporarily seeded by a parent,

sponsor or affiliate that does not guarantee the obligations of such fund

or participate in or control the management of such fund; the fund is
7

launched and seeded in order to establish a performance record before

external investors will invest in them.  When these “seeded funds” are

seeded by a parent with material swaps exposure (MSE), such seeded

funds have to post IM while other seeded funds sponsored by entities

without MSE or not otherwise affiliated with a group that has MSE do not

have to post IM.  This disparate treatment puts these seeded funds at a

disadvantage domestically and globally as most of the U.S.’s global

competitors have adopted the BCBS‐IOSCO framework’s

recommendation that all investment funds be exempt from consolidation

with their parent, sponsor or affiliate, provided that the seeding entity

does not guarantee such fund’s obligations.  

 Recommendation: In accordance with the BCBS‐IOSCO framework and

other global jurisdictions, provide an exemption from the consolidation

of seeded funds with their sponsors (provided such sponsors do not

guarantee the seeded funds’ obligations) for purposes of calculating

AANA and MSE during the limited seeding period in order to provide a

level playing field domestically and globally for these seeded funds.

 Relief Relating to IM Calculations for Small Covered Swap Entities

 Challenge: The smaller CSEs coming into scope in Phases 5 and 6, may

not be approved to calculate IM amounts using a quantitative IM model

like ISDA SIMMTM.  As a result, they may be required to post and collect

higher IM amounts under the regulatory schedule, and may more readily

breach the IM Threshold, reducing their preparation time.

 Recommendation: Provide no‐action relief to small CSEs allowing them

to rely on the IM amounts calculated by their CSE counterparties for

purposes of IM monitoring and IM exchange.

 Provide a Grace Period to Reduce Congestion and Facilitate Compliance

 Challenge: Even with the actions taken by the Commission to date and

the recommended extension of the Phase 5 and Phase 6 compliance dates

due to the COVID‐19 crisis, many Phase 5 and Phase 6 firms’ relationships

will not be ready to exchange regulatory IM as of the phase‐in dates

notwithstanding best efforts due to existing industry resource

constraints.  

 Recommendation: For at least Phases 5 and 6, grant a 6‐month grace

period commencing from the day the regulatory IM for a relationship
8

exceeds the IM Threshold during which the parties must complete the IM

documentation and operational set‐ups and begin exchanging IM.

Later Term Recommendations

Later term recommendations are anticipated to have substantial beneficial impact

if adopted by the CFTC prior to, or as of, the Phase 6 compliance date.    The

descriptions below for each recommendation highlight the challenge that the

recommendation would address and how the recommendation could be

implemented.

 Application of Separate IM Threshold to Each Separately Managed

Account of an SMA Client

 Challenge: As indicated above, given the unique and separate

counterparty relationship between an SMA Client, acting through its

SMA asset managers, and a CSE with whom it trades, each individual SMA

asset manager does not have visibility to, nor control over, the total

regulatory IM amount of the SMA Client in order to independently

manage the timeline for IM preparation.  The SMA Client establishes each

SMA independently (e.g., limited recourse arrangements, separate

documentation, margining and netting arrangements, etc.) in order to

achieve diversification.  Each SMA asset manager is thus forced to make

a cost‐benefit decision as to whether to put in place documentation and

custodial arrangements based solely on the transactions that it

independently executes for the SMA it manages.  If the SMA Client facing

a particular CSE were to suddenly and unexpectedly exceed the $50M IM

Threshold in the aggregate, then SMA asset managers would encounter

various cliff‐edge scenarios, including potentially being cut off from

trading or having to terminate existing positions.

 Recommendation: Given the lack of transparency and control among

SMA asset managers and the independent operation of their SMAs, allow

each SMA to be treated as a distinct entity to which a separate regulatory

IM Threshold will apply, thereby giving each manager much‐needed

certainty and control over when an SMA is at or near the IM Threshold.  

Although this recommendation is the simplest and most efficient

solution, we acknowledge that, absent broader support for it by other U.S.

and global regulators, an alternative recommendation would be to allow

the option for each CSE and SMA asset manager to agree to apply a flat

IM Threshold of $10M per SMA in light of the operational and practical

difficulties of sharing the $50M IM Threshold at the SMA Client level.  
9

Although this recommendation to allow a $10M IM Threshold per SMA

would not be subject to an overall cap of $50M, there are safeguards to

mitigate the risks of an uncapped option, as explained further in Part

II.B.1.

 Adjustments to the MSE Calculation’s Timing and Methodology and the

Post Phase‐In Compliance Periods

 Challenge: The Commission’s Margin Rules (as well as the uncleared swap

margin rules of the U.S. Prudential Regulators (USPRs)) for the timing

and method of conducting MSE calculations and the compliance dates

following September 1, 2021, diverge from the global BCBS‐IOSCO

framework.   The differences create significant cross‐border complexity

which leads to additional operational burdens, costs and compliance

challenges for market participants subject to margin requirements in

multiple global jurisdictions.

 Recommendation: Align the timing and methodology for MSE

calculations and the post phase‐in compliance periods with the BCBS‐

ISOCO framework and other global regulations.

 Codification of Relief Related to Minimum Transfer Amount

 Challenge: The minimum transfer amount (MTA) requirements do not

account for certain practical operational processes and circumstances

which limit the ability of CSEs and their covered counterparties to use the

MTA, including issues with the application of an MTA for each SMA

Client and the ability to split the maximum allowable MTA between

distinct IM and variation margin flows.

 Recommendation: These challenges were effectively addressed by CFTC

staff letters 17‐12 and 19‐25.  As staff letters may expire or be revoked, we

recommend that the CFTC provide certainty to CSEs and their

counterparties by amending the Margin Rules to codify the provisions of

CFTC staff letters 17‐12 and 19‐25.

 Removal of Deliverable FX from MSE Calculation

 Challenge: Small financial end users (a group of market participants

described in Part I) are unnecessarily burdened by monitoring and other

requirements due to the inclusion of deliverable foreign exchange (FX)

swaps and forwards (collectively, Deliverable FX) in the MSE

calculation.
10

 Recommendation: While the Margin Subcommittee recognizes that

inclusion of Deliverable FX has been considered previously by

international regulatory bodies without changes recommended, we

strongly request reassessment of the market impact, particularly upon

small financial end users, and amendment of the Margin Rules to exclude

Deliverable FX from the MSE calculation.  Since Deliverable FX itself does

not have IM requirements, its inclusion in MSE calculations and resulting

burdens on small financial end users is not warranted.

The Margin Subcommittee appreciates the GMAC’s consideration of the above

recommendations.  Further background, explanation, and rationale are provided in

this report.
11

I. Remaining Phases of Initial Margin for

Uncleared Swaps: Background on

Impacted Entities

A. COMPLETED AND REMAINING MARGIN REQUIREMENTS

The Margin Rules require certain swap dealers (SDs) and major swap participants

(MSPs) to post and collect variation margin (VM) and IM for uncleared swaps with

financial end users and other swap entities.    VM requirements, which are now

implemented in 10 jurisdictions and apply to all in‐scope transactions involving SDs

and financial end users, account for more than $944.7 billion in margin posted or

received, significantly reducing counterparty and systemic risks.11  IM pledged to

and collected from the entities that were brought into compliance during Phases 1

through 4—i.e., approximately 40 entities with an AANA exceeding $0.75 trillion12—

is already significantly contributing to these risk‐reducing measures.  According to

ISDA’s Year‐End 2019 Margin Survey, the 20 largest market participants alone

collected more than $100 billion in mandatory IM required by the Margin Rules in

addition to discretionary IM.13

In contrast to Phases 1 through 4, the remaining phases (Phase 5, Phase 6 and

beyond) for the IM requirements of the Margin Rules will bring into scope a much

larger and more diverse group of financial end users and swap entities.14  The CFTC

Margin Study found that entities in what are now known as Phases 5 and 6 will span

a variety of business sectors, including pension funds (54), insurance companies (48),

managed investors (153) hedge funds (163), corporates (65), among others.15  The

CFTC’s DSIO acknowledged that “[a]s a result of the large reduction in the

compliance threshold”—which would be from $750 billion to $50 billion for Phase 5

                                                 

11 See ISDA Margin Survey Year‐End 2019 (Apr. 2020) at 3, available at

https://www.isda.org/a/1F7TE/ISDA‐Margin‐Survey‐Year‐end‐2019.pdf (ISDA YE 2019 Margin

Survey).

12 See CFTC Margin Study at 4.

13  ISDA YE 2019 Margin Survey at 3.

14 See Statement of the Honorable CFTC Chairman Heath P. Tarbert in Support of Extending Relief

for Initial Margin Requirements for Uncleared Swaps (Mar. 18, 2020), available at

https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820.

15 See CFTC Margin Study at 4‐5.
12

(and from $50 billion to $8 billion for Phase 6)—“a significant number of

counterparties will come into scope of the IM requirements.”16  According to the

CFTC Margin Study, “[w]hile Phases 1 through 4 capture just over 40 entities,” Phase

5 as originally adopted (now split into the recently finalized Phase 5 and Phase 6)

“could bring 700 entities in scope,” which amount to approximately 7,000 IM

relationships.17  Of those 700 entities, approximately 200 entities would be captured

by what is now known as Phase 5 and would represent 8 percent of the AANA across

all phases, and approximately 500 entities would be captured by what is now known

as Phase 6 and would represent 3 percent of the AANA across all phases.18   

Moreover, the Initial Margin Phase‐in Analysis conducted by ISDA in 2018 (ISDA’s

2018 Quantitative Analysis) indicated that, after applying the MSE phase‐in

threshold of $8 billion, a significant portion of the counterparties and relationships

brought into scope are not likely to be required to exchange regulatory IM, and

those that do will make up a small percentage of the amount of the total industry

ISDA SIMMTM (SIMM) amounts.19  Specifically:

− “The vast majority of the more than 1,100 counterparties brought into scope

in [what are now known as Phase 5 and Phase 6] will fall close to the lower

bounds of the EUR/USD 8 billion threshold.”  

− “An estimated 83% (992) of 1,190 counterparties [in what are now known as

Phase 5 and Phase 6], and 75% (7,220) of 9,598 relationships [in what are now

known as Phase 5 and Phase 6] fall below the USD 100 billion level.”   

− “As most of these parties would not exceed a USD 50 million IM exchange

threshold, these relationships would on average attract only USD 29.9

million of IM using a regulatory schedule (grid‐based) calculation

methodology, and USD 10.5 million under a SIMM calculation.”

In the simplest terms, as stated by former CFTC Chairman J. Christopher Giancarlo,

“small entities contribute little to systemic risk, and would, in any case, exchange

                                                 

16 See CFTC Letter No. 19‐16 (July 9, 2019) at 3, available at https://www.cftc.gov/csl/19‐16/download.

17 See CFTC Margin Study at 4, 7.   

18 See CFTC Margin Study at 4, 5.  

19 See Letter Re: Margin Requirements for Non‐Centrally Cleared Derivatives – Final Stages of Initial

Margin Phase‐In (Sept. 12, 2018) at 6, available at https://www.isda.org/a/5evEE/Initial‐Margin‐

Phase‐In‐Implementation‐Joint‐Trade‐Association‐Comments.pdf.
13

only small amounts of initial margin.”20  The following sections provide a further

description of the general categories (and sub‐categories) of entities impacted by

the remaining IM phases under the Margin Rules.21

B. SMALL FINANCIAL END USERS  

1. Key Features

The Margin Rules will bring into scope an expansive list of financial end users and,

as noted above, a potentially high volume (including retail and private funds, pooled

investment vehicles, SMA Clients, seeded

funds, etc.).    For purposes of this report,

“Small Financial End User” refers to a

financial end user that did not exceed the

AANA thresholds in the prior phases

(Phases 1 through 4) and that may be

subject to IM requirements in the

remaining phases.  A sizeable portion of the

Small Financial End Users would exceed the

AANA thresholds in Phase 5 and Phase 6

due to the inclusion of Deliverable FX in the

AANA calculation, notwithstanding that

Deliverable FX is not subject to the IM

requirements.    According to the CFTC’s

Office of the Chief Economist, 200 of the

700 (30%) of financial end users in what are

now known as Phase 5 and Phase 6 will have

MSE due to Deliverable FX.22  Industry data analyzed by ISDA estimates that 1,363

relationships of 227 global financial end users are scoped in for IM requirements due

                                                 

20 See Letter Re: Phase Five Implementation from J. Christopher Giancarlo to Federal Reserve Board

Vice Chairman Randal K. Quarles (Apr. 29, 2019) at 2, available at

https://www.cftc.gov/PressRoom/PressReleases/7922‐19.  

21 Although not discussed at length in this report, certain security‐based swap dealers and major

security‐based swap participants could also be brought into scope in Phase 5 and beyond.

22 See CFTC Margin Study at 6‐7.

Figure 1. Example of small financial end user 

calculation of AANA (rounded/anonymized) 

AANA calculation: 10 Billion AANA; 90% 

attributable to Deliverable FX; the remaining 10% 

($1B) is split between non-deliverable FX forwards 

and swaps/swaptions. 

Result: Fund will need to engage dealers 

regarding the Margin Rules, monitoring whether it 

is below the IM Threshold and posting/collecting if 

above on the $1B exposure. If Deliverable FX 

were removed from AANA calculation, the Fund 

would be out of scope for the Margin Rules given 

that it does not maintain MSE. 

Note: This Fund engages in Deliverable FX 

because it is a global fixed income strategy that 

pursues being 100% hedged to USD, the 

portfolio’s base currency. The Fund’s manager 

philosophically believes that unhedged and 

unmanaged currency risk is unjustified in this 

strategy given it is traditionally used by investors 

as a risk reducer/diversifier. 
14

to Deliverable FX.  These relationships would post only 4.6% (SIMM) or 2.5% (GRID)

of the total IM for Phases 5 and 6.23    

Overall, the data and information highlighted above demonstrates that Small

Financial End Users individually and in the aggregate do not present the systemic

risk that the IM requirements aim to address.  Yet, by virtue of being scoped in,

Small Financial End Users will face legal, operational, technological and other costs

and burdens, as discussed further in Part II.  More importantly, these Small Financial

End Users may also face disruptions to their trading of derivatives to hedge other

risks in their portfolios, access certain markets and meet performance targets.

2. Separately Managed Account Clients – Pensions,

Insurance Companies, Pooled Investment Vehicles and

Funds  

An SMA Client is a Small Financial End User such as a pension fund, insurance

company or retail fund that has multiple investment mandates executed through

separate asset managers.  Each separate asset manager has full investment discretion

over a strategy with a specified allocation of assets under management (AUM) and

executes that strategy through an SMA.  The account parameters are set forth in a

separate investment management agreement and any permitted guidelines attached

thereto (the IMA) between the SMA Client and the asset manager, which, among

other things, sets out the scope of the asset manager’s authority to trade derivatives

relative to that asset manager’s specified AUM.    Numerous SMA Clients use

derivatives as part of an overall investment strategy, with FX as the most common

underlier due to the typical need to hedge currency exposure.   

SMA Clients typically invest in different investment strategies through a multitude

of asset managers in order to achieve diversity of investment perspectives, expertise,

and asset allocations and to mitigate concentration risks.   While the number of

strategies and external asset managers employed by every SMA Client or client type

is not the same, large pension funds, endowments, corporations or other

institutional investors may have multiple asset managers trading OTC derivatives

                                                 

23 See Letter Re: Margin Requirements for Non‐Centrally Cleared Derivatives – Final Stages of Initial

Margin Phase‐In (Sept. 12, 2018) at 7, available at https://www.isda.org/a/5evEE/Initial‐Margin‐

Phase‐In‐Implementation‐Joint‐Trade‐Association‐Comments.pdf.    The concepts of “SIMM” and

“GRID” are explained in Part I.C.1.
15

on their behalf and, as principal, will face the same SD and its consolidated affiliates

through each asset manager.24   

While the legal entity that constitutes the SMA Client (e.g., “ABC pension fund” or

“University XYZ Endowment”) will be the same across the ISDA master

agreement(s) and credit support documents entered into with each SD, the SMAs

managed by each asset manager on behalf of the same SMA Client will be

contractually treated as distinct counterparties in uncleared swap transactions,

typically with liability limited (a/k/a ring‐fenced) to the AUM allocated to the

investment mandate.  Moreover, each SMA will typically have its own payment and

margin netting set for uncleared swaps transactions corresponding to each ISDA

entered into by the relevant asset manager.25  As a result, collateral movements for

IM or VM are not netted across the SMA Client’s SMAs, including investment

mandates pursued by the same asset manager, but instead, are covered under a

separate, eligible master netting agreement per each strategy per asset manager.   

Each asset manager has no transparency to, nor control over, any assets or trading

activity for an SMA Client beyond its own AUM.  SMA Clients usually require each

asset manager to treat their individual trading mandates with confidentiality and do

not share information across managers so no single manager would have access to

or control over, all of the SMA Client’s overall assets.  SD counterparties to SMA

Clients are also bound by a duty of confidentiality to not share information across

the asset managers for SMA Clients.  As such, asset managers for a common SMA

Client neither act in concert nor have visibility to the SMA Client’s overall trading

activity.    Consequently, a single asset manager for an SMA Client is unable to

independently calculate or monitor an SMA Client’s aggregate AANA amount, IM

Threshold or MTA across the SMA Client and all of its asset managers (and any

                                                 

24 For example, the Los Angeles County Employees Retirement Association (LACERA) in its 2019

Annual Financial Report provides a list of its investment managers organized by strategy and asset

class. See LACERA 2019 Annual Financial Report at 125, available at:

https://www.lacera.com/investments/Annual_Report/cafr/cafr.pdf.

25 For example, swap dealer A may face ABC pension fund as principal on an ISDA negotiated and

signed on behalf of ABC pension fund by Asset Manager 1 (managing 1% of the assets of the pension),

while facing ABC pension fund on other ISDAs that were separately negotiated and signed by each

of ABC pension fund’s other asset managers.  Alternatively, ABC pension fund may negotiate its own

ISDA with swap dealer A and each asset manager may establish a CSA to manage each payment and

margin netting set separately.  As such, each ISDA or CSA will have its own payment netting set, with

eligible collateral, collateral haircuts and other features negotiated by the relevant asset manager,

with such asset manager responsible for its own collateral movements.
16

consolidated affiliates of the SMA Client). 26    The SMA Client also does not

coordinate or orchestrate the trading activities across its managers as it typically

grants full investment discretion to each manager and as such, does not separately

employ derivatives experts in‐house.  The Commission has recognized this lack of

transparency and control as the basis to grant disaggregation relief in relation to

SMA Clients under other CFTC regulations.27     

3. Seeded Funds

A seeded investment fund is a fund which has received a portion or all of its start‐

up capital from a parent or affiliate (each, a sponsor).  While the sponsor may retain

a passive, equity interest in the seeded fund, neither it nor its commonly

consolidated entities controls or has transparency into the management or trading

of the seeded fund and does not guarantee the obligations of the seeded fund.  The

asset manager retains independent management and investment discretion and has

independent fiduciary duties to the other investors in the fund (if any).  Additionally,

the sponsor’s exposure to the seeded fund is capped at its investment, similar to any

other passive investment in a third party instrument or vehicle.   

Although seeded funds do not independently have uncleared swaps exposures that

pose significant risks to swap counterparties or the financial system, requiring

consolidation with their sponsors for AANA purposes and/or IM Threshold

purposes may result in the appearance of larger exposures that exceed the lower

AANA thresholds of the remaining IM phases and the IM Threshold.  

                                                 

26 These issues were raised at multiple points by the Asset Management Group (AMG) of the

Securities Industry and Financial Markets Association (SIFMA) on behalf of multi‐managed clients.  

See, e.g., Letter from SIFMA AMG to BCBS‐IOSCO Re: Comment Letter on the Second Consultative

Document for the Margin Requirements for Non‐Centrally‐Cleared Derivatives (Mar. 15, 2013), at 5‐

6, available at https://www.sifma.org/resources/submissions/sifma‐amg‐submits‐comments‐to‐the‐

bcbc‐and‐iosco‐on‐margin‐requirements‐for‐non‐centrally‐cleared‐derivatives/ (“[A] single client

may have a number of separate accounts with different managers entering into derivatives on its

behalf.  Unlike the situation of affiliates within a corporate group that can communicate with each

other to ensure they remain below a consolidated group threshold, multiple asset managers of a

separate account client will not know of each other’s existence or have the ability to manage the

derivatives positions, on a group basis, to remain below a common threshold.  Any concerted effort

or shared communications would likely violate the managers’ contractual or fiduciary obligations.  

In addition, a single asset manager may manage multiple accounts for the same separate account

client, with no recourse or risk transfer between the accounts.”).  However, regulators decided not

to make changes to AANA or IM threshold requirements notwithstanding this feedback.

27 See CFTC Regulation § 150.4(b)(4), 17 C.F.R. § 150.4(b)(4) (“Exemption for accounts carried by an

independent account controller”).  
17

In the Volcker Rule, the USPRs recognized that it is common practice to seed funds

(in particular, retail funds) in order to build a track record in performance and

attract third party investors and distributors when they provided an exemption for

seeded funds from having to comply with the requirements of the Volcker Rule

during a three‐year seeding period.28  Similarly, when determining how to calculate

MSE for purposes of defining which entities constitute MSPs, the Commission

declined to attribute the positions of a subsidiary to its parent in the absence of

recourse.29

C. SWAP DEALERS

1. Small Covered Swap Entities

The term “CSE” in the Margin Rules includes CFTC‐registered swap dealers that are

not regulated by a USPR.  For purposes of this report, “Small Covered Swap Entity”

(or Small CSE) refers to a dealer entity that is a CSE and that did not exceed the

AANA thresholds in the prior phases (Phases 1 through 4) and may be subject to IM

requirements in the remaining phases.  According to the CFTC Margin Study, 20

SDs will begin posting and collecting IM in the remaining phases. 30 Under the

Margin Rules, CSEs have the option to calculate the amount of mandatory IM using

either a risk‐based model or the standardized IM table set forth in the Margin Rules

(such method based on the standardized IM table, GRID).  All CSEs already subject

to the IM requirements under Phases 1 through 4 have adopted the ISDA SIMMTM

risk‐based model (SIMM) to calculate IM and received the required regulatory

approval to do so.  By contrast, many Small CSEs intend to choose GRID based on

the type of activity they primarily engage in (e.g., physical commodities) and

customer classification (e.g., end users).  The different IM calculation methodology

                                                 

28 12 C.F.R. §248.12(a)(1); see also https://www.federalreserve.gov/supervisionreg/faq.htm#16.

29 See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security‐Based Swap Dealer,’’ ‘‘Major Swap Participant,’’

‘‘Major Security‐ Based Swap Participant’’ and ‘‘Eligible Contract Participant’’, 77 Fed. Reg. 30,689

(May 23, 2012). Specifically, the Commission noted:

“We no longer take the position that a subsidiary’s swap or security‐based swap position as

a matter of course should be attributed to the subsidiary’s majority‐owner parent.  Instead,

... an entity’s swap or security‐based swap positions in general would be attributed to a

parent, other affiliate or guarantor for the purposes of the major participant analysis to the

extent the counterparties to those positions would have recourse to that other entity in

connection with the position. Positions would not be attributed in the absence of recourse.”

30 See CFTC Margin Study at 5.
18

used by the CSEs in Phases 1 through 4 (i.e., SIMM) compared to the methodology

used by Small CSEs (i.e., GRID) could create discrepancies when they face each other

as counterparties, with GRID potentially requiring a higher amount of IM than

would be required by SIMM.  As discussed in Part II, such discrepancies could cause

transaction disruptions or other delays.

2. Dealers with Limited Bandwidth

Large CSEs are a concentrated segment of the market.  In a recent statement, the

Honorable CFTC Chairman Tarbert noted that the biggest 40 SDs are all currently

subject to IM requirements under the Margin Rules.31  While some post‐financial

reforms have made transactions with large banks less attractive by reducing

counterparty protections,32 market structure has not materially changed to offer a

broader range of alternative counterparties.  One reason for this result is that many

financial end users must transact with entities meeting certain regulatory

counterparty eligibility requirements while other do so due to risk management

standards.33  Some financial end users also take comfort that large CSEs are subject

to heightened capital and regulatory standards and therefore only approve trading

with large CSEs or a smaller subset thereof.    The costs and complex regulatory

                                                 

31 See Statement of the Honorable CFTC Chairman Heath P. Tarbert in Support of Extending Relief

for Initial Margin Requirements for Uncleared Swaps (Mar. 18, 2020), available at:

https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820.

32 For example, under bank supervisory rules adopted in the U.S. in 2017, global systemically

important banks (GSIBs) are prohibited from entering into bilateral swaps and other QFCs that

provide certain cross default rights and transfer restrictions upon the GSIB’s bankruptcy orresolution

proceeding, among other things.  See, e.g., Board of Governors of the Federal Reserve System (Board),

Final Rule, Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking

Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations;

Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions, 82 Fed.

Reg. 42,882 (Sept. 12, 2017).

33 See, e.g., for Irish UCITS, Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1))

(Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (SI No 420 of

2015) (“A responsible person shall only invest assets of the UCITS in an OTC derivative if the

derivative counterparty is within at least one of the following categories: (a) a credit institution that

is within any of the categories set out in Regulation 7; (b) an investment firm authorised in

accordance with MiFID; or (c) a group company of an entity approved as a bank holding company

by the Federal Reserve of the United States of America where that group company is subject to bank

holding company consolidated supervision by the Federal Reserve.”).
19

requirements for registered SDs have also deterred many alternative market

participants from competing in this space.

Given this market concentration and reliance on large CSE, thousands of IM

relationships will have to pass through yet another pinch point in order to comply

with the IM requirements.   

D. CUSTODIANS

As the number of new market participants scoped into Phases 5 and 6 is expected

to be exponentially greater than all prior Phases combined, the demands for third

party custodians and tri‐party collateral agents’ segregation services for regulatory

IM has grown quite dramatically.   

The lead time, however, required to set up the requisite segregated IM accounts is

far longer and more complex than prior Phases.  This is partly attributable to the

extensive due diligence and background, credit and operational checks that need to

be completed on new clients with whom the custodians do not have a prior

relationship and the sheer volume of these new requests.   

Some custodians have indicated that it may take as long as eight to twelve months

to complete the segregation documentation and operational set up for Phase 5, and

have imposed deadlines for initiating the documentation process well before the

commencement of the relevant AANA calculation period.  For end users, especially

SMA Clients who may need to aggregate their AANA exposures for different

calculation periods under different jurisdictional requirements from different asset

managers, this in turn, will further exacerbate the pipeline challenges they face as

they may not determine that they are in scope until a few months prior to the

relevant compliance date, well after the deadlines set by most custodians.
20

II. Remaining Phases of Initial Margin for

Uncleared Swaps: Challenges and

Recommendations

A. ISSUES THAT SHOULD BE ADDRESSED IN IMMEDIATE TERM

(PHASE 5 COMPLIANCE)

1. Separate Compliance for Separately Managed Accounts  

a) Challenge: Because SMAs Are Managed

Independently Without Transparency Across Asset

Managers, a CSE’s Relationship with an SMA Client

May Inadvertently Breach the $50M Regulatory IM

Threshold  

Unique compliance issues arise where a CSE trades with an in‐scope SMA Client

that is advised by multiple asset managers.  A typical example of this is a pension

fund that hires 10 asset managers in order to diversify strategies and expertise; each

asset manager will establish one or more SMAs for the benefit of the SMA Client

and, where authorized to trade swaps, establish trading relationships with CSEs for

the SMA.  Given the limited number of CSEs in the market, each CSE will likely

handle multiple SMAs for the same SMA Client; however, the CSE cannot provide

each asset manager with transparency into all of the SMA Client’s trading as it must

limit information access to the asset manager’s own portion.  As the regulatory IM

Threshold will need to be calculated by the CSE for the SMA Client in the aggregate,

each SMA trading uncleared swaps will contribute towards the regulatory IM

Threshold, but each asset manager will only know the regulatory IM for SMAs it is

managing.   

When an SMA Client comes into scope for the Margin Rules, it is unlikely that all of

that SMA Client’s SMAs will be papered under regulatory IM compliant

documentation at the outset, and given the difficulties for CSEs in monitoring IM

amounts on an intraday basis across multiple SMAs and multiple trading desks at

the CSE, it is possible that the $50M regulatory IM Threshold could be inadvertently

breached.  Once the CSE exceeds $50M in uncollateralized regulatory IM exposure

with an SMA Client across all of its asset managers, the CSE may feel it needs to

interpret the Margin Rules as requiring it to cease trading activity with all asset

managers for such SMA Client—even those acting under regulatory IM compliant

documentation or within agreed regulatory IM sub‐Threshold limits.
21

b) Recommendation: Issue Interpretive Guidance to

Confirm that a CSE Can Continue to Trade with an

SMA Client in the Case of an Inadvertent Breach of

the $50M IM Threshold  

The Margin Subcommittee requests that the Commission confirm that the Margin

Rules be interpreted to allow a CSE to continue to trade with certain SMAs of an

SMA Client in the case of an inadvertent breach of the $50M regulatory IM

Threshold if (i) the asset manager for the SMA is trading under regulatory compliant

IM documentation; or (ii) the CSE and asset manager for the SMA have agreed a

regulatory IM sub‐Threshold and the asset manager for the SMA is trading at or

below the agreed regulatory IM sub‐Threshold, provided that the CSE and the asset

managers of the other SMAs of the SMA Client are no longer continuing to trade

(absent other relief) and are working to reduce the aggregate uncollateralized

regulatory IM exposure of the SMA Client back to at or under $50M.   

Therefore, on occasions where the SMA Client’s uncollateralized regulatory IM

exposure in the aggregate across all SMAs inadvertently exceeds the $50M regulatory

IM Threshold due to one or more SMAs exceeding a regulatory IM sub‐Threshold

without regulatory compliant documentation or trading without a regulatory IM

sub‐Threshold, this interpretation would provide certainty that the impact would

be limited to only those SMAs.  We have included as Appendix C, the application of

this interpretive guidance in various scenarios.  It is important to note that, pursuant

to this interpretive guidance, the uncollateralized regulatory IM exposure for the

SMA Client would promptly be reduced back to at or below $50M due to the

condition that SMAs breaching a regulatory IM sub‐Threshold or trading without a

regulatory IM sub‐Threshold must cease trading until the breach at the CSE and

SMA Client level is cured.  Further, we do not believe this recommendation would

require a rule change, but rather could be implemented as interpretive guidance

from the Commission regarding the application of Margin Rules to multi‐managed

SMA Client relationships.

c) Supporting Rationale for Recommendation

Inadvertent Regulatory IM Threshold breaches may occur.  None of the CSE,

SMA Client or asset manager of an SMA will be able to determine pre‐trade whether

a transaction with an SMA will result in the SMA Client breaching its regulatory IM

Threshold with the CSE.    This outcome is due to a number of market realities,

including:

(i) Asset managers often place a trade order with a CSE for multiple accounts

simultaneously (a bunched order).  CSEs typically do not know at the
22

time of trade whether an SMA is part of the bunched order or how much

of the bunched order will be allocated to the SMA post trade by the asset

manager.   Further, multiple trading desks at a CSE may trade with an

SMA, and there may be legitimate business reasons to prevent different

trading desks from coordinating their activities with a particular SMA

(e.g., confidentiality requirements or information barriers within a CSE).  

While CSEs can and do calculate aggregate regulatory IM exposure at the

SMA Client level, those calculations are typically end of day and cannot

always be done on a real‐time basis.  These issues can prevent a CSE from

knowing, pre‐trade, if a transaction for an SMA will result in regulatory

IM exposure above an agreed regulatory IM sub‐Threshold of the SMA.

(ii) The asset managers of SMAs operate independent of one another and

typically do not have knowledge of the trading strategies or activities of

the other asset managers engaged by the SMA Client.

(iii) The SMA Client does not know real‐time the trades that each asset

manager is executing for its SMAs in order to determine whether its

aggregate regulatory IM Threshold with a CSE will be breached.  Even if

the SMA Client had perfect transparency, SMA Clients typically do not

have the ability to calculate regulatory IM amounts themselves.

CSEs will likely not repaper all SMA trading relationships quickly, or

potentially at all.    Entering into the necessary documentation and taking the

operational steps required to enable regulatory IM compliant trading is a significant

undertaking.  Where an SMA historically has, or is expected to, engage in trading

strategies that will result in large regulatory IM exposures (e.g., $15M or more), a

CSE will likely prioritize putting in place regulatory IM compliant documentation

with that SMA.   

However, not all SMAs will engage in strategies that are expected to produce

meaningful regulatory IM exposure.  For example, the only “swap” activity for some

SMAs may be in Deliverable FX, which will not generate any regulatory IM exposure.  

Further, some SMA asset managers may only trade infrequently and/or in swaps

with small notionals, and therefore only generate small (e.g., <$1M) regulatory IM

exposure.   

For these SMAs, given the low expected regulatory IM usage, a CSE may decide to

monitor and manage the relationship without repapering, with (or in some cases

without) agreeing a regulatory IM sub‐Threshold.  A CSE may not want to allocate

a regulatory IM sub‐Threshold to SMAs with low expected IM usage as that would

allow the CSE to dynamically manage IM exposure across those SMAs over time and
23

would enable the CSE and SMA Client to make better use of the aggregate regulatory

IM Threshold of $50M.   

Even where a CSE decides to repaper SMA relationships, it may prioritize those

SMAs which are heavier users of swaps—meaning some SMAs will take longer than

others to complete documentation.

As a result, there will likely be at least some period of time where not all SMAs are

repapered and SMAs may be competing for the same CSE and custodian resources.   

Rationale for relief. If an SMA Client’s aggregate regulatory IM exposure exceeds

the regulatory IM Threshold of $50M, a CSE may interpret requirements

conservatively in the absence of regulatory confirmation such that the CSA may feel

that any additional transactions, even those with SMAs that have repapered their

relationships or those with SMAs who are operating under their agreed regulatory

IM sub‐Threshold, cannot occur because those transactions could create additional

uncollateralized regulatory IM exposure at the SMA Client level.

Without relief, SMAs trading with regulatory IM compliant documentation and/or

SMAs acting within their regulatory IM sub‐Threshold may unexpectedly have

trading disruptions due to the activities of a different asset manager who exceeds its

regulatory IM sub‐Threshold or who has not completed the documentation

requirements of the Margin Rules.  Provided the CSE is promptly addressing the

issue by working with the SMA Client and/or relevant SMA asset manager to

remediate the problematic trades, it would be inconsistent with the purpose of the

Margin Rules to interrupt trading for SMAs that are compliant with requirements.34     

2. Collateral Eligibility Requirements for Money Market

Funds

a) Challenge:  Restrictions on the Eligibility of Money

Market Funds as IM Collateral Broadly Disqualify

Most Money Market Funds

The Margin Rules permit CSEs and covered counterparties to use MMFs as

regulatory IM, provided that the MMF holds only U.S. Treasuries (or securities

unconditionally guaranteed by the U.S. Treasury), and cash funds denominated in

U.S. dollars or similar quality government securities.35  However, the Margin Rules

                                                 

34 See Appendix C for examples.

35 See CFTC Regulation § 23.156(a)(1)(ix)(B), 17 C.F.R. § 23.156(a)(1)(ix)(B) (“Securities denominated

in a common currency and issued by, or fully guaranteed as to the payment of principal and interest
24

significantly restrict the use of MMFs as eligible collateral by requiring that “[a]ssets

of the fund may not be transferred through securities lending, securities borrowing,

repurchase agreements, reverse repurchase agreements or other similar means . . . .”36   

Nearly all U.S. MMFs engage in some form of these activities, or are authorized to

do so, and therefore these limitations would severely reduce the number of MMFs

that would qualify as IM under the Margin Rules to less than a handful worldwide.  

One leading custodial bank researched all the U.S. MMFs currently available to its

institutional clients in the U.S. and found only four that would meet these new

requirements.  Additionally, the industry is not aware of a single MMF that would

qualify as eligible IM under the CFTC’s Margin Rules, the USPRs’ uncleared swap

margin rules (the USPR Margin Rules), 37 and the European Union’s (EU)

uncleared swap margin rules (the EU Margin Rules).38  As a result, absent any

action or relief by the Commission:   

 this efficient form of IM widely used by financial end users may be severely

undermined and unduly disrupted (especially for financial end users who

combine voluntary IM on legacy transactions with mandatory IM on new in‐

scope trades);

 any MMF IM pledged to CSEs may be concentrated in only a few eligible

MMFs (which presents other systemic risks);

                                                 

by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk

weight under the capital rules applicable to swap dealers subject to regulation by a prudential

regulator, and immediately‐available cash funds denominated in the same currency...”); see also

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed.

Reg. 636, 701 (Jan. 6, 2016).

36 See § 23.156(a)(1)(ix)(C), 17 C.F.R. § 23.156(a)(1)(ix)(C) (emphasis added); see also 12 C.F.R 45.6

(Comptroller of Currency eligible collateral); 12 C.F.R. 45.7 (Comptroller of Currency segregation of

collateral); 12 C.F.R. 237.6 (Federal Reserve eligible collateral); 12 C.F.R. 237.7 (Federal Reserve

segregation of collateral); 12 CFR 349.6 (FDIC eligible collateral) 12 C.F.R. § 349.7 (FDIC segregation

of collateral); 12 C.R.F. 624.6 (FCA eligible collateral); 12 C.F.R. 624.7 (FCA segregation of collateral);

12 C.F.R. 1221.6 (FHFA eligible collateral); 12 C.F.R. 1221.7 (FHFA segregation of collateral).  

37  See Margin and Capital Requirements for Covered Swap Entities, 80 Fed. Reg. 74,840 (Nov. 30,

2015).

38  See Commission Delegated Regulation No. 2016/2251 of October 4, 2016 Supplementing Regulation

(EU) No 648/2012 of the European Parliament and of the Council of July 4, 2012 on OTC Derivatives,

Central Counterparties and Trade Repositories with Regard to Regulatory Technical Standards for

Risk‐Mitigation Techniques for OTC Derivative Contracts Not Cleared by a Central Counterparty (as

corrected by Commission Delegated Regulation (EU) 2017/323 of January 20, 2017).  
25

 financial end users may be forced to use other less efficient or ideal forms of

non‐cash IM collateral (thus, increasing costs, settlement delays, tracking

errors and operational burdens); and  

 absent the use of substituted compliance or any further actions by other

regulators, financial end users may be forced to use different MMFs or other

forms of eligible IM when trading with U.S. and EU CSEs and also potentially

causing asset managers to be forced to break up block trades across U.S. and

non‐U.S. clients with similar strategies when trading with a single CSE

(applying different margin calculations) due to pricing differentials as a result

of the different form of IM being pledged.      

b) Recommendation:    Eliminate Undue Restrictions

on Eligibility of Money Market Funds

For Phases 5 and 6 and beyond, the Margin Subcommittee recommends eliminating

the undue restrictions on MMFs’ activities under subparagraph (C) of Section

23.156(a)(ix) of the Margin Rules.  This would allow for a broader selection of MMFs

that are eligible for regulatory IM and thereby, mitigate any concentration risks and

permit the uninterrupted use of existing MMFs by financial end users for legacy and

new in‐scope transactions.  

c) Supporting Rationale for Recommendation

Under the Margin Rules, the Commission highlighted that the restrictions on a

MMF’s use of securities lending, securities borrowing, reverse repurchase

agreements, or similar arrangements was to “ensure consistency with the

prohibition under the final rule against custodian rehypothecation of initial margin

collateral”.39  However, in the MMF sweep arrangements, under no circumstances

does the pledgor’s custodian have any right to rehypothecate, reuse the IM collateral

or take any other independent actions with respect to the pledged MMF shares.  

Instead, the CSE and financial end user agree upfront in the collateral

documentation to the list of eligible MMFs and any associated haircuts, as pledgor

any cash sweep into a MMF is instructed by the financial end user or its manager

and absent any default, any transfers into and out of the collateral account by the

custodian is instructed by the financial end user and agreed to by the CSE (as

secured party).         

                                                 

39  See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81

Fed. Reg. 636, 666 (Jan. 6, 2016).
26

Since the financial crisis of 2008, buy‐side market participants have steadily

increased the use of third party custodians

to segregate voluntary IM away from SD

counterparties.    Also, as margin transfer

deadlines continue to contract from a

regulatory perspective, there has been a

growing use of MMFs as a secure and

efficient alternative to cash margin.  MMFs

are highly regulated short‐term

investment vehicles that are subject to

liquidity and diversification requirements

under U.S. and European MMF

regulations, such as SEC Rule 2a‐7.  Many

custodians offer money market sweep

programs that allow buy‐side entities,

asset managers and end‐user clients the

continued operational ease of pledging

cash40 into segregated collateral accounts and then instructing the custodian to

sweep such cash into MMF shares that are pledged as collateral to SD counterparties.    

MMFs invest predominantly in treasuries and other high quality, short‐term

government securities.  The Commission has recognized such MMFs as safe, high

quality investments, such as under CFTC Regulation 1.25 which permits the

investment of customer margin by futures commission merchants (FCMs) without

similar restrictions.41   

These sweep arrangements afford buy‐side market participants with the ability to

timely and efficiently meet margin calls in compressed timeframes first in cash,

without settlement delays or having traders (outside of collateral management

operations) constantly buying or selling treasuries or other non‐cash assets or

dealing with odd lot sizes, transaction costs and other settlement issues.  

Additionally, the sweep into MMFs also allows buy‐side market participants to

                                                 

40 According to the latest ISDA Margin Survey, 73% of derivatives collateral posted is cash.  ISDA YE

2019 Margin Survey at 10.

41 Pursuant to CFTC Regulation 1.25(b)(3)(i)(E) and (c), an MMF is a permissible investment without

limits for customer funds by an FCM so long as it meets certain requirements and does not

voluntarily elect to be subject to liquidity fees or redemption restrictions.  See also CFTC No‐Action

Letter No. 16‐68 (Aug. 8, 2016).  Additionally, CFTC Regulation 1.25 specifically permits, subject to

certain conditions, FCMs to buy and sell otherwise permitted investments pursuant to repurchase

and reverse repurchase agreements.

Figure 2. Key reasons for enabling use of MMFs as 

eligible collateral 

1. Cash settlement process is efficient, 

fungible, and meets compressed margin 

transfer timeframes. Firms may not have 

ready access to eligible non-cash 

collateral. 

2. Firms may not have the optimal 

infrastructure and/or capacity to efficiently 

buy and transfer other eligible n o n -

c a s h collateral. 

3. Transformation outside the custodian can 

be costly for firms with less scale. 

4. Holding securities specifically in 

anticipation of collateral calls creates a 

drag on performance, decreasing 

investment performance for end investors 

and increasing tracking errors. 

5. There are situations where collateral 

transformation is not possible or practical 

prior to posting without ready access to 

MMFs e.g., due to reinvestment/custodian

cut‐off times.
27

effectively mitigate insolvency risks to the custodians as non‐cash collateral would

not be consolidated with the custodian’s balance sheet or estate from a

supplemental leverage ratio and bankruptcy perspective.  Finally, the use of MMFs

may avoid risk of potential negative interest rate charges that may be charged by

custodian banks on cash collateral.  

Most multi‐billion dollar MMFs available to the institutional marketplace use

securities lending, repurchase agreements, reverse repurchase agreements, and

similar instruments in order to earn returns on cash and other high quality assets,

avoid any cash drag on performance, diversify its investments and mitigate its

potential exposure to its custodian’s insolvency and any consolidation issues with

respect to any cash held at the custodian.  The MMF’s asset manager, as its fiduciary,

would determine the types of investments and transactions would be in the best

interest of the MMF and its investors.    Neither the buy‐side market participant

pledging MMF shares as eligible IM collateral nor its SD counterparty has any

transparency or control as to the trading activities or investments of the MMF.

Figure 3

Additionally, over the past few years, there have been unusual strains in the Treasury

repo market which has led the Federal Reserve to take additional measures “to
28

mitigate the risk of money market pressures”. 42    The vast majority of U.S.

government MMFS engage in prudent repo, reverse repo, and securities lending.  If

the Margin Rules require financial end users to move 10s of billions in collateral out

of those existing MMFs and into cash or the few eligible MMFs, it could create new

and continuing trading and liquidity disruptions and concentration risks in this

critical market. 43   

To the extent that the CFTC (and USPRs) were to adopt the Margin Subcommittee’s

recommendation and eliminate the undue restrictions on the underlying activities

of eligible MMFs, there are still further complications for financial end users that

are pledging IM to both U.S. and EU CSEs under different margin regimes as well as

for asset managers trading in blocks across U.S. and EU clients with a single CSE

that may apply different margin rules.44  Absent measures by the EU regulators to

also eliminate undue restrictions and operationally challenging conditions on the

use of MMFs, to our knowledge, there are no MMFs that are eligible under both the

EU Margin Rules and either the CFTC’s Margin Rules or the USPR Margin Rules.  As

a result, these restrictions significantly decrease the viable options for eligible

collateral and efficient collateral management considering settlement and transfer

timing limitations and global fragmentation.

3. Seeded Funds – Scoping Issue  

a) Challenge: Seeded Funds Unduly Come in Scope

Due to Consolidation with Passive Sponsors

Under the Margin Rules, seeded funds are required to consolidate their AANA

exposures with their passive sponsors (and their consolidated affiliates) that may

have MSE and therefore may have to post regulatory IM during the critical time in

which they are trying to establish a performance track record.    This puts these

seeded funds at a disadvantage to their global and domestic competitors who are

not similarly burdened under other margin regimes.

                                                 

42 See Board of Governors of the Federal Reserve System, Statement Regarding Monetary Policy

Implementation (Oct. 11, 2019), available at

https://www.federalreserve.gov/newsevents/pressreleases/monetary20191011a.htm.  

43 The shift in margin is expected for market participants who will not preserve legacy netting sets

but instead combine existing trades with voluntary IM with new in‐scope transactions.

44 For example, an EU domiciled CSE may apply the EU Margin Rules when trading with EU

domiciled clients, but may apply the CFTC’s Margin Rules when trading with U.S. Persons.
29

b) Recommendation: Provide Exemption from

Consolidation of Seeded Funds with Sponsors for

Purposes of AANA Calculation

For Phases 5 and 6 and beyond, the Margin Subcommittee recommends that the

Commission publish a time‐limited no‐action letter to exempt seeded investment

funds from having to post IM until the Commission can adopt the following

language via rule making:  

“Investment funds that are managed by an investment advisor are considered

distinct entities that are treated separately when applying the AANA and IM

Threshold as long as the funds are distinct legal entities that are not collateralized

by or are otherwise guaranteed or supported by, investment funds and other

sponsors or the investment advisor in the event of fund insolvency or bankruptcy

and shall not be considered to be an "affiliate" or"margin affiliate" of any other entity

for a period of three years after such investment fund commences trading.”  

This language is a verbatim restatement of the BCBS‐IOSCO final statement on

margin requirements for non‐centrally cleared derivatives (which specifically

excluded all investment funds that are not collateralized or otherwise guaranteed or

supported by an affiliate to be excluded from the definition of a group for purposes

of calculating the group’s AANA) except for the addition of the time limited seeding

period at the end of the BCBS‐IOSCO language: “for a period of three years after

such investment fund commences trading”.45

c) Supporting Rationale for Recommendation

Global Harmonization. This relief would put U.S. seeded funds on a level playing

field globally with non‐U.S. seeded funds that are not subject to the same

consolidation requirements under other margin regimes.    Regulators in other

jurisdictions, including the EU, Japan, Australia and Canada, have fully adopted the

BCBS‐IOSCO’s investment fund exception without similar limitations. 46 The

                                                 

45 See Footnote 10 to Requirement 2.2 of the BCBS‐IOSCO framework, available at

https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.  

46 The EU adopted this approach via Paragraph 13 of Commission Delegated Regulation No. 2016/2251

of October 4, 2016 Supplementing Regulation (EU) No 648/2012 of the European Parliament and of

the Council of July 4, 2012 on OTC Derivatives, Central Counterparties and Trade Repositories with

Regard to Regulatory Technical Standards for Risk‐Mitigation Techniques for OTC Derivative

Contracts Not Cleared by a Central Counterparty, 2016 O.J. L340/11, available at https://eur‐

lex.europa.eu/legal‐content/EN/TXT/PDF/?uri=CELEX:32016R2251&from=EN.  Canada adopted this

approach via Margin Requirements for Non‐Centrally Cleared Derivatives by the Office of the

Superintendent of Financial Institutions of Canada effective as of June 2017, available at
30

Margin Subcommittee is not asking for the Commission to adopt BCBS/IOSCO’s

investment fund exemption with no time limit.  Instead, we are asking for a time‐

limited exemption for seeded funds during a three year seeding period, typically

after which, seeded funds have established a sufficient performance track record to

draw in distributors and third party investors and are no longer consolidated with

their sponsor or affiliates for AANA purposes.   

To the extent that the Commission does not address this issue, U.S. CSEs may also

be exposed to a reduction in liquidity and trading disruptions as EU seeded funds

may intentionally limit their trading activities to non‐U.S. CSEs to take advantage

of the EU consolidation exemption.   

Consistency with Prior Relief on Seeded Funds.  The requested relief is consistent

with the treatment of seeded funds by the Federal Reserve and the Commission

under the Volcker Rule.  In answers to frequently asked questions published on July

16, 2015, the Federal Reserve elected to exclude seeded funds from the requirements

of the Volcker Rule during a three year seeding period recognizing the importance

of allowing seeded funds time for the “...testing the fund's investment strategy,

establishing a track record of the fund's performance for marketing purposes, and

attempting to distribute the fund's shares.” 47  

This relief would be also consistent with the Commission’s approach to MSP

calculations.  When adopting the MSP calculations, the Commission declined to

attribute the positions of a subsidiary to its parent in the absence of any contractual

recourse.  Specifically, the Commission noted:

“We no longer take the position that a subsidiary’s swap or security‐based swap

position as a matter of course should be attributed to the subsidiary’s majority‐

owner parent.    Instead, ... an entity’s swap or security‐based swap positions in

general would be attributed to a parent, other affiliate or guarantor for the purposes

                                                 

http://www.osfi‐bsif.gc.ca/Eng/Docs/e22.pdf.  The JFSA published the final Japanese margin rules on

March 31, 2016 by way of amendments to the Cabinet Office Ordinance concerning Financial

Instruments Business, etc. as one of the subordinate regulations of the Financial Instruments and

Exchange Act.  The Australian Prudential Regulation Authority (APRA) adopted the BCBS‐IOSCO

framework through the Banking, Insurance, Life Insurance and Superannuation (prudential

standard) determination No. 1 of 2017 Standard CPS 226 Margining and risk mitigation for non‐

centrally cleared derivatives.  

47 See Board of Governors of the Federal Reserve System, Volcker Rule FAQ, Foreign Public Fund

Seeding Vehicles (June 10, 2014), available at  

https://www.federalreserve.gov/supervisionreg/faq.htm#5.
31

of the major participant analysis to the extent the counterparties to those positions

would have recourse to that other entity in connection with the position. Positions

would not be attributed in the absence of recourse.”48

Seeded Funds Do Not Pose Systemic Risk.  Seeded funds are typically capitalized

with $50‐100M and have little notional exposure (and are, for the purposes of the

relief being sought, not guaranteed by their sponsor/investment adviser).  

Additionally, swap dealer counterparties to seeded funds generally do not have any

recourse to a seeded fund’s sponsor or investment adviser.

An informal sampling in 2018 of members of SIFMA AMG and the American Council

of Life Insurers identified that respondents had a total of 33 seeded funds that will

be in scope due to their derivatives notional exposures being consolidated with

entities with MSE.  Absent consolidation with their sponsors, these 33 seeded funds

had derivatives with a combined gross notional amount of $938M relative to $2.7B

of total net asset value, and the average gross notional exposure for each seeded

fund was $32M.  Therefore, none of these seeded funds would be in scope under the

Margin Rules absent the consolidation requirements.  Even though these seeded

funds do not pose the type of systemic risk that the Commission, BCBS‐IOSCO and

other global regulators are properly attempting to mitigate with the implementation

of the IM regime, these seeded funds will have to pledge IM under the U.S. margin

regime as if they did pose a systemic risk to the financial system.

As an odd result, the obligation to pledge regulatory IM will either negatively impact

a seeded fund’s performance or inhibit its ability to trade (if CSEs decline to repaper

and exchange IM with the seeded fund) which defeats the whole purpose of the

original seed capital.  In addition, once third party capital is invested in a seeded

fund and it is no longer required to consolidate with its sponsor or its affiliates, such

seeded fund will grow larger and have more of a market impact on an individual

basis, but since it will no longer be affiliates of an entity that has MSE, it will no

longer exceed the AANA thresholds or potentially have to pledge IM.  

Existing Risk Mitigation Applicable to Seeded Funds.    Seeded funds remain

subject to the VM requirements of the Margin Rules and will still be required to post

at a minimum the required regulatory VM collateral on a daily basis, thus mitigating

any risk such funds might pose to the overall financial system.

                                                 

48 Further Definition of ‘‘Swap Dealer,’’ ‘‘Security‐Based Swap Dealer,’’ ‘‘Major Swap Participant,’’

‘‘Major Security‐ Based Swap Participant’’ and ‘‘Eligible Contract Participant’’, 77 Fed. Reg. 30,689

(May 23, 2012).
32

Also, seeded funds that trade derivatives are commodity pools that will be subject

to the Commission’s jurisdiction.  Most seeded funds will rely on the de minimis

exemptions to registration as a commodity pool provided by Rules 4.13(a)(3) or 4.5.  

If a seeded fund were to breach the limits set forth in those exemptions, then such

seeded fund would be required to register with the Commission and provide

additional reporting and transparency to the Commission with respect to its

derivative positions.   

Additionally, retail funds such as U.S. registered investment companies and

European funds known as Undertakings for the Collective Investment in

Transferable Securities (UCITS) and sociétés d'investissement à capital variable

(SICAVs) are highly regulated entities subject to other regulatory regimes that limit

their use of leverage and derivative instruments, which further prevent these types

of seeded funds from generating systemic risk.  

Performance Drag and Operational Costs.  While the amount of IM posted by

any specific seeded fund is expected to be negligible as compared to the overall size

of the market for uncleared OTC derivatives, such amounts may be material to a

fund in its start‐up phase and result in performance drag to investors.   

Performance drag will be especially felt in seeded funds that will not otherwise hold

assets that are eligible collateral—with one day posting requirements this will

generally take the form of a larger cash reserve (which cannot be used in the fund’s

investment thesis), but could also involve transformation costs of changing assets

held by the fund that are ineligible for IM to IM‐eligible assets.   

Equity‐focused funds, emerging markets funds and others may be especially hard

hit.    Smaller funds that are less able to spread set‐up and maintenance costs of

required margin accounts will also be more impacted than larger seeded funds.

In addition to drag from holding additional cash or transforming assets to assets

that are eligible for IM, the funds will incur costs of setting up and maintaining

margin accounts, hiring a custodian to handle IM, and other costs as a result of being

required to post IM to CSE counterparties.    

Such funds will also need to negotiate and complete complex margin

documentation and develop compliance infrastructure to handle the posting and

receiving IM at a cost not commensurate with their risk to the financial system.   

Because of their small size, seeded funds are likely to encounter documentation

issues as counterparties and custodians address similar documentation across their
33

client base—faced with a bottleneck, counterparties and custodians are likely to

prioritize larger AUM clients.

Unlike larger entities that are not consolidated, seeded funds may not be able to

take advantage of the $50M IM Threshold in the Margin Rules, or such relief may be

limited, because of potential fiduciary conflicts or confidentiality wall issues as

between the fund, the investment adviser, the ultimate sponsor/parent and other

affiliates of the sponsor/parent.  This may be particularly acute for life insurance

companies with fiduciary duties to mutualized policyholders or shareholders.

Some companies that may be consolidated for financial purposes are entirely

distinct legally and operationally.  As a result, they may not have the ability to share

the AANA exposure information required to manage the $50M IM Threshold. For

example: determining an equitable division of the IM Threshold relief between the

ultimate parent’s hedging activity and the seeded fund’s derivatives activity (in a list

of funds that will constantly change) may be difficult to determine (or monitor) as

the parent owes fiduciary duties to one group, while the fund investment adviser

may owe them to different groups of investors in its various seeded funds.  

Additionally, there could be regulatory wall issues that would not permit any trade

level information to be shared between a seeded fund and its sponsor/parent and

other affiliates.  For example, an insurance company making a seed investment in a

fund would not share the fund’s trading activity with an affiliate trading swaps to

hedge general insurance risk.  

Funds that are variable interest entities may consolidate at a threshold of 10%

ownership, which means fund managers need to look not just their own affiliated

entity consolidation issues, but whether any investor can consolidate the fund on

its financial statements, in case that entity has MSE.

Domestic Harmonization.  If a fund sponsor/seeder does not have MSE, then any

fund it sponsors/seeds will not have to post IM or bear the operational costs of

establishing and maintaining the infrastructure necessary to post and collect IM

provided that the seeded fund is not otherwise consolidated with affiliates that

collectively have MSE.  A seeded fund that does have to post IM and bear these

operational cost will be significantly disadvantaged vis‐à‐vis its domestic

competitors which creates an uneven playing field for seeded funds here in the

United States.  
34

4. Small Covered Swap Entities and IM Calculation

a) Challenge:  Small CSEs Using GRID May Not Be Able

to Reconcile IM Calculations with CSE

Counterparties Using SIMM Model

Under the Margin Rules, CSEs have the option to use either a quantitative IM model,

like the SIMM, or GRID to calculate the initial margin amount for the purpose of

collecting or posting IM and to determine whether the $50M IM Threshold has been

exceeded.  Many Phases 5 and 6 Small CSEs coming into compliance with the IM

requirements have elected or intend to elect to utilize GRID.  Due to the differing

nature of the risk calculations between the GRID and the SIMM approach widely

used by the larger CSEs, this may create potential barriers to Phase 5 and 6 Small

CSEs from being able to engage in swaps transactions.

b) Recommendation:  Remove Barriers for Small CSEs

to Rely on Their CSE Counterparty’s SIMM

Calculations

The Margin Subcommittee recommends amending the Margin Rules prior to the

compliance date for Phase 5 by adding new subparagraph (iii) to CFTC Regulation

23.154(a)(1) as follows:

§ 23.154(a)(1)(iii) For those covered swaps transactions where a covered swap

entity having elected the table‐based method pursuant to § 23.154(c) is

transacting with a covered counterparty which uses a risk model approved

pursuant to § 23.154(b) or approved by a Prudential Regulator, the parties

may agree to use the IM calculation generated by the risk model subject to

the following requirements:  

A. The parties must agree in writing that such IM calculation will be

used to determine the amount of IM to be collected from the

covered counterparty, and to determine whether the $50 million

IM Threshold amount has been exceeded, requiring compliance

with the documentation requirements pursuant to §§ 23.157 and

23.158; and

B. The parties must agree in writing that the IM calculation will be

provided to the covered swap entity in such a manner and

timeframe that would allow the covered swap entity to comply

with § 23.152.  

To the extent that the Commission is unable to amend the Margin Rules prior to

September 1, 2020, we respectfully request that prior to such date the Commission

issue interpretative guidance or an extension of the relief provided to Cargill
35

Incorporated pursuant to the CFTC’s No‐Action Letter dated December 19, 2019

(Cargill NAL), to all CSEs, including all Small CSEs using GRID.  Additionally, for

the reasons specified below, we respectfully request that the relief should apply to

all swaps transactions, not just those entered into for the purpose of hedging.  

c) Supporting Rationale for Recommendation

As noted in Part I of this report, a number of Small CSEs will be phased into the

Margin Rules during Phases 5 and 6.  Under the Margin Rules, CSEs have the option

to calculate IM by using either (1) an approved risk‐based model like SIMM, or (2)

GRID.  The SIMM calculates IM as the potential future exposure of a swap or a

netting set of swaps which allows for a more finely calibrated approach.  The GRID

specifies the minimum IM that must be posted and collected as a percentage of a

swap’s notional amount, which varies based on the asset class and currency of the

swap.  In most cases, the SIMM calculates a lower IM number than the GRID, which

is based on a notional value calculation.   

The GRID is simpler to administer and does not require implementing more

complicated systems.   As a result, Small CSEs in Phases 5 and 6 will be using a

different methodology to calculate IM from the CSEs in Phases 1 through 4.   A

primary concern is that GRID may result in the calculation of a much larger IM

amount.  As a result, CSE counterparties may decline to trade with Small CSEs if

they are required to post a higher amount of IM than would be required by SIMM.  

This may have the additional consequence of disproportionately impacting liquidity

in certain markets where there are fewer swap providers. Further, even if the CSE

counterparty is willing to post a higher IM amount in order to transact with the

Small CSE, this will result in higher transaction costs.    

To illustrate, Phase 5 and 6 CSEs are already seeing how the GRID calculation of IM

has the potential to cause an acceleration of reaching the $50M IM Threshold for

compliance with the IM documentation requirements.  If allowed to proceed, the

limited bandwidth of custodians and larger CSEs (discussed above) would become

further congested. These larger CSEs and custodians are dealing with setting up

thousands of counterparties over the next 2 years during Phases 5 and 6.    Each

covered counterparty margin pair will require approximately 5‐10

documents/agreements collectively.    If an entity is not close to the $50M IM

Threshold using SIMM, given the number of covered counterparties coming into

compliance in Phases 5 and 6, it is unlikely they will be prioritized by larger CSEs

and custodians to begin exchanging documents for onboarding.
36

One example of the stark differential in the calculation of IM between GRID and

SIMM is the “Municipal Prepayment Transactions.”49   Using GRID to calculate IM

means that the IM obligation will likely be based on a notional value totaling a

twenty‐to‐thirty‐year exposure, which would be much larger than the IM risk

valuation of the same transaction using SIMM and arguably inconsistent with the

purpose and intent of IM.  If a Small CSE using GRID must calculate IM based on a

twenty‐year notional value calculation, CSE counterparties in Phases 1 through 4

will no longer participate in these types of transactions with the Small CSE or if they

do, the transaction will result in significantly higher transaction costs.  

Extending the requested relief to non‐hedge transactions would not curtail the

Small CSE’s obligation to operate with the parameters of its risk management

program under 23.600.   All CSEs will continue to be required to have in place robust

risk management programs as outlined by the CFTC and reviewed regularly by the

National Futures Association (NFA) that set forth Value‐at‐Risk (VaR) limits

applicable to all transactions to control systemic risk, and all transactions between

CSEs are already subject to VM requirements.  Additionally, the requested relief will

result in an exchange of an appropriate level of IM between CSEs, even if it is based

on one of the covered counterparty’s ISDA SIMM calculation.   

Operationally, for many CSEs it is extremely difficult to separate hedging from

dealing on a transaction‐by‐transaction basis since CSEs often manage hedging on

a portfolio basis and transact both hedging and dealing swaps under a single ISDA

Master Agreement.    Therefore, limiting the relief to hedge transactions may

diminish its utility for Small CSEs.  As a result, this restriction has the potential to

remove liquidity from the market for the reasons stated above.    The CFTC has

recognized that liquidity in the commodities markets is essential to allow market

participants to hedge their commercial risk, so any measure that inadvertently

harms liquidity should be avoided, if possible.  

                                                 

49 Municipal Prepayment Transactions involve matched commodity swaps used to hedge a

municipality’s prepayment for the supply of long‐term (e.g., 20‐30 year) natural gas or electricity

requirements.    The matched swaps allow the parties to hedge their respective exposures to the

changing price of the natural gas or electricity underlying the transaction with a single CSE.  They

expressly contain no mark‐to‐market credit exposure to participants upon either early termination

or replacement events.  The matched swaps thus economically offset each other in every way.  Under

the structure of the Municipal Prepayment Transactions, neither swap will survive the termination

of the prepayment transaction, and the prepayment transaction will not survive if both commodity

swaps do not remain in place.   Accordingly, there is no counterparty, safety and soundness, or

systemic risk associated with the matched commodity swaps in Municipal Prepayment Transactions.
37

5. Documentation and Account Set‐Up – Industry

Implementation Issue

a) Challenge: Pipeline Congestion and Other

Obstacles Pose Delays for Completion of IM

Documentation and Account Set‐Up and May

Result in Trading Disruptions and Loss of Hedges

Financial end users and Small CSEs that will be in scope for Phases 5 and 6 and

beyond are facing various challenges to completing documentation and operational

steps necessary to comply with the Margin Rules before the relevant compliance

dates and therefore, may be shut out of trading of derivatives.   

Even if the CFTC (and other global regulators) grant an extension of the Phase 5 and

Phase 6 compliance dates in accordance with the BCBS‐IOSCO recommendation for

relief related to the COVID‐19 pandemic, market participants coming into scope for

any newly scheduled Phase 5 and Phase 6 (and beyond) will still face pipeline issues

and other obstacles that may delay getting IM compliant documentation and

accounts in place.  This extension of the compliance dates would not resolve these

pipeline issues as the primary purpose of the extension is to give market participants

the necessary time to mitigate the effects of the COVID‐19 crisis, which has caused

extreme market volatility and uncertainty.  During the pandemic, firms have had to

redeploy depleting resources to deal with market closures, trading suspensions,

thinning liquidity and wider bid‐ask offers, among other issues.    With such

resources appropriately redirected towards risk management and business

continuity as well as covering for colleagues who are sick or caring for family

members who are ill, counterparties and custodians will likely not be able to make

material progress on IM documentation and account set up, and the same

congestion issues will likely remain once implementation is expected under the new

compliance dates.  The extensions also will not solve for the compressed timeframes

between the end of the AANA calculation periods and the relevant compliance dates.   

In other words, the extension of Phase 5 and Phase 6 compliance dates—while

extremely helpful and necessary in light of the havoc being wreaked by COVID‐19

on the global financial landscape—will not afford additional time to resolve the

various margin implementation issues faced by the industry even before the COVID‐

19 crisis, but instead will bring those issues to a head at a later date.

b) Recommendation:   Provide 6‐Month Forbearance

Period

The Margin Subcommittee requests that the Commission grant each CSE (and its

consolidated affiliates) to financial end user (and its consolidated affiliates)/Small
38

CSE relationship, a one‐time, 6‐month grace period for compliance with the Margin

Rules, commencing from the day the regulatory IM amount for the relationship

exceeds the $50M IM Threshold.  We would ask that such grace period:  

1) Be applicable to all types of financial end users and Small CSEs, subject to

certain potential modifications in the context of SMAs, as will be discussed

further in Part II.B.2;

2) Is time limited to Phases 5 and 6, and to be revisited for future compliance

dates based on the number of accounts likely to be in scope for such date and

the experience of market participants in Phases 5 and 6;  

3) Be conditioned on the parties coming into compliance with the Margin Rules

as soon as they are able to do so within the 6‐month grace period; and

4) Could be provided immediately in the form of no‐action relief or a statement

of forbearance from enforcement against the CSE.

c) Supporting Rationale for Recommendation

The grace period is critical for market participants in Phases 5 and 6 who are

urgently trying to enter into regulatory IM compliant documentation and be

operationally ready by the applicable compliance date given the various challenges

they currently face, that include, but are not limited to:    

1. Account opening, document negotiation and operational set up for an in‐

scope relationship is estimated to take as long as 12‐18 months leading up to

a compliance date due to the large number of relationships coming into

scope for Phases 5 and 6 and potentially thereafter as well.  This includes, but

is not limited to:

a. Negotiating amendments or new ISDA Master Agreements and Credit

Support Annexes (CSAs) and agreeing, as needed, to how regulatory

IM will overlay with existing Independent Amount margin

requirements and whether legacy transactions will be margined

together or separately from new in‐scope transactions;  

b. Negotiating allocations of the IM Thresholds with each CSE for each

SMA client;

c. Establishing electronic communications channels and procedures

among the counterparties and custodians;

d. Agreeing to the relevant jurisdictional margin requirements and

margin methodology that apply to the different counterparty

combinations and asset classes; and

e. Completing the necessary IM testing, file exchanges and

reconciliations and operational set‐ups among counterparties,

custodians and any vendor platforms.
39

2. The AANA measurement period for Phase 5 is March, April and May of 2020

(2021 under the BCBS/IOSCO recommendations), which means that a

financial end user will not know with certainty that it is in scope for Phase 5

until the end of May.  However, some custodians have established deadlines

for document negotiations to be completed that are well in advance of the

end of May if a relationship is to be operationally ready by September 1, 2020

(or a delayed September 1, 2021).  This is particularly challenging for SMA

clients who need to aggregate data for the AANA period (not only under the

CFTC’s rules, but across all relevant jurisdictions) from various managers in

order to determine if they have exceeded the AANA thresholds and will be

required to exchange mandatory IM.

3. Some market participants are experiencing difficulty getting engagement

from counterparties and/or custodians to start the documentation process

for a variety of reasons such as low estimated SIMM numbers, unknown

AANA numbers, or the mix of instruments traded (i.e., predominantly FX

forwards which are not collateralized) resulting in de‐prioritization of a

relationship for repapering.

4. The template account control agreements with custodians to segregate IM

(Account Control Agreements) to be used from Phase 5 for various

custodial platforms, were only recently finalized by custodians and some

templates are still under review by industry working groups as of April 2020.  

While Account Control Agreements were used by market participants in the

prior phases, new templates are being drafted specifically for use in Phases 5

and beyond to enable market participants to negotiate those agreements in

an efficient manner with end users’ custodians who may not have been active

in prior Phases.

5. Some CSEs prefer to use certain custodial platforms for their posting leg, but

those platforms have only been used by CSEs.    Onboarding non‐CSE

accounts to those platforms as the receiver of collateral is burdensome as the

documentation is written with banks or CSEs in mind or they are based on

new legal structures and documentation that have not been vetted in the

prior phases.

6. There are a number of tasks that must be completed by the custodians,

including but not limited to:

a. Assessing the applicable jurisdictions and required legal agreements

based on the types of IM segregation arrangements;
40

b. Performing the necessary “Know Your Customer” (KYC) due diligence

on new clients as well as responding to similar inquiries from clients

regarding the custodians’ financial stability, risk management,

disaster recovery, business continuity, cyber security and data

protection policies;

c. Determining the post‐KYC documentation required for a new custody

account, including credit documentation, settlement instructions, fee

schedules, contact lists, user access requests, signatory lists and tax

documentation; and  

d. Completing tri‐party documentation and operational set‐up for the

IM segregation, including the list of eligible collateral and haircut

schedules based on the jurisdiction(s) of the clients.  Due to the gross‐

gross nature of IM segregation, there can be 2‐4 triparty documents

and two eligible collateral schedules required for each relationship, as

well as any custody documentation.  See Appendix B for an illustration

of the typical documentation involved in setting up arrangements for

regulatory IM exchange and segregation.

7. For SMA Clients, there is the additional issue of multiple asset managers

managing derivatives for the SMA Client’s accounts and having to discuss

and agree an allocation of the IM Threshold with the SMA Client (as

beneficial owner) and/or CSEs.  The industry is dealing with this issue for the

first time in Phases 5 and 6 and it remains to be seen how CSEs and SMA

asset managers will resolve this challenge. Additional considerations related

to SMA Clients include, but are limited to:

a. SMA Clients may also need to perform due diligence and KYC analysis

on new custodians used by their CSE counterparties, where they are

the secured party in a transaction.  In the case of an SMA, the asset

managers may need to perform this as well; and

b. SMA Clients and each of their asset managers will have to determine

if the SMA client, its custodian or each manager will negotiate and set

up the IM segregation arrangements (including any additional

custodial fees), if additional custodial accounts need to be opened and

whether the asset managers have the requisite authority to act on

behalf of the SMA Client in connection with the custodial

arrangements.  SMA asset managers may also need to comply with

custody rules, such as under the Securities and Exchange Commission

(SEC) regime based on the scope of the asset manager’s authority in

relation to the custodial accounts.   
41

Regarding the length of the grace period, the Margin Subcommittee believes that a

period of at least 6 months would provide a reasonable, meaningful amount of time

for market participants to work towards completing the tasks needed for

compliance with the Margin Rules.    The Margin Subcommittee contends that a

shorter grace period, such as the 2‐month grace period adopted by the SEC, would

be insufficient for market participants subject to IM requirements in the remaining

phases of the Margin Rules.  Although the SEC did not specifically explain why it

chose 2 months for its grace period, it apparently viewed such time to be sufficient

in light of the unique features of its margin regime, which appear to present less of

a burden for market participants in at least a couple of key ways:

 First, the SEC’s documentation requirements do not expressly call for specific

margin documentation.   Rather, the SEC’s margin rules include collateral

agreement and netting agreement requirements that are arguably more high‐

level (e.g., agreement must be “legally enforceable”) 50 than the margin

documentation that is required under the CFTC’s Margin Rules (along with

collateral agreements that are also required under the Margin Rules).51   

 Second, because the SEC’s margin rules are scheduled to become effective at

some point in 2021 (i.e., approximately five years after the initial compliance

phases for the margin rules of the CFTC/U.S. Prudential Regulators), the SEC

may have expected SBSDs (particularly dual‐hatted ones) to have acquired

                                                 

50 Under the SEC’s “collateral agreement” requirement (SEC Rule 18a‐3(c)(4)), one of the conditions

for a nonbank security‐based swap dealer (SBSD) to be able to take into account the fair market

value of collateral delivered by a counterparty is that such collateral “is subject to an agreement

between the [SBSD] and the counterparty that is legally enforceable by the [SBSD] against the

counterparty and any other parties to the agreement.”  Similarly, under the SEC’s “netting agreement”

requirement (SEC Rule 18a‐3(c)(5)), a SBSD “may include the effect of a netting agreement that allows

the [SBSD] to net gross receivables from and gross payables to a counterparty upon the default of the

counterparty, for the purposes of the calculations required pursuant to [the margin rules], if: (i) The

netting agreement is legally enforceable in each relevant jurisdiction, including in insolvency

proceedings; (ii) The gross receivables and gross payables that are subject to the netting agreement

with a counterparty can be determined at any time; and (iii) For internal risk management purposes,

the [SBSD] monitors and controls its exposure to the counterparty on a net basis.”

51  Under the CFTC’s margin documentation requirements, such documentation must (i) provide the

CSE with the contractual right and obligation to exchange IM and VM in such amounts, in such form,

and under such circumstances as are required by margin rules; (ii) specify the methods, procedures,

rules, inputs, and data sources to be used for determining the value of uncleared swaps for purposes

of calculating VM; (iii) describe the methods, procedures, rules, inputs, and data sources to be used

to calculate IM for uncleared swaps entered into between the CSE and the counterparty; and (iv)

specify the procedures by which any disputes concerning the valuation of uncleared swaps, or the

valuation of assets collected or posted as IM or VM may be resolved.  See CFTC Regulation §23.158,

17 C.F.R. § 23.158.
42

sufficient experience/systems/documentation to be in a position to more

expeditiously comply with the SEC’s margin rules.  Indeed, the SEC alluded

to nonbank SBSDs being able to leverage existing documentation (e.g.,

collateral agreements and margin documentation compliant with CFTC

requirements) to meet the SEC’s collateral and netting agreement

requirements.52   

Overall, with market participants facing potentially lower compliance hurdles under

the SEC’s margin rules, a 2‐month grace period may be appropriate in that context;

however, a longer period (such as the 6‐month grace period recommended in this

report) would be needed for markets participants subject to the greater burdens in

achieving compliance with the Margin Rules.

The Margin Subcommittee also believes that the 6‐month grace period

recommendation offers a measured, calibrated approach by including a time

limitation to Phases 5 and 6 (with a potential exception in the SMA context, as

discussed in Part II.B.2) and an explicit condition that IM exchange begin as soon as

the parties have finished their preparations and are operationally ready within the

6‐month period.    The time limitation to Phases 5 and 6 recognizes that the

bottleneck issues are likely to be most prevalent during those phases due to the

various challenges outlined above.  However, it is possible that the pipeline problem

will not significantly subside after Phase 6 and thus we are asking the Commission

to revisit the 6‐month grace period recommendation for potential application to

future post phase‐in compliance dates based on the number of accounts likely to be

in scope for such dates and the experience of market participants in Phases 5 and 6.

                                                 

52 See Capital, Margin, and Segregation Requirements for Security‐Based Swap Dealers and Major

Security‐Based Swap Participants and Capital and Segregation Requirements for Broker‐Dealers, 84

Fed. Reg. at 43,909 (Aug. 22, 2019) (“[An existing netting or collateral agreement with a counterparty

that was entered into by the nonbank SBSD in order to comply with the margin documentation

requirements of the CFTC or the prudential regulators will suffice for the purposes of Rule 18a–3, as

adopted, if the agreement meets the requirements of paragraph (c)(4) or (5) [requirements relating

to collateral agreements and netting agreements], as applicable.”); Id. at 44,015 (SEC notes that a

nonbank SBSD may not need to use the whole deferral period if “the nonbank SBSD and its

counterparty have an existing agreement and processes that can be readily modified to incorporate

the $50 million threshold”); Id. at 43,920 (“[B]y aligning with the requirements of the CFTC and

prudential regulators [with respect to sets of eligible collateral and haircuts], the [SEC’s] final rule

should reduce the likelihood that SBSDs will seek to amend existing collateral agreements that may

specifically reference haircuts in the margin rules of the CFTC or prudential regulators.”).
43

With respect to the condition relating to the extent to which the 6‐month grace

period can be used, the Margin Subcommittee has sought to clarify that the grace

period should be used only to the point that it is necessary and, as such, parties

would need to begin exchanging IM as soon as they are ready to do so.  This would

mean, for instance, that if parties are ready to exchange IM after the second month

within the grace period, they should proceed to do so, rather than putting off the

exchange of IM until the conclusion of the 6‐month period.  By crafting the 6‐month

grace period recommendation with this condition and the above‐noted time

limitation, the Margin Subcommittee has intended to strike a balance between, on

the one hand, providing a fail‐safe for those market participants facing various

hurdles as they make their best efforts to comply with the Margin Rules and, on the

other, ensuring that the exchange of IM pursuant to those rules is not unduly

deferred.    

B. ISSUES THAT COULD BE ADDRESSED IN LATER TERM (PHASE

6 COMPLIANCE)

1. Separately Managed Accounts – Scoping Issue   

a) Challenge: Application of IM Threshold to SMA

Client in the Aggregate Creates Uncertainty for

SMA Client’s Independently Operating Asset

Managers and Leads to Potential Cliff‐Edge Events

With many Small Financial End Users (including SMA Clients) likely to cross the

$8B AANA threshold for Phase 6, they will then need to determine whether they

exceed the $50M IM Threshold vis‐à‐vis a CSE and therefore be required to exchange

IM and be subject to the full suite of IM requirements.  For SMA Clients in particular,

the obligation to manage the $50M IM Threshold with each CSE on a real‐time,

aggregate basis is unduly challenging in light of the lack of transparency and control

across the SMA Client’s asset managers and may result in trading disruptions and

the inability to hedge portfolios.53  The requirement to share the $50M IM Threshold

                                                 

53 In Letter No. 17‐12, CFTC staff recognized that the separation among an SMA Client’s SMAs (and

SMA asset managers) “is needed to allow asset managers to execute effectively on the investment

strategy and to track the profits and losses for each strategy (in turn allowing the owner the ability

to measure the effectiveness of each strategy and asset manager).”  See CFTC Letter No. 17‐12 (Feb.  

13, 2017), at 4, available at  

https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17‐

12.pdf.
44

across an SMA Client’s various SMAs that are independently managed by asset

managers presents similar concerns to those that arose in 2017 in the context of an

SMA Client’s SMAs sharing an aggregate $500,000 MTA.  Such concerns include, but

are not limited to:

 Negotiations and delays associated with CSEs allocating the $50M IM

Threshold; and

 Potential renegotiations, repapering, amendments and system updates based

on reallocations due to changes in the number of SMAs/asset managers,

trading mandates, volumes, market conditions, etc.

Unlike with MTAs, a CSE may decide not to allocate the IM Threshold to all or any

SMAs of an SMA Client until the SMA Client’s aggregate regulatory IM amount is at

or near $50M or the CSE’s internal threshold.

Given the lack of transparency, control, or coordination in SMA arrangements and

the current requirement to aggregate regulatory IM on a real‐time daily basis across

the SMAs of an SMA Client (and potentially, the lack of IM Threshold allocations),

it is nearly impossible to ensure that the SMA Client in the aggregate will not exceed

the $50M IM Threshold at any time.54  An SMA Client’s sudden and unexpected

breach of the IM Threshold would lead to cliff‐edge events, such as the following:  

 Some or all asset managers may no longer be able to trade for the SMAs they

are independently managing on behalf of the SMA Client until the necessary

documentation and operations are set up—thus, resulting in potential

negative performance, realized losses, inability to hedge or execute prudent

portfolio and risk management;

 Some or all of the asset managers may be asked or required to novate or

terminate existing positions of their SMAs—again, to the detriment of the

performance of the SMA Client’s portfolio or the ability to effectively hedge

the SMA Client’s exposures;

 With the reduction of eligible counterparties, some or all asset managers may

not be able to achieve best execution or comply with regulatory requirements

or client guidelines regarding concentration limits (e.g., 5% securities related

                                                 

54 See Part II.A.1. for a more extensive discussion of the market realities that can lead to inadvertent

breaches of the IM Threshold in the SMA context.  
45

issuer limits for ‘40 act funds, 5% counterparty exposure limits for UCITS

funds, etc.); and

 There may be a race to repaper across the asset managers for the same SMA

Client with the same CSE and the same third‐party custodians and/or tri‐

party collateral agents potentially at the same time, with smaller asset

managers or those with smaller trading volumes likely to be deprioritized.

b) Recommendation:  Permit Application of Separate

IM Threshold to Each SMA of an SMA Client

As highlighted in prior comments submitted to the Commission, the cleanest and

most efficient approach would be to extend to each SMA its own $50M IM Threshold

on the basis that each SMA functions as a distinct entity (e.g., limited recourse

arrangements, separate margining and netting, etc.). 55    However, the Margin

Subcommittee acknowledges that it may be difficult for this approach to gain

support across jurisdictions, and therefore are recommending an alternate approach

that would allow for the application of a flat IM Threshold of $10M for each SMA

akin to the flat MTA amount per SMA that was permitted in CFTC Letter No. 17‐12.  

This flat $10M IM Threshold would be an option, not a requirement, for CSEs to use

instead of negotiating allocations of the $50M IM Threshold across the SMAs/SMA

asset managers of an SMA Client.  In addition, the ability to rely on a flat $10M IM

Threshold per SMA could be subject to conditions such as those set forth in Letter

No. 17‐12, including:

(1) Any such swaps are entered into with the CSE by an asset manager on behalf of

an SMA owned by the legal entity pursuant to authority granted under an IMA; and

(2) The swaps of such SMA are subject to a master netting agreement that does not

permit netting of IM or VM obligations across SMAs of the legal entity that have

swaps outstanding with the CSE.

Similar to the application of Letter No. 17‐12 to MTA, this recommendation would

not cap IM at $50 million.    As discussed below, safeguards mitigate the risk of

providing this uncapped option.

                                                 

55 See, e.g., SIFMA AMG Letter to the CFTC and USPRs on Proposed Uncleared Margin Rules (Nov.

24, 2014), at 9‐10, available at https://www.sifma.org/wp‐content/uploads/2017/05/sifma‐amg‐

submits‐comment‐letter‐to‐multiple‐regulators‐regarding‐margin‐and‐capital‐requirements‐for‐

covered‐swap‐entities.pdf.
46

c) Supporting Rationale for Recommendation

Allowing a flat $10M IM Threshold per SMA would help tackle the challenges faced

by SMA Clients and their individual asset managers without limiting flexibility for a

CSE to address credit, risk, or operational concerns.    In particular, the flat IM

Threshold approach would:

 Address the lack of transparency each asset manager has to the aggregate

$50M IM Threshold and provide them with certainty and control as to how

much they can trade with a specific CSE;

 Address CSEs’ credit, operational and legal burdens with having to (i) allocate

and negotiate IM Thresholds with some or all of an SMA Client’s SMAs,

and/or (ii) potentially re‐negotiate and amend the allocations if one SMA is

at or near its allocation of the IM Threshold;

 Prevent the likely cliff edge events and mitigate potential trading disruptions;

 Permit asset managers to monitor and control how much trading their SMAs

are doing with a CSE and address any potential overage by either novating,

terminating or entering into offsetting trades prior to exceeding the $10M IM

Threshold per SMA;

 Mitigate the time, costs, burdens of pre‐emptively setting up the tri‐party

collateral agent or third party custodial arrangements and the unnecessary

clogging of the custodial and CSE pipeline;

 Allow asset managers who cannot or choose not to trade within the flat IM

Threshold to seek to pre‐emptively repaper; and

 Avoid the worst‐case scenario where, according to feedback from some

pension trusts and other financial end‐users, the undue burdens and

complexity flowing from the need to continuously monitor the sharing of the

$50M IM Threshold would cause SMA Clients to assign a $0 IM Threshold

across all their SMAs and CSEs.56

Moreover, as indicated above, Letter No. 17‐12 offers a precedent for allowing the

application of a flat threshold amount at the SMA level in order to address the

                                                 

56 A similar concern arose in the context of MTAs.  See Letter No. 17‐12 at 5 (“If SMAs are left with no

choice but to set MTA to zero at the account level, this consequence negatively impacts SMA owners,

imposing burdens that SIFMA AMG argues are not necessary to achieve the objectives of the

uncleared swap margin requirements.”).
47

significant practical challenges that would otherwise arise if an aggregate threshold

had to be shared by the SMAs of an SMA client.  We acknowledge that the “flat

threshold amount” in Letter No. 17‐12 relates to MTA (i.e., 50K MTA per SMA),

which is a distinct regulatory concept from the IM Threshold.  However, we believe

that the application of similar conditions in Letter No. 17‐12 to the flat IM Threshold

approach could help guard against potential misuse by market participants.  Further,

while the flat IM Threshold approach could potentially result in undocumented,

unmargined exposures beyond $50M (at the SMA Client level), there are certain

safeguards to prevent significant exposures/systemic risk:

 CSEs will have their own internal credit/risk parameters in determining how

much uncollateralized exposures they are willing to take and are not required

to agree to use the Flat IM Threshold for the SMAs of each SMA Client or

asset manager; and

 SMA Clients that have significant uncollateralized exposures would run the

risk of potentially having to register as MSPs and would be directly subject to

the Margin Rules.

2. Separately Managed Accounts – Implementation Issue

a) Challenge: Implementation Complexities Arise in

the SMA Context Once the Applicable IM

Threshold Is Exceeded

If a flat IM Threshold approach is not adopted (or if a flat IM Threshold approach is

adopted by the CFTC but a CSE refuses to use it with respect to the SMAs of an SMA

Client), then the $50M IM Threshold would be applied to the SMA Client in the

aggregate and implementation issues would arise for SMA asset managers,

particularly those that do not have regulatory IM compliant

documentation/allocations at the time that the SMA Client may unexpectedly

exceed the $50M IM Threshold.  We acknowledge that the recommendation in Part

II.A.1 would be relevant in this scenario in regards to those SMA asset managers that

do have documentation/IM allocations in place.

b) Recommendation: Expanded Forbearance for

SMAs

The Margin Subcommittee recommends that the 6‐month grace period (described

in Part II.A.5) be made available in the SMA context even beyond Phase 6 (i.e., the

6‐month grace period should not be subject to the time‐limitation identified in Part

II.A.5).
48

To be clear, if a flat IM Threshold approach for SMAs is adopted by the CFTC (and

if a CSE agrees to use the flat IM Threshold approach for the SMAs of an SMA Client),

SMA asset managers (along with the industry in general) would still be able to avail

themselves of the grace period as described in Part II.A.5 (i.e., with the time

limitation).

c) Supporting Rationale for Recommendation

Assuming that the $50M IM Threshold applies to the SMA Client in the aggregate,

SMA asset managers will face uncertainty regarding whether the SMA Client is

at/near that IM Threshold and thus will be subject to potential cliff edge events (as

described in Part II.B.1), in addition to the general industry concerns about pipeline

problems and other obstacles that may delay documentation and account set‐up (as

discussed in Part II.A.5).  This would necessitate allowing for the 6‐month grace

period to be made available in the SMA context even beyond Phase 6.

Notably, if a flat IM Threshold approach is adopted by the CFTC and if a CSE agrees

to use the flat IM Threshold approach for the SMAs of an SMA Client (allowing each

asset manager to have certainty over when the SMA it manages is at/near the

relevant IM Threshold rather than being in the dark as to whether the SMA Client

in the aggregate is at/near the IM Threshold), there would still be the pipeline

challenges of getting documentation in place once the relevant IM Threshold ($10M)

is exceeded.  Accordingly, the 6‐month grace period should be made available (with

the time limitation as set forth in Part II.A.5).  

3. MSE Calculation Period and Methodology and Post Phase‐

In Compliance Periods

a) Challenge: The Margin Rules’ MSE Calculation

Period and Methodology Are Inconsistent with

Global Standards and Create Undue Complexity,

Monitoring Burdens and Confusion  

Under the Margin Rules, a financial end user is required to calculate whether it,

together with its affiliates, exceed the MSE of $8 billion, and must therefore comply

with the requirements to exchange regulatory IM.    The MSE calculation is

conducted based on the averaging of the daily aggregate notional amount of

uncleared swaps, security‐based swaps, and Deliverable FX with all counterparties

during June, July and August of the calendar year preceding the corresponding

compliance year.  Following the final phase‐in period forIM requirements beginning

September 1, 2021, if the MSE calculation changes the status of a group of

consolidated entities to either bring them into or take them out of scope of the IM
49

requirements, such change would apply as of the next calendar year (i.e., beginning

January 1).  (The USPR Margin Rules work in a similar way.)   

These requirements diverge from the BCBS‐IOSCO framework and the

requirements of global regulators in the following ways:

 MSE calculation

o The BCBS‐IOSCO framework and all other non‐U.S. jurisdictions

require the AANA to be calculated during March, April and May.

o The BCBS‐IOSCO framework and all other non‐U.S. jurisdictions,

besides Brazil, base the calculation on the month‐end average of

derivatives notional exposure.  

 Post phase‐in compliance dates

o US, EU, Switzerland: January 1 to December 31

o BCBS‐IOSCO framework and all other jurisdictions: September 1 to

August 31

These differences in the U.S. regulations create complexity and confusion, and lead

to additional effort, cost and compliance challenges for smaller market participants

that are generally subject to margin requirements in multiple global jurisdictions.   

For further information, see Appendix D for a comparison chart of global AANA

calculation requirements and IM compliance dates.

b) Recommendation #1: Align the Margin Rules’

Timing and Calculation Methodology for MSE and

the Post Phase‐In Compliance Periods with

International Standards

The Margin Subcommittee recommends that the CFTC amend its uncleared margin

requirements to align the following with global standards: (i) the timing and method

for the MSE calculation; and (ii) the post phase‐in compliance periods.

The recommended alignment could be accomplished via the following amendments

to the definition of material swaps exposure in §23.151 and compliance dates in

§23.161(c):

“Material swaps exposure for an entity means that, as of September 1 of any

year, the entity and its margin affiliates have an average daily month‐end

aggregate notional amount of uncleared swaps, uncleared security‐based

swaps, foreign exchange forwards and foreign exchange swaps with all

counterparties for June, July, andAugust March, April and May of that yearof
50

the previous calendar year that exceeds $8 billion, where such amount is

calculated only for business days.”

§ 23.161 (c)(1) If a covered swap entity’s counterparty changes its status such

that an uncleared swap with that counterparty becomes subject to a stricter

margin requirement under §§ 23.150 through 23.161 (for example, if the

counterparty’s status changes from a financial end user without material

swaps exposure to a financial end user with material swaps exposure), then

the covered swap entity shall comply with the stricter margin requirements

for any uncleared swaps entered into with that counterparty after the

counterparty changes its status.  A counterparty’s material swaps exposure

status is determined on September 1 each year.

§ 23.161 (c)(2) If a covered swap entity’s counterparty changes its status such

that an uncleared swap with that counterparty becomes subject to less strict

margin requirement under §§ 23.150 through 23.161 (for example, if the

counterparty’s status changes from a financial end user with material swaps

exposure to a financial end user without material swaps exposure), then the

covered swap entity may comply with the less strict margin requirements for

any uncleared swaps entered into with that counterparty after the

counterparty changes its status as well as for any outstanding uncleared swap

entered into after the applicable compliance date under paragraph (a) or

(c)(1) of this section and before the counterparty changed its status.    A

counterparty’s material swaps exposure is determined on September 1 each

year.

As currently required, the MSE calculation period for IM requirements for

the compliance period beginning September 1, 2021 (commonly referred to as

“Phase 6”) is June, July and August of 2020.  As it may not be feasible to effect

an amendment prior to this time, there would still be value in adopting the

amendments that would create global consistency to the ongoing annual

MSE calculations that will be conducted by smaller counterparties following

Phase 6.  In such case, the definition of material swaps exposure could be

amended as follows:

“Material swaps exposure for an entity means that, as of September 1 of any

year, the entity and its margin affiliates have an average month‐enddaily

aggregate notional amount of uncleared swaps, uncleared security‐based

swaps, foreign exchange forwards and foreign exchange swaps with all

counterparties for March, April and May of that yearJune, July, and August

of the preceding calendar year that exceeds $8 billion, provided that for
51

September 1, 2021, material swaps exposure for an entity means that the

entity and its margin affiliates have an average daily aggregate notional

amount of uncleared swaps, uncleared security‐based swaps, foreign

exchange forwards and foreign exchange swaps with all counterparties for

June, July and August of the preceding calendar year that exceeds $8 billion,

where such amount is calculated only for business days.”   

c) Recommendation #2: As an Alternative to Globally

Aligned Post Phase‐in Compliance Dates, Confirm

that the Initial Post Phase‐in Compliance Date is

January 1, 2023, Consistent with the EU and

Switzerland

Alignment of the compliance dates following the phase‐in period would only be

helpful to the industry if these changes were also made by the USPRs and, ideally,

the EU and Switzerland.    If global alignment cannot be achieved, then in the

alternative, the Margin Subcommittee recommends that the CFTC provide guidance

confirming that the initial compliance date following the phase‐in period is January

1, 2023, rather than January 1, 2022, in accordance with the intentions of the EU and

Switzerland.  This step would prevent a U.S. only compliance date of January 1, 2022

only four months after the Phase 6 compliance date.

In connection with this, we recommend that section §23.161 explicitly specify the

compliance year cycle which follows the phase‐in periods, so these dates are more

transparent to market participants.    Without consideration of the relevant

discussion in the preamble, it is not clear to many market participants that a change

in status is currently meant to apply from January 1 of each year.

d) Supporting Rationale for Recommendations

Requirement 8.9 of the BCBS‐IOSCO framework, revised as of April 2020, states

that:  

On a permanent basis (i.e., from 1 September 2022), any covered entity belonging to

a group whose aggregate month‐end average notional amount of non‐centrally

cleared derivatives for March, April, and May of the year exceeds €8 billion will be

subject to the requirements described in this paper during the one‐year period from
52

1 September of that year to 31 August of the following year when transacting with

another covered entity (provided that it also meets that condition).57

Thus, the Margin Rules contradict both the timing and methodology for the

calculation of the average notional amount of derivatives for the purpose of

determining the application of initial margin requirements, as well as the annual

compliance periods following Phase 6.

Material Swaps Exposure

ISDA’s 2018 Quantitative Analysis estimates that 850 counterparties may become

subject to regulatory IM in Phase 6 with an AANA between $8 billion and $50 billion.  

Of those, 53% (or 631) will have an AANA of less than $25 billion.  These hundreds

of counterparties, along with potentially hundreds of others that do not initially

breach the $8 billion threshold, will need to annually reassess their MSE calculations.

However, U.S. deviation on the approach to the MSE calculation means that these

smaller market participants will need to run completely separate calculations from

those which they have run for all other jurisdictions since neither the timing nor the

method match.   

Changing the timing of the MSE calculation alone would be helpful, but it would be

most beneficial to change the calculation method from daily to month‐end

averaging as well.    A daily calculation is substantially more work for smaller

counterparties and is only used for the U.S.  The MSE calculation period that was

conducted in June, July and August of 2019 for Phase 5 in the U.S. required 64

observations to be calculated for averaging; whereas the global AANA calculation

period for Phase 5 in March, April and May of 2020 will require three.

The Margin Rules state that use of daily averaging forthe MSE calculation is believed

to be preferable to an as‐of date such as year‐end, which might allow a market

participant to adjust its exposures for such date to avoid the CFTC’s margin

requirements.  Use of month‐end dates over the course of the 3‐month calculation

period mitigates this risk by providing three periodic dates on which the aggregate

notional is calculated prior to averaging.    It would be neither practicable nor

financially desirable for parties to tear‐up their positions on a recurring basis prior

to each month‐end, interfering with their hedging strategies and causing them to

                                                 

57 See Basel Committee on Banking Supervision and Board of the International Organization of

Securities Commissions, Margin Requirements for Non‐Centrally Cleared Derivatives (Apr. 2020),

available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.
53

incur realized PnL changes.    Global regulations following the BCBS‐IOSCO

framework have soundly employed the month‐end averaging approach since 2016.  

The CFTC has issued equivalence determinations for the uncleared margin

requirements of Australia, EU and Japan which employ the month‐end averaging

method.

Compliance Dates

If an annual MSE calculation results in a change in status, those parties will need to

notify all their counterparties and both sides will need to implement the necessary

adjustments in their systems which track and either apply or disapply IM

requirements to existing or future netting sets effective as of the applicable

compliance date.   

As the U.S., EU and Switzerland have diverged from the annual compliance period

in the BCBS‐IOSCO framework, market participants will have to apply jurisdiction‐

specific effective dates to a subset of each netting set.  For instance, if a party subject

to both Japanese rules and U.S. rules determined via its annual AANA/MSE

calculation that it had exceeded the JPY 1.1 trillion AANA and $8 billion MSE

thresholds, such change would apply as of September 1 in Japan and as of the

following January 1 in the U.S.  Thus, swaps entered into between September and

December would be subject to IM requirements in Japan and not the U.S.  If that

same party’s status should change the following year such that it now fell below the

minimum thresholds in both regimes, such change would apply to its transactions

as of September in Japan and the following January in the U.S.

In addition, the bifurcated timelines may interfere with a party’s ability to use

substituted compliance.    Using the same example of a swap subject to U.S. and

Japanese IM requirements, a party which is subject to Japanese IM requirements as

of September could not meet those requirements using U.S. rules as it would not

become subject to U.S. requirements until the following January 1.

These misaligned compliance periods will create significant effort and cost for

smaller market participants and their counterparties to track the jurisdictional

application of IM requirements to a set of swaps.  The complexity will lead to errors

in tagging and tracking of transactions, resulting in differences in IM calculations,

increased reconciliation effort and disputed IM amounts.

The additional cost and complexity of differentiated compliance periods and the

impact to substituted compliance will incentivize use of local trading relationships

and inhibit cross‐border transacting.   
54

If globally aligned compliance dates cannot be achieved, then the alternative

recommendation to confirm an initial post phase‐in compliance date of January 1,

2023 (January 1, 2024 under revised BCBS‐IOSCO timeline) would at least eliminate

a compliance date only applicable in the U.S. and avoid the additional cost and effort

for CSEs and a portion of their financial end user counterparties to adjust their

netting sets after only four months.  In addition, it prevents financial end users from

having to run an additional MSE calculation and provide a separate notification in

respect of a status change applicable as of January 1, 2022 (or January 1, 2023 under

revised BCBS‐IOSCO timeline) only in respect of U.S. regulations.  This exceptional

case in the U.S. is not transparent to market participants, and there is a risk of

inconsistent application.

The delayed transition to the calendar year compliance period cycle means that the

first post‐Phase 6 reassessment of MSE would not apply until 16 months after the

Phase 6 compliance date.  While this means parties newly exceeding the $8 billion

MSE threshold following the phase‐in period will have a longer period before they

are required to begin calculating regulatory IM and potentially exchanging IM.  It

also means there is a longer period before Phase 6 firms (which have already

exceeded the MSE threshold), might come out of scope of the IM requirements

should their MSE fall below $8 billion.  As ISDA’s 2018 Quantitative Analysis shows

that 85% of Phase 6 firms would not exceed a $50M IM Threshold two years into

their regulatory IM requirements, there is a very limited amount of IM exchange

that might be impacted during this period.  Therefore, the complexity, effort and

cost of a U.S. only regulatory IM compliance date cannot be substantiated.

4. Minimum Transfer Amount (MTA)

a) Challenge: Operational and Documentation Issues

with Using MTA

In order to ease the transaction costs associated with the exchange of margin, the

Margin Rules allow a CSE and its covered counterparty to agree to a MTA of up to

$500,000.  The CSE is only required to collect or post collateral, as applicable, when

the amount of both variation margin and initial margin exceeds the MTA.  Although

generally useful, the MTA requirements do not account for certain practicable

operational processes and circumstances which limit the ability of CSEs and their

covered counterparties to use the MTA.  These impediments were recognized and

addressed by DSIO staff through two staff letters, CFTC Letter No. 17‐12 and CFTC

Letter No. 19‐25.   
55

b) Recommendation: Codify Relief Provided in CFTC

Letters No. 17‐12 and 19‐25 Which Address Practical

Challenges of Applying MTA to Collateral

Settlement

As the accommodations in CFTC Letter Nos. 17‐12 and 19‐25 are practical in nature

and do not materially increase the amount of uncollateralized exposure at a given

time, they should be permanently adopted.

CFTC Letter No. 17‐12 (17‐12)58

− In response to a request from SIFMA AMG, DSIO issued 17‐12 on February 13,

2017.  It allows an SD to apply an MTA of up to $50,000 (for VM and IM) when

entering into swaps with an asset manager on behalf of an SMA owned by an

SMA Client, regardless of the number of managers for the SMA Client.

− This relief helps to address the practical challenge for SDs to negotiate sub‐

allocations of the aggregate $500,000 MTA per SMA Client across an SMA

Client’s multiple managers.

− Further, it prevents the parties from having to negotiate amendments to the

sub‐allocations in the collateral documents based on the changes in the

number of asset managers or alternatively, to have to set the MTA at zero for

all SMAs, resulting in frequent transfers of small amounts of collateral.

CFTC Letter No. 19‐25 (19‐25)59

− In response to a request from ISDA, DSIO issued 19‐25 on December 6, 2019

which allows an SD or MSP to maintain separate MTAs for VM and IM with

each covered counterparty, provided the combined amount does not exceed

the maximum allowable MTA of $500,000.

− ISDA requested this relief because the Margin Rules are misaligned with

market practice, requiring parties to combine their total IM and VM amount

for comparison to the MTA and settle both in the event the combined

amount exceeds a single MTA agreed between the parties.

                                                 

58 CFTC Letter No. 17‐12 (Feb.  13, 2017), available at https://www.cftc.gov/csl/17‐12/download.  

59 CFTC Letter No. 19‐25 (Dec. 6, 2019), available at https://www.cftc.gov/csl/19‐25/download.  
56

− ISDA argued that such an approach was not feasible, since VM and IM follow

separate settlement flows due to the regulatory requirement for IM

segregation and therefore, there is not a juncture at which the combined

margins can be compared to the MTA and a decision transmitted regarding

whether the transfer is required for both VM and IM.

− DSIO granted the relief until December 31, 2021 based on an understanding

of the operational impediments and the knowledge that any amounts of

margin that might otherwise have been exchanged would not be material.   

The rule amendments for the MTA requirements under the Margin Rules can

primarily be proposed in accordance with the relief terms provided in each of 17‐12

and 19‐25.  However, the interplay of the two necessitates an additional nuance to

the recommended rule amendment by which the option to split the applicable

maximum MTA between VM and IM should apply to either a covered counterparty

or an asset manager on behalf of an SMA.

These amendments to the Margin Rules could be effected by adding definitions for

“separately managed account” and “SMA owner” and amending §§ 23.151,

23.152(b)(3), 23.153(c) and 23.158(b) as follows:

§ 23.151 Definitions applicable to margin requirements.

Separately managed account means an account managed by an asset manager

and governed by an investment management agreement that grants an asset

manager authority to exercise investment discretion over a portion of an

SMA owner’s assets for management in a separate account. The swaps of the

separately managed account are subject to a separate master netting

agreement established by an asset manager that does not permit netting of

initial or variation margin obligations across separately managed accounts of

the SMA owner established by other asset managers that have swaps

outstanding with a covered swap entity.

SMA owner means a client on whose behalf one or more separately managed

accounts are managed by an asset manager.

Minimum transfer amount means an amount agreed between a covered swap

entity and a counterparty in respect of combined initial margin andor

variation margin under which no actual transfer of funds is required. The

combined minimum transfer amounts agreed by a covered swap entity with

a counterparty for both initial and variation margin shall not exceed $500,000,

except in respect of a counterparty that is an SMA owner, for which the
57

combined minimum transfer amounts may exceed $500,000, provided that

for each separately managed account the combined minimum transfer

amounts for both initial and variation margin do not exceed $50,000.

§ 23.152 Collection and posting of initial margin.

(b)(3) Minimum transfer amount. A covered swap entity is not required to

collect or to post initial margin pursuant to §§ 23.150 through 23.152, 23.154

and 23.156 through 23.161 with respect to a particular counterparty or a

separately managed account unless and until the combined amount of initial

margin and variation margin that is required pursuant to §§ 23.150 through

23.152, 23.154 and 23.156 through 23.161 to be collected or posted and that has

not been collected or posted with respect to the counterparty is greater than

the minimum transfer amount for initial margin$500,000.

§ 23.153 Collection and posting of variation margin.

(c) Minimum transfer amount. A covered swap entity is not required to

collect or to post variation margin pursuant to §§ 23.150, 23.151, 23.153, 23.155,

23.156, and 23.158 through 23.161 with respect to a particular counterparty

unless and until the combined amount of initial margin and variation margin

that is required pursuant to §§ 23.150, 23.151, 23.153, 23.155, 23.156, and 23.158  

through 23.161 to be collected or posted and that has not been collected or

posted with respect to the counterparty is greater than the minimum transfer

amount for variation margin$500,000.

§ 23.158 Margin documentation.

(b)(2) Describe the methods, procedures, rules, inputs, and data sources to

be used to calculate initial margin for uncleared swaps entered into between

the covered swap entity and the counterparty; and

(3) The minimum transfer amounts applicable to initial margin and variation

margin; and

(4) Specify the procedures by which any disputes concerning the valuation of

uncleared swaps, or the valuation of assets collected or posted as initial

margin or variation margin may be resolved.  

c) Supporting Rationale for Recommendation

As no‐action relief can be revoked by staff and/or may expire, codifying the changes

provides certainty to market participants which informs the negotiation of the

collateral support documentation and operational builds.   Providing this certainty
58

would be helpful for IM Phases 5 and 6 and beyond; though the ongoing availability

of the relief would provide a stop‐gap measure in the event rule amendments are

not promulgated prior to the Phase 5 compliance date.  17‐12 is not time bound,

while 19‐25 expires on December 31, 2021, and would need to be codified or extended

prior to that time.    

The rule amendment in respect of 17‐12 only applies to SMAs and their SD trading

counterparties.   The rule amendment for 19‐25 has application to SDs and their

covered counterparties indirectly subject to the rule.

In respect of 17‐12, the rule modification for SMAs would be a beneficial global

accommodation, including by the USPRs and SEC, but is being requested from the

CFTC regardless since the existing relief letter provides a practical accommodation.

The rule amendment in line with 19‐25 would allow for SDs and their counterparties

to manage MTA in an operationally practicable way that aligns with the global

market standard.   

5. Removal of Deliverable FX from MSE Calculation

a) Challenge: Small Financial End Users Are

Unnecessarily Scoped in for Phase 6 and Beyond

Due to Inclusion of Deliverable FX in AANA

Calculation

As discussed in Part I, even though Small Financial End Users generally do not

present the systemic risk that the IM requirements seek to address, at least 30

percent are scoped into the remaining IM phases, due in large part to the inclusion

of Deliverable FX in their AANA calculations.  Consequently, those Small Financial

End Users would be subject to IM requirements if they exceed the $50M IM

Threshold (even intermittently).  Small Financial End Users are thus unnecessarily

burdened by having to: (1) monitor IM levels throughout the compliance period to

determine if the $50M IM Threshold is exceeded; (2) implement compliance

measures even in advance of exceeding the IM threshold to address the potential risk

of non‐compliance; and (3)risk losing market access until IM‐compliant agreements

are in place if the IM Threshold is exceeded (even if temporarily or immaterially).  

These burdens come with a hefty price tag per legal entity and per CSE in annual

vendor costs to monitor the SIMM on a daily basis to confirm if does not exceed the

IM Threshold per CSE (and its consolidated affiliates), as well as approximately

$15,000‐$20,000 per Small Financial End‐User to maintain segregated accounts (and

such cost would be on a per manager basis if the Small Financial End User trades

through asset managers).   
59

Again, these impacts are exacerbated for Small Financial End Users that hedge FX

risk with Deliverable FX and therefore, technically exceed the relevant AANA

threshold as a result of the inclusion of Deliverable FX.  Given the relatively low

percentage of in‐scope swaps that these Small Financial End Users may be trading

as well as the limited CSE and custodian bandwidth to meet all repapering demands,

these entities may be deprioritized and unable to implement their hedging

strategies.  In addition, the Small Financial End Users with the lowest exposures

(including seeded funds which, absent the consolidation requirements under the

Margin Rules, would not exceed the AANA threshold) have an increased risk of

losing market access during the phase‐in periods as CSEs and custodians will likely

give higher priority to entities with relatively larger exposures.  

b) Recommendation: Remove Deliverable FX from

AANA Calculation

The Margin Subcommittee recommends assessment of market impact of including

deliverable FX in the MSE calculation and amendment of the Margin Rules to

exclude deliverable FX from the MSE calculation.    The rule amendment would

adjust the definition of “Material Swaps Exposure” to add “non‐deliverable” prior to

“foreign exchange forwards” and “foreign exchange swaps” as follows:  

Material swaps exposure for an entity means that the entity and its margin

affiliates have an average daily aggregate notional amount of uncleared swaps,

uncleared security‐based swaps, non‐deliverable foreign exchange forwards,

and non‐deliverable foreign exchange swaps with all counterparties for June,

July and August of the previous calendar year that exceeds $8 billion, ....

c) Supporting Rationale for Recommendations

The Margin Subcommittee is proposing the above recommendation to mitigate

burdens on Small Financial End Users that could be scoped into the remaining

phases.    Small Financial End Users do not present material, systemic risks that

justify the burdens of monitoring initial margin, preemptive documentation and

potentially losing market access due to immaterially or temporarily exceeding the

initial margin threshold prior to complying with Margin Rules.    These Small

Financial End Users will also likely face challenges during the compliance period

due to the need for CSEs and custodians to prioritize resources towards entities with

higher regulatory IM amounts.  Given that, as highlighted in Part I, one‐third of the

Small Financial End‐Users captured by Phase 5 and 6 will have been unnecessarily

brought in due to the inclusion of Deliverable FX in AANA calculations—even

though Deliverable FX is not subject to IM requirements under the Margin Rules—

we believe that Deliverable FX should be carved out from AANA calculations.   
III. APPENDICES

A. APPENDIX A – CFTC MARGIN STUDY

B. APPENDIX B – ILLUSTRATION OF CUSTODIAL

DOCUMENTATION ARCHITECTURE

C. APPENDIX C – INTERPRETIVE GUIDANCE SCENARIOS

D. APPENDIX D – COMPARISON CHART OF GLOBAL AANA

CALCULATION REQUIREMENTS AND IM COMPLIANCE DATES
APPENDIX A

CFTC MARGIN STUDY
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Margin Phase 5 

by 

Richard Haynes, Madison Lau, and Bruce Tuckman1 

October 24, 2018 

EXECUTIVE SUMMARY

The uncleared margin rules (UMR) mandate that registered swap dealers exchange initial margin 

(IM) on their trades with others swap dealers and financial end users. The covered entities first brought 

into scope were those, which—at the group level—had the largest average aggregate notional amount 

(AANA) of swaps. Compliance for those with smaller AANAs was required on later dates. The last such 

date, “Phase 5,” takes effect on September 1, 2020. As of then, all covered entities will be in scope so 

long as their AANAs exceed a material swaps exposure (MSE) of $8 billion. 

Market participants have argued that Phase 5 will bring into scope a large number of relatively 

small financial end users; that the costs of implementing these new IM arrangements will strain industry 

resources; that many newly in-scope entities will never actually have to post IM because their positions 

are in products exempt from IM or because their required IM falls below the existing $50mm threshold; 

and, finally, that Phase 5 entities, because of their relatively small swaps positions, pose little systemic 

risk. 

Following up on these concerns, industry representatives have begun to ask international 

regulators for various forms of relief, e.g., extending the phase-in schedule; permanently raising the MSE 

threshold; excluding physically-settled foreign exchange (FX) swaps—which are exempt from IM—from 

the calculation of AANA; and simplifying the compliance process. 

The purpose of this paper is to guide regulators in their responses to these requests for relief by 

providing empirical estimates as to the coverage of Phase 5. Using regulatory data at the CFTC, this 

study complements the recent, related work of market participants and other regulators. Its main 

conclusions are as follows: 

o While Phases 1 through 4 capture just over 40 entities, Phase 5 could bring 700 entities in 

scope, which together encompass only 11% of the AANA across all phases. 

o Nearly 60% of entities coming into scope in Phase 5 have AANAs of less than $25 billion, and 

over 75% have AANAs less than $50 billion. These subsets of entities comprise about 15% 

and 30% of total Phase 5 AANA, respectively. 

o Phase 5 entities will span a variety of business sectors. The average AANA of newly in-scope 

swap dealers, however, will be many times that of any other sector. 

o Excluding physically-settled FX swaps from AANA could reduce the number of Phase 5 

entities by nearly 30%. 

o Phase 5 compliance could require implementing nearly 7,000 IM relationships. Excluding 

physically-settled FX swaps from AANA could reduce that number to under 5,000. 

Office of the Chief Economist, Commodity Futures Trading Commission. While this paper was produced in the authors’ official capacity, the

views expressed here are those of the authors and do not necessarily reflect the views of other Commission staff, the Office of the Chief 

Economist, or the Commission. The authors would like to thank Rafael Martinez and Jeffrey Hasterok for helpful comments and suggestions. 

1 

1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTRODUCTION 

Global uncleared margin rules (UMR) require that swap dealers exchange initial margin (IM) 

with financial entities and with other swap dealers against uncleared swap positions. Commercial end 

users and various government entities are exempt. All other entities covered by the UMR are subject to 

a gradual phase in of the requirements. The relevant schedule in the United States is shown in Figure 1. 

The compliance phases are based on average aggregate notional amount (AANA) of swaps, 

which equals the daily average of notional amount of swaps over June, July, and August of the previous 

year. With the exception of swaps with commercial end users, all swaps must be counted toward the 

AANA, including swaps that are exempt from IM. AANA is calculated on a corporate group level, and 

swaps between affiliates are included, but counted only once. 

Returning to the figure, Phases 1, 2, and 3, brought into scope entities with more than $3 

trillion, $2.25 trillion, and $1.5 trillion AANA, respectively. Phase 4 is scheduled to lower the threshold to 

$750 billion AANA as of September 1, 2019, and Phase 5, as of September 1, 2020, to bring all remaining 

entities into scope. 

As the figure shows, however, an entity remains out-of-scope if its AANA is below a material 

swaps exposure (MSE) of $8 billion. One purpose of this MSE was to exempt entities that would 

probably never have to post IM because the margin requirement on their relatively small swaps 

positions would likely never exceed the $50 million IM threshold. In any case, the combination of the 

UMR phase in and the MSE means that Phase 5 will capture entities with AANAs between $8 and $750 

billion.2 

As a result of global coordination, the UMR and its compliance schedule are similar in the United 

States and in other jurisdictions. For example, the only difference between the U.S. and European phase 

in is that the numerical thresholds in the latter are in Euros rather than U.S. dollars, that is, Phase 5 in 

Europe applies to entities with between €8 and €750 billion AANA.3 

Several observers have noted that Phase 5 will bring a large number of relatively small entities 

into the scope of the UMR.4 Some have also surmised that the costs of implementing these new IM 

arrangements will strain industry resources; that many newly in-scope entities will never actually have 

to post IM because their positions are in products exempt from IM or because their required IM falls 

below $50mm; and, finally, that Phase 5 entities, because of their relatively small swaps positions, pose 

little systemic risk. 

Following up on these arguments, industry representatives have begun to ask international 

regulators for various forms of relief, e.g., extending the phase-in schedule; permanently raising the MSE 

2 The UMR in the United States is given by Commodity Futures Trading Commission (2016). Some details of AANA 

computation are on pages 703-4. The phase-in schedule is on pp. 675-676, and the MSE is on page 644. Note that, 

for the purposes of MSE, AANA is calculated as an average over March, April, and May. 

3 BCBS-IOSCO (2015), pp. 24-25. 

4 See Cloud Margin (2018), Condat, Puce, and Nommels (2018), ISDA (2018), and ISDA and SIFMA (2018). Please 

note that ISDA (2018) has been made available only to regulators. 

2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

threshold; excluding physically-settled foreign exchange (FX) swaps—which are exempt from IM—from 

the calculation of AANA; and simplifying the compliance process.5 

The purpose of this paper is to guide regulators in their responses to these requests for relief by 

providing some empirical estimates of the coverage of Phase 5. Using regulatory data at the CFTC, this 

study complements the recent, related work of market participants and other regulators. 

DATA AND METHODOLOGY 

This study includes data on all U.S. reporting entities’ interest rate swaps (IRS), index and singlename credit default swaps (CDS), FX swaps, and equity swaps. Data for all of these products except 

single-name CDS are available to the CFTC through reporting by Swap Data Repositories (SDRs). Data on 

single-name CDS are available to the CFTC through DTCC’s Trade Information Warehouse.6 Data on IM 

currently exchanged on these positions was not available. 

Due to current data limitations, commodity swaps are not included in this study. While 

regrettable, this omission should not be too consequential: commodity swaps constitute less than 0.35% 

of global swaps notional amounts.7 

For compliance purposes, AANA is computed as a daily average over a three-month period. For 

simplicity, however, this study computes AANA from a single day’s snapshot of positions on convenient 

dates around September, 2018.8 All notional amounts are converted to U.S. dollars at then prevailing 

exchange rates. 

According to the UMR in the United States, swaps with commercial end users are not counted in 

the computation of AANA. The only available and relevant data, however, are that some swaps are 

tagged by commercial end users as hedges of commercial risk and, consequently, as exempt from 

clearing. This study, therefore, approximates the exclusion of swaps with commercial end users by 

excluding from AANA all swaps by entities that have tagged any of their swaps as hedges of commercial 

risk. 

To make in-scope determinations, AANA is aggregated across all affiliated entities.9 This study 

accounts for the required aggregations by combining the legal entity identifiers (LEIs) that accompany 

each swap in the regulatory data with affiliate structure data from S&P’s Cross Reference Services.

Furthermore, as required by the UMR, inter-affiliate swaps are included only once in the calculation of 

AANA. 

Some results in this paper rely on the categorization of entities by business sector. These sector 

classifications are a product of CFTC staff. 

5 See, for example, ISDA et al (2018). 6 Single-name CDS are CDS on individual corporate or sovereign credits, as opposed to index CDS, which are CDS on 

baskets of credits or indexes. Index CDS are under the jurisdiction of the CFTC, which has established “Part 45” 

rules that govern reporting to SDRs. Single-name CDS are under the jurisdiction of the SEC, which has not yet 

implemented a corresponding reporting regime. 

7 See BIS (2018). 

8 The dates of these snapshots were August 31, 2018, for IRS, index CDS, and FX swaps; September 1, 2018, for 

single-name CDS; and September 21, 2018, for equity swaps. 

9 See, for example, Commodity Futures Trading Commission (2016), pp. 703-704. 

3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINDINGS 

While Phases 1 through 4 capture just over 40 entities, Phase 5 could bring 700 entities in scope, which 

together encompass only 11% of the AANA across all phases. 

Table 1 shows the qualitative differences between Phases 1, 2, and 3, which have already taken 

effect, and Phases 4 and 5, which are to come. Phases 1, 2, and 3 combined captured 23 entities in this 

data set and encompassed $292 trillion AANA, for an average of about $13 trillion per entity. While 

Phase 4 would capture about the same number of entities, it would add only $20 trillion AANA, for an 

average of $1 trillion per entity. In sharp contrast, Phase 5 would capture over 700 additional entities, 

but, at an average of $54 billion per entity, constitute only 11% of the total AANA across all phases. 

Table 1: Number of Entities and AANA Covered by IM Phases

Phase(s) Number of Entities Total AANA ($billions) Average AANA per Entity 

($billions) 

1, 2, and 3 23 292,338 12,710 

4 20 20,049 1,002 

5 704 38,275 54 

The exact number of Phase 5 entities calculated here is less important than its order of 

magnitude. Because this study uses AANAs at particular dates in 2018, the actual number of entities that 

will be captured by Phase 5 in September, 2020, will certainly be different. There are, for example, 31 

entities in the sample with AANAs between $7.5 and $8 billion that could grow into scope by September 

1, 2020, and 34 entities between $8 and $8.5 billion that could fall out of scope by that time. 

Although not shown in the table, there are tens of thousands of entities that have AANAs below 

the $8 billion MSE and, therefore, will continue to remain out-of-scope after Phase 5. 

Nearly 60% of entities coming into scope in Phase 5 have AANAs of less than $25 billion, and over 75% 

have AANAs less than $50 billion. These subsets of entities comprise about 15% and 30% of total Phase 

5 AANA, respectively. 

Figure 2 shows the distribution of Phase 5 entities across several AANA buckets. The choice of 

buckets is arbitrary, but the $50 billion and $100 billion thresholds have some significance, as market 

participants have called for raising the MSE threshold from $8 billion to either $50 billion or $100 

billion.10 

The blue bars in Figure 2 give the number of entities (left axis) in each of the AANA buckets. The 

vast majority of the 704 Phase 5 entities are in the smallest two AANA buckets, with 403 entities, or 

57%, in the $8 to $25 billion bucket and 139 entities, or another 20%, in the $25 to $50 billion bucket. 

There are 70 entities (10%) in the $50 to $100 billion range, and the remaining 92 entities (13%) fall in 

the over $100 billion range. 

The red line in Figure 2 (right axis) gives the cumulative AANA across buckets, starting from the 

rightmost bucket. For example, the cumulative amount of AANA covered by Phase 5 entities with AANAs 

in the five rightmost buckets, i.e., from $50 to $750 billion, is about $28 trillion. 

10 See, for example, Bartholomew (2018) and ISDA et al. (2018), p. 4. 

4 
 

 

 

 

 

 

 

 

 

 

 

Along this line, the following statistics may be computed. Entities in the $8 to $25 billion bucket 

encompass $5.6 trillion AANA, or about 15% of the $38.3 trillion Phase 5 total, while entities in the two 

leftmost buckets, with AANAs between $8 and $50 billion, encompass $10.6 trillion AANA or 28% of the 

Phase 5 total. 

Recalling from Table 1 that the entirety of Phase 5 AANA is 11% of the AANA of all phases 

combined, entities with AANAs below $50 billion constitute 28% of 11%, or about 3% of AANA across all 

phases of the UMR. 

Phase 5 entities will span a variety of business sectors. The average AANA of newly in-scope swap 

dealers, however, will be many times that of any other sector. 

Table 2 analyzes the Phase 5 entities by sector. The first row gives the number of Phase 5 

entities in each sector; the second row gives the total Phase 5 AANA in each sector; and the third row 

gives the average AANA of entities in that sector. It should be noted that the government sector used 

here matches the rules of the UMR, by, for example, including U.S. municipalities but excluding central 

banks.11 

By count, banks, hedge funds, and asset managers predominate. By total AANA, banks, hedge 

funds, and, to a lesser extent, asset managers, are the largest. By average AANA, however, swap dealers 

are many times as large as entities in other sectors. 

Table 2. Phase 5 Entities and their AANAs by Sector 

Swap 

Dealers Banks Hedge Funds 

Asset 

Managers 

Insurance 

Companies 

Pension 

Funds Corporates Gov’t Sector Unclassified 

Number 

of Entities 20 158 163 153 48 54 65 14 29 

Total ANA 

($billions) 4,045 9,180 10,412 6,598 3,985 1,445 1,226 840 544 

Average 

ANA 

($billions) 

202 58 64 43 83 27 19 60 19 

Table 2 also reveals that 704 Phase 5 entities may be somewhat of an overestimate. As 

discussed in the section on data and methodology, this study excludes commercial end users that have 

claimed commercial hedging exemptions from clearing. It is possible, however, that some of the 65 

corporates in Table 2, which did not claim such exemptions, may claim to be commercial end users that 

are exempt from the UMR. In that case, the true number of Phase 5 entities will fall from 704 by the 

number of these commercial end users. 

11 More specifically, central banks and entities guaranteed by a federal government are excluded from the UMR 

and from the entity count in Table 2, with the exception of FNMA and FHLMC, which are included. (The swaps of 

these excluded entities, however, are included in the calculation of AANA for covered entities.) Other governmentrelated entities, like U.S. municipalities, Federal Home Loan Banks, and sovereign wealth funds are included in the 

UMR and in the entity count in Table 2. 

5 
 

 

 

 

 

 

 

 

 

 

 

Excluding physically-settled FX swaps from AANA could reduce the number of Phase 5 entities by 

nearly 30%. 

Figure 3 shows how AANA breaks down by product across the IM phases. Entities in all phases 

have about the same percentage of IRS swaps, but, overall, Phase 4 and 5 entities have a much larger 

percentage of FX products and a much smaller percentage of equity products than entities in Phases 1, 

2, and 3. 

The data used for this study do not allow for the precise identification of physically- vs. cashsettled FX swaps. Consistent with market practice, however, a rough rule has been applied here: all FX 

options, NDFs (non-deliverable forwards), and exotic derivatives are considered cash settled, while all FX 

forwards and swaps are considered physically settled.12 Using this approximation, Figure 3 reveals that 

Phase 4 and 5 entities have a significant fraction of their AANA in physically-settled FX swaps. 

The extent of AANA in physically-settled FX swaps has a particular policy implication. Under 

current rules, all FX swaps have to be included in AANA even though physically-settled FX swaps are 

exempt from IM requirements. Therefore, an entity with more than $8 billion of physically-settled FX 

swaps but little of any other product would be captured by one IM phase or another, and would have to 

prepare for the exchange of IM, but would never actually need to collect or post IM. For this reason, 

market participants have asked regulators to exclude physically-settled FX swaps from AANA. 

Table 3 describes the impact of excluding physically-settled FX swaps from AANA. Of the 704 

Phase 5 entities predicted to be in scope, 501 (71%) would remain in scope, while 203 (29%) would fall 

out of scope, i.e., would have their AANAs fall below $8 billion. 

Table 3 also shows that average AANA—computed with all swaps—is significantly higher for 

entities remaining in scope than for those falling out of scope. In other words, on average, excluding 

physically-settled swaps exempts the smallest swap counterparties from the IM regulatory regime. 

There are a small number of cases, however, in which entities with relatively large AANAs fall out of 

scope because their AANAs are concentrated in physically-settled FX swaps. 

Table 3. Effects of Excluding Physically-Settled FX Swaps from AANA. (FX Forwards and FX Swaps are the 

products assumed to be Physically Settled.) 

AANA Includes all Swaps 

Phase 5 in-scope entities (AANA between $8 and $750 billion) 704 

Average AANA $54 billion 

AANA Excludes Physically-Settled FX Swaps 

Phase 5 entities remaining in scope 501 

Average AANA (all swaps) $69 billion 

Phase 5 entities falling out of scope 203 

Average AANA (all swaps) $19 billion 

12 Cross-currency swaps, which are explicitly included in IM requirements, are considered cash-settled FX swaps for 

the purposes of this study. 

6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Phase 5 compliance could require implementing nearly 7,000 IM relationships. Excluding physicallysettled FX swaps from AANA could reduce that number to under 5,000. 

As mentioned in the introduction, market participants claim that the implementation of new IM 

agreements between Phase 5 entities and swap dealers from any phase will severely strain the 

resources of the financial industry. To quantify this concern, this paper estimates the number of IM 

relationships required by Phase 5 entities. 

Strictly speaking, an IM agreement is required between every pair of LEIs. In practice, however, 

LEIs representing affiliates of larger groups tend to realize economies of scale in establishing these 

agreements. An individual portfolio manager, for example, might have its own IM arrangements in place 

with a particular swap dealer, but has probably shared legal and operational resources with other 

portfolio managers in the same asset management group. For this reason, this study defines a 

“relationship” as an entity and a swap dealer, where the entity is an aggregation of related affiliates. The 

aggregation logic is the same as used for computing AANA. 

Table 4 shows the number of relationships of Phase 5 entities that include at least 1 swap 

dealer. Under the aggregation assumption of the previous paragraph, the number of these relationships 

correspond to the number of IM agreements that must be in place for Phase 5 entities to continue their 

swaps business with their existing counterparties. 

Table 4. Number of Phase 5 Relationships that Include at Least 1 Swap Dealer from any Phase. LEIs are 

aggregated at the group level. 

Including Corporates Excluding Corporates 

All FX trades in AANA 6,957 6,333 

Excluding physically-settled FX swaps from AANA 4,918 4,509 

The first column of Table 4 assumes that all of the corporates discussed in Table 2 fall under the 

UMR. In that case, Phase 5 could require nearly 7,000 IM agreements, or about 10 relationships for each 

of the 704 Phase 5 entities. If physically-settled FX swaps were excluded from AANA, the number of inscope entities would fall and the number of required agreements would fall to below 5,000. 

The second column of Table 4 assumes that all of the corporates in Table 2 declare themselves 

to be commercial end users that are exempt from the UMR. In that case, the number of agreements falls 

to 6,333, or, if physically-settled FX swaps are excluded, to 4,509. 

CONCLUSION 

This study has described the characteristics of the entities that are likely to be included in Phase 

5 of the IM regime. On the whole, the findings show that Phase 5 will capture a large number of entities 

with relatively low AANAs and with a relatively high proportion of physically-settled FX swaps. Broadly 

speaking, these results are consistent with recent comments and studies by market participants and 

other regulators. 

7 
 

3,000 

2,500 

~ 2,000 

~ i 1,500 

1,000 

500 

Phase 1 

- AANA Threshold 

Phase 2 - MSE {$8 Billion) 

Phase 3 

Phase 4 

Phase 5 

0 

Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-2 

Figure 1. Scheduled Phase In of Uncleared Margin Rules. Entities come into scope when their Average 

Aggregate Notional Amount (AANA) exceeds the given thresholds. An entity is never in scope if its AANA 

is less than a Material Swaps Exposure of $8 billion. 

8 
 

 

Figure 2. Phase 5 Entities by AANA Bucket. The blue bars (left axis) show the number of entities in each 

bucket. The solid red line (right axis) shows the cumulative AANA across buckets, starting from the 

rightmost bucket. 

40,000 

- Number of Entit ies 

400 - Cumulative MNA 

30,000 

300 

20,000 

200 

10,000 

100 

0 0 

8-25 25-50 50-75 75-100 100-250 250-500 500-750 

500 

9 
 

 

1, 2, 3 Phase 4 Phase 5 

 IRS  FX (Cash Settled) FX {Physically Settled)  Equity  CDS 

Figure 3. Product Breakdown of AANA by IM Phase 

10 
 

 

 

 

 

References 

Bartholomew, H. (2018), “Industry Seeks Smaller ‘Big Bang’ for Margin,” Risk.Net, July 26. 

BIS (2018), “OTC derivatives outstanding,” May. Available at https://www.bis.org/statistics/derstats.htm 

BCBS-IOSCO (2015), “Margin requirements for non-centrally cleared derivatives,” Bank for International 

Settlements. 

Cloud Margin (2018), “Seven Considerations About Initial Margin,” Version 1, July.

Commodity Futures Trading Commission (2016), “Margin Requirements for Uncleared Swaps for Swap 

Dealers and Major Swap Participants; Final Rule,” Federal Register 81(3), pp. 636-709 

Condat, A., Puce, A., and Nommels, C. (2018), “How EMIR data help regulators better understand the 

impact of policies,” Research Note, Financial Conduct Authority, August.

ISDA (2018), “Initial Margin Phase-In Analysis,” September.

ISDA and SIFMA (2018), “Initial Margin for Non-Centrally Cleared Derivatives: Issues for 2019 and 2020,” July. 

Available at https://www.isda.org/2018/07/19/initial-margin-for-non-centrally-cleared-derivatives-issues-for2019-and-2020/ 

ISDA, SIFMA, ABA, GFXD, and IIB (2018), “Re: Margin Requirements for Non-Centrally Cleared 

Derivatives—Final Stages of Initial Margin Phase-In,” letter to Secretariat of the Basel Committee on 

Banking Supervision and Secretariat of the International Organization of Securities Commissions, 

September 12, 2018. Available at https://www.isda.org/2018/09/26/joint-trades-final-stages-of-initialmargin-phase-in-comment-letter/ 

11 
APPENDIX B

ILLUSTRATION OF CUSTODIAL

DOCUMENTATION ARCHITECTURE
Party A

(Client)

Segregated Account 

at

Party A Custodian

(US Law)

Party A IM Amount

Segregated Account 

at 

Party B Custodian 

(Bel/Lux Law)

Party 

(Deale

Party B IM Amount

Security Interest

Security Interest

US Law Account 

Control Agreement

Custody Agreement

Custody Account

IM CSA

Bel/Lux Law 

Collateral Transfer 

Agreement

Bel/Lux Law Security 

Agreement

Membership 

Documents

Custody A

Custodial Documentation Architecture: Illustration
APPENDIX C

INTERPRETIVE GUIDANCE SCENARIOS
Interpretive Guidance Scenarios

Scenario 1

Asset

Manager

Reg IM  

Sub‐Threshold

Reg IM

Compliant

ISDA/CSA

Reg IM

Exposure

Reg IM  

Posted

Uncollected

Reg IM

1 15 Yes 12 0 12

2 10 Yes 20 10 10

3 10 No 8 0 8

4 None No 6 0 6

5 None No 9 0 9

6 Zero Yes 3 3 0       

Total 58 13 45

Analysis: No regulatory IM compliance issues.  Total uncollected regulatory IM for the SMA Client is

less than $50M.  All Asset Managers may continue trading with Dealer.

Scenario 2

Asset

Manager

Reg IM  

Sub‐Threshold

Reg IM

Compliant

ISDA/CSA

Reg IM

Exposure Reg IM Posted UncollectedReg IM

1 15 Yes 12 0 12

2 10 Yes 20 10 10

3 10 No 8 0 8

4 None No 10 0 10

5 None No 12 0 12

6 Zero Yes 3 3 0       

Total 65 13 52

Analysis: Managers 4 and 5 execute new trades generating additional regulatory IM exposure, which

results in a regulatory IM compliance issue, as total uncollected regulatory IM for the SMA

Client is now $52M.  Under the proposed Interpretive Guidance, Managers 1, 2 and 6 could

continue trading as each has regulatory IM compliant documentation in place.  Manager 3 is

also allowed to continue trading as it has an agreed regulatory IM sub‐Threshold and is

below that regulatory IM sub‐Threshold.  Dealer will need to work with Managers 4 and/or 5

to reduce aggregate uncollected regulatory IM to $50M or below and Managers 4 and 5

cannot execute new trades (absent other relief).   
Scenario 3

Asset

Manager

Reg IM  

Sub‐Threshold

Reg IM  

Compliant

ISDA/CSA

Reg IM

Exposure Reg IM Posted UncollectedReg IM

1 15 Yes 12 0 12

2 10 Yes 20 10 10

3 10 No 15 0 15

4 None No 6 0 6

5 None No 9 0 9

6 Zero Yes 3 3 0       

Total 65 13 52

Analysis: Manager 3 executes new trades generating additional regulatory IM exposure, which

exceeds its regulatory IM sub‐Threshold and results in a regulatory IM compliance issue, as

total uncollected regulatory IM for the SMA Client is now $52M.  Under the proposed

Interpretive Guidance, Managers 1, 2 and 6 could continue trading as each has regulatory

IM compliant documentation in place.  Dealer will need to work with Manager 3 to reduce

uncollected regulatory IM to Manager 3’s regulatory IM sub‐Threshold of $10M or below, or

to execute regulatory IM compliant documentation and collect $5M in regulatory IM.  

Managers 4 and 5 do not have regulatory IM compliant documentation, nor a regulatory IM

sub‐Threshold, so they cannot execute new trades until the aggregate uncollected

regulatory IM for the SMA Client is at or under $50M (absent other relief).  However, if

Dealers were to agree a regulatory IM sub‐Threshold of $6M and $9M, respectively, for

example with Managers 4 and 5, they would be able to continue to trade up to their

regulatory IM sub‐Threshold.

Scenario 4

Asset

Manager

Reg IM  

Sub‐Threshold

Reg IM

Compliant

ISDA/CSA

Reg IM

Exposure Reg IM Posted UncollectedReg IM

1 15 Yes 22 0 22

2 10 Yes 20 10 10

3 10 No 8 0 8

4 None No 6 0 6

5 None No 9 0 9

6 Zero Yes 3 3 0       

Total 68 13 55

Analysis: Manager 1 has executed new trades and failed to post the required $7M in regulatory IM.  

Manager 1 is in breach of its posting obligations to Dealer.  Dealer will need to collect the

required regulatory IM or close out Manager 1.  Dealer can continue trading with Asset

Managers 2 and 6 as each has regulatory IM compliant documentation in place.  Manager 3

is also allowed to continue trading as it has an agreed regulatory IM sub‐Threshold and is
below its regulatory IM sub‐Threshold.  Managers 4 and 5 do not have regulatory IM

compliant documentation, nor a regulatory IM sub‐Threshold, so they cannot execute new

trades until the aggregate uncollected regulatory IM for the SMA Client is at or under $50M

(absent other relief).  However, if Dealers were to agree a regulatory IM sub‐Threshold of

$6M and $9M, respectively, for example with Managers 4 and 5, they would be able to

continue to trade up to their regulatory IM sub‐Threshold.
APPENDIX D

COMPARISON CHART OF GLOBAL AANA 

CALCULATION REQUIREMENTS AND IM 

COMPLIANCE DATES
This document is intended as an information resource only; it does not contain legal advice and should not be considered a guide to or explanation of all 

transactions. You should consult your legal advisors and any other advisor you deem appropriate in considering the issues discussed herein. ISD

Copyright © 2020 by International Swaps and Derivatives Associ

AANA Calculation Periods and Compliance Dates for Non‐Cleared M

ISDA is providing the following information based on current understanding 

The information in yellow is subject to regulatory confirmation or rule amendments/finalization. The tex

For ease of comparison, the below information does not reflect rule changes recently finalized or proposed to delay Phases 5 a

US EU/UK Japan Canada Switzerland Australia Ho

AANA Calculation Method Daily averaging

Month‐end

average Month‐end average Month‐end average

Month‐end

average

Month‐end

average

M

ComplianceDate

AANA/MSE

AANACalcPeriod AANA

AANACalcPeriod AANA

AANACalcPeriod AANA

AANACalcPeriod AANA

AANACalcPeriod AANA

AANACalcPeriod AANA

Phase 5 1‐Sep‐20

USD50billion

March,April,May2020

EUR 50billion

March,April,May2020

JPY 7

trillion

March,April,May 2020

CAD 75billion

March,April,May2020

CHF50billion

March,April,May2020

AUD75billion

March,April,May2020

HKD375billion

Phase 6 1‐Sep‐21

USD 8

billion

June,July, Aug2020

EUR 8

billion

March,April,May2021

JPY 1.1

trillion

March,April,May 2021

CAD 12

billion

March,April,May2021

CHF 8billion

March,April,May2021

AUD12billion

March,April,May2021

HKD60billion

Postphase‐in

period 1‐Jan‐22

USD 8

billion

June,July, Aug2021 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 

Postphase‐in

period 1‐Sep‐22 n/a n/a n/a n/a

JPY 1.1

trillion

March,April,

May 2022

CAD 12billion

March,April,May2022 n/a n/a

AUD12billion

March,April,May2022

HKD60billion

Postphase‐in

period 1‐Jan‐23

USD 8

billion

June,July, Aug2022

EUR 8

billion

March,April,May2022 n/a n/a n/a n/a

CHF 8billion

March,April,May2022 n/a n/a n/a 

Postphase‐in

period 1‐Sep‐23 n/a n/a n/a n/a

JPY 1.1

trillion

March,April,

May 2023

CAD 12billion

March,April,May2023 n/a n/a

AUD12billion

March,April,May2023

HKD60billion

Postphase‐inperiod 1‐Jan‐24

USD 8

billion

June,July, Aug2023

EUR 8

billion

March,April,May2023 n/a n/a n/a n/a

CHF 8billion

March,April,May2023 n/a n/a n/a 

Postphase‐in

period 1‐Sep‐24 n/a n/a n/a n/a

JPY 1.1

trillion

March,April,

May 2024

CAD 12billion

March,April,May2024 n/a n/a

AUD12billion

March,April,May2024

HKD60billion