With Phase 6 of Uncleared Margin Rules set to go live September 1, 2022, managers with Average Aggregate Notional Amounts (AANA) in excess of 8 billion are preparing. AANA is calculated slightly differently depending on the jurisdiction. For US CFTC (Commodity Futures Trading Commission) and EMIR (European Market Infrastructure Regulation) regulators, AANA calculation uses the average month-end value from March, April and May 2022. US Prudential Regulators (USPR) use a daily AANA calculation for each business day from June, July and August 2021. If entities in different jurisdictions are subsidiaries of each other, then AANA must be calculated across entities.
Products covered by AANA include swaps, security-based swaps, deliverable (physically settled) and non-deliverable foreign exchange (FX) swaps, and forwards that are not centrally cleared. Physically settled FX swaps and forwards are included in the AANA calculation, but will not be included in the calculation of any regulatory initial margin amount. Equity options are not covered by the definition of swap or security-based swap under the US regulations, but theyarecovered for EMIR regulations. If possible, entities can compress OTC trades, or shift certain OTC trades to the cleared trade type options.
After September 1, managers can expect to see several significant changes:
Additional “gross” posting of collateral by both managers and their counterparties
Introduction of tri-party and third-party settlement complexities
Increased costs of collateral
Stricter collateral eligibility schedules
More punitive haircuts being applied
Higher-margin call volumes & complexities
1 to 2 calls per CSA will expand to 3 to 4 calls per CSA, depending on agreement terms
Increased dependencies of Variation Margin and Regulatory Initial Margin calculations due to ‘Greater of’ and ‘Allocated’ Margin Approaches
So what’s next for the firms preparing for Phase 6? You calculate your entity-level AANA and determine which of your entities are in scope. Determine the counterparties impacted by in-scope entities (some brokers may be higher priority based on volumes and product types). Finally, negotiate and sign CSAs and ACAs with your counterparties. In doing so, you should consider threshold monitoring, whether to calculate SIMM or GRID, who the sole calculation provider is and if a third party or tri-party is involved.