Insights

Uncleared Initial Margin Rules Phases 5&6 – considerations for in-scope market participants

The Factor Team
November 11, 2020

Factor was delighted to host our third in a series of webinars shining a light on the Uncleared Initial Margin Rules. Moderated by Keith Blizzard (Head of Factor SME Group) the session addressed the key challenges facing buy- and sell-side market participants striving to execute IM documentation by the Phase 5 deadline of September 1, 2021, and the Phase 6 deadline of September 1, 2022. 

Keith was joined by a panel composed of distinguished experts; Guy Antrobus (Partner Allen & Overy, Capital Markets Practice), Joseph Scordato (Formerly Global Head, General Counsel – Contract Risk Advisory, Credit Suisse) and Jorge Rey (Senior Derivatives Counsel, Factor) 

The discussion was well attended by 17 institutions representing a broad scope of buy-side and sell-side market participants.  It was notable that the audience for the session comprised stakeholders representing COO offices, Program Management, and Business Management functions, in addition to in-house Legal participants.  Perhaps this is a sign of the complexities inherent of phase 6 and the challenges it represents to buy-side institutions who do not have the in-house expertise or incumbent custodian relationships on which to deliver a solution.

Market insights and update: 

Keith and the Panel addressed three core topics:  

  1. IM5 completion and planning for IM6 
  2. Trends observed from negotiation 
  3. Resourcing and successful delivery
     

1. Project Planning for delayed IM5 completion and approach to IM6 

Participant polling gave the following insight into the response to the delays announced in April 2020: 

In relation to your original IM5 program, on the announcement of the delay, did you? 

  • Suspend/stop all negotiations – 21% 
  • Continue with negotiations but with reduced resources – 29% 
  • Continue the project without interruption – 50% 

It was striking that 50% of those polled had observed some level of disruption to their project planning.  Jorge Rey, Factor painted a more positive picture stating that in his experience c.95% of counterparties had elected to continue moving forward uninterrupted. Guy Antrobus, Allen & Overy concurred but added that efficiency has suffered as participants are using the delay to negotiate more and many appear to have lost some focus.
  

2. Trends observed from IM Phase 5 Negotiations 

Jorge Rey discussed the 3 principal areas of IM negotiation: 

  1. Eligible Collateral Schedules (ECS) 
  2. Account Control Agreements (ACA) 
  3. Initial Margin CSAs 

Jorge noted that while some market participants preferred to sequence the negotiation of the documents, others opted to negotiate the documents concurrently.  Guy Antrobus observed that “While there are legal technical points on the sequencing of execution, none of those are insurmountable”. It is also important to ensure that ACA elections mesh with some of the clauses in CSAs to the extent that the documents are not executed simultaneously. 

Joseph Scordato (Formerly Global Head, General Counsel - Contract Risk Advisory, Credit Suisse) suggested that market participants look to their experience in implementing the initial and variation margin rules and use the lessons learned there.  A “constant monitoring” approach enables participants to apply changes to communication guides as swiftly as possible, helping to expedite future negotiations. 
 

3.  Resourcing and successful delivery 

The Panel shared with the audience, their experiences of project successes and challenges on IM engagements to date.  Joe Scordato provided a thorough checklist of items to consider stating that market participants should deploy a limited number of senior lawyers to supervise junior negotiators, prepare fallbacks for non-standard term requests, and prepare a playbook to help facilitate the negotiation process.  Joe also emphasized the importance of co-ordinating with internal stakeholders, echoing sentiments expressed by Jorge earlier in the discussion.  The entire Panel was unanimous in expressing the importance of setting up IM projects to eventually “handoff to Business as Usual”, to ensure BAU processes are empowered to smoothly deliver changes to documentation when the project is complete. 

Turning to phase 6, Guy cast an interesting opinion on Counterparty Credit, stating “Credit is a very important stakeholder, some phase 6 counterparties may present challenges to credit and the appetite to offer flexibility on different access rights could be diminished”. 

Participant polling on this topic was enlightening: 

What do you think will be the most challenging aspect of successful delivery for Phase 6?? 

  • Agreeing acceptable collateral – 25% 
  • Custodian engagement/negotiation – 42% 
  • Agreeing/reconciling documentation sets – 17% 
  • Negotiating defaults and terminations – 17% 
  • Agreeing Calculation Agent – 0% 

The audience response suggested the preeminent challenge to successful delivery for phase 6 will be Custodian engagement and negotiation.  This piqued the interest of Jorge and Guy who agreed that new generation election-based ACAs tend to be more straightforward than historical documents, though Jorge noted that he still expects parties to negotiate some of the key elections.
 

Concluding Remarks

In summary, the session emphasized the following points for attendees to consider: 

  • Negotiation Cadence - Know Custodian deadlines. These will drive ACA lockdown 
  • IM CSA negotiation - define a strategy early as the focus of IM negotiations at the beginning of 2021 will center on implementing ACAs and Eligible Collateral Schedules by the custodial deadlines designated for Q1. 
  • Treat counterparties as clients.  Both parties are seeking to achieve a mutual goal.  Spirit of collaboration will ensure all parties reach their goal more swiftly 
  • Prioritize internal stakeholder management, ensure all functions are fully engaged and do not underestimate the value of maintaining and adapting playbooks to incorporate fallbacks and answers learned during the negotiation process. 

Boasting a decade of experience helping global firms manage and deliver complex outreach and renegotiation, Factor has repapered over 20,000 CSA’s since 2017.  Our expertise in coordinating playbook and stakeholder management is often critical in delivering successful regulatory reform remediation projects.  Looking forward to 2021 with the convergence of Libor Transition, IM5, and CSDR in early 2022, Factor can also help our clients navigate the challenges of multiple regulatory reform projects running alongside each other. 

Please click here to contact the team who will be very happy to set up a call to share further insights.