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REPOSTING BECAUSE REDDIT WAS BEING AN ASS AND NOT RENDERING THE PAGE PROPERLY, AND HALF OF THE PEOPLE SAW NOTHING AT ALL------------------------------------------------------submitted by Ok-Ingenuity4838 to Superstonk [link] [comments]
DisclaimerI am writing this after watching the panel video once. Not knowing who anyone on the panel is, and not knowing most of the acronyms and terms that were mentioned were, I wanted to do some digging and explain some things as best as I understand.
Be advisedThe amount of information, publications, and webpages covering this topic is PLENTIFUL, and I've spent the last couple days off and on combing through page after page picking out what I think best fits a Reddit DD, while still providing value. That said, There will of course be a topic, requirement, or something else that I may have missed, but this more than covers the gist.
TLDRNew margin requirements are coming into effect on September 1, 2022. In a process of phases that started in September of 2016, phase 6 is now on the way. This final phase, has the lowest threshold to date, which is $8 billion; a FAR cry from the $3 trillion threshold of phase 1. As such, MANY more counterparties--institutions, hedge funds, family office, etc--will come into scope, where, if the threshold is exceeded, margin calls can happen, on top of the hefty administrative fees and costs associated with exceeding the threshold.
Moreover, the panel video from November expresses a clear opinion--in a couple of the panelist--that not everyone has been working through the laborious laundry list of preparing to comply, if they have started at all. Which leads me to believe that MANY will be caught of guard September 1, 2022.
And no, this will not be delayed. This phase was already delayed a year due to Covid, but this is happening in a few weeks, come rain or shine.
I have seen the below screenshot posted a lot across socials the last few days, and rightfully so.
However, I have not seen much in the way of explaining some of the nuts and bolts of what exactly is going on.
Also, a recent panel video on the subject that was recorded in November 2021 was streamed to YouTube on Jul 5, 2022. On this panel were members from financial institutions, law firms, and ISDA itself. The video is 53-ish minutes, but I feel it's worth the watch, for sure... especially if you go through this DD first--should you decide to do so--and then watch the video with the proper context.
Let's start with some key terms
The Panel Members
(Leaving this nugget here for anyone who wants to do some digging)
The Topic of this Panel?
'As of September 1, 2022*,* regulatory initial margin (IM) requirements will apply for the first time to hundreds of global counterparties that belong to a consolidated group for which the average aggregate notional amount (AANA) of derivatives transactions exceeds €8 billion, or a similar amount in local currency*.* This compliance date is commonly referred to as ‘Phase 6’, since it is the sixth global compliance date for the phase-in of regulatory IM requirements since September 1, 2016.
ISDA estimates that more than 775 counterparties with an excess of 5,400 relationships may become subject to regulatory IM requirements in Phase 6*. More than 800 of those relationships may need to exchange IM in the near-term following September 1, and therefore should be actively preparing at this stage.*
Preparation for regulatory IM is complex and resource intense, involving the bilateral negotiation of new IM documents, the establishment of custodial accounts, and operational preparation for collateral management processing – including margin calculation, margin call communication, allocation, and affirmation, collateral settlement and reporting. It is imperative that a group of counterparties that anticipates it will exceed the AANA threshold for Phase 6 and is likely to exceed the IM threshold of €50 million (or similar in local currency) notifies its counterparties and begins preparation.'
So, "Who or What is ISDA***"***?
According to Investopedia, the International Swaps and Derivatives Association (ISDA) is a private trade organization whose members, mainly banks, transact in the OTC derivatives market. This association helps to improve the market for privately negotiated over-the-counter (OTC) derivatives by identifying and reducing risks in that market.
For a more "ape friendly" explanation, let's revisit The Big Short.
The Big Short
As we learned from this now infamous scene of the 2015 smash hit--now cult classic and "must watch" to retail investors alike--in order to "sit at the big boy table", you need an ISDA [agreement].
"What is an ISDA Agreement?", you ask?
Per Investopedia, an ISDA Master Agreement is the standard document regularly used to govern over-the-counter (OTC) derivatives transactions and outlines the terms to be applied to a derivatives transaction between two parties, typically a derivatives dealer and a counterparty.
TLDR: An ISDA agreement gives an institution/firm/entity the ability to make significant sums of money by engaging in off-exchange transactions on derivatives and swaps.
BNY-Melon informs us that "ISDA has over 960 member institutions from 78 countries".
"So, this change is coming from ISDA?"
No. As reported by ISDA, "the Basel Committee on Bank Supervision and International Organization of SecuritiesCommissions (BCBS-IOSCO) developed and finalized their Final Framework on MarginRequirements for Non-Centrally Cleared Derivatives (BCBS-IOSCO Final Framework), which sought to establish international standards for such requirements..."
Okay, so "What's all this 'Phase 6' talk"?
Great question. However, before we discuss that, we must first discuss another acronym; UMR.
In short, Uncleared Margin Rules (or UMR) were created to address the OTC derivatives market--and its participants-- in the wake of the global financial crisis (GFC) of 2008-2009, implementing new margin requirements for non-centrally cleared derivatives. As to not stun the market, and to allow for members to comply with what the ultimate changes of these new rules would become, these rules were "phased in".
Starting in 2016, we are now at a precipice where Phase 6 will be going into effect September 1, 2022, some 4 weeks and 5 days away ; or 23 trading days, if you want to be more exact.
According to FinServConsulting,
"The phased thresholds for UMR means that, with each Phase, more and more In-Scope Counterparties will be affected and has been the source of some consternation among market participants", and that "in 2018, market regulators postponed the last two Phases (4 and 5) by one year. The Phase 4 compliance date was originally September 2018 and was moved to September 2020. The Phase 5 compliance date moved from September 2020 to September 2021", and "in addition to the notional thresholds, IM is required to be posted between counterparties where there is a consolidated threshold of $50mn USD or $50mn EUR".
TLDR: Going back to September of 2016, a new set of initial margin rules came into effect. Because the first phase had had the largest AANA threshold--set at $3 trillion--there were few counterparties who came into scope--or met the requirements--which explains why we're only really hearing about this now.
For context, the below graph illustrates the progression of counterparties coming into scope through these phases as the UMR reuirements have changed
With Phase 6 on the way, the "scope" has SIGNIFICANTLY reduced, from a staggering $3 trillion in phase 1, down to a "measly" $8 billion for US counterparties.
We also know that, while only a small number of firms have been impacted by Phases 1-4, the process to comply with Phases 1 - 4 was no walk in the park.
In the conclusion of their ISDA SIFMA Initial Margin Phase-in white paper in July of 2018, ISDA tells us "Large dealers spent two to three years building out their data, systems, and organizations to support regulatory IM calculation and maintenance for 2016 Phase 1 go-live. In the six months prior to September 2016, the Phase 1 firms struggled to finalize CSAs, custodial agreements, collateral schedules, collateral and netting opinions*, perfect security interests and establish accounts with custodians. These difficulties existed even though the first phase involved comparatively fewer entities (approximately 100 counterparties for each dealer)*".
Additionally, we know that the final phases of UMR do not get any easier [in execution or application], with Phase 6--which is almost exclusively buy-side focused, according to Bloomberg--expected to bring its own challenges.
ISDA tells us "The final phases of IM phase-in pose a substantial challenge for market participants, third-party service providers and the market as a whole. Readiness requires detailed discussion and close collaboration across firms, regulators and other stakeholders in an extremely timely manner".
ISDA also tells us “Phase six will undoubtedly be a challenge for our entire industry..."
A look at the Phases. And, no. We're not talking the moon... not yet, anyways.. wink
That all seems pretty intense, but.. What does it mean?
Recall from our key terms earlier that AANA is used to determine if a firm is in scope. Once a determination of whether or not someone is "in scope"--which could be assets managers, banks, hedge funds, corporations, pension funds, family offices, etc--the firm is now required to comply with UMR Phase 6.
Once September 1st comes around, some 775 counterparties, with an excess of 5,400 relationships will be at risk of being in scope for UMR Phase 6, which means--and this is where I may misinterpret something in translation, so someone please correct if I am wrong--once a threshold is agreed to--presumably, this means, once a counterparty enters into an agreement or a transaction that falls under these guidelines--counterparties need exchange initial margin when the $50 million threshold is exceeded. Recall from earlier that initial margin is the percentage of the purchase price of a security that must be covered by cash or collateral when using a margin account.
According to Bloomberg, "the main challenge faced by traders is staying beneath the $/€50 million initial margin threshold, since exceeding that threshold comes with significant costs and cumbersome legal and custodian requirements".
Who is subject to U.S. non-cleared margin regulations?
A party trading derivatives products covered by these rules may be subject to requirements to exchange variation margin (VM) and IM.
"In general, the U.S. rules apply directly to registered swap dealers (SDs) and major swap participants and indirectly to “financial end users”. If a financial end user has an AANA of in-scope, non-cleared derivatives transactions greater than USD 8 billion, then the IM requirements will apply (in addition to VM). (The U.S. rules use the term “material swaps exposure” to refer to an AANA greater than USD 8 billion.)"
More on margin.
CME Group provides us a nice standardized initial margin (IM) schedule; Seen below.
This "AANA" seems pretty important. How do you even come up with that number?
ISDA provides the 5 following basic steps:
However, a more robust 7 steps to calculations AANA--covered in "Guide to Initial Margin AANA Calculations--can be found here.
What kind of derivatives are in scope?
The above list is not exhaustive, however, for a more complete listing of "What's in scope?", click here.
This all seems pretty involved. I bet it's going to be difficult and cumbersome.
Correct. In fact, FinServConsulting made a nice handy infographic with what they see as some of the biggest challenges.
ISDA's white paper on the subject even has lots to say about the difficulties around UMR and provides some caution for newly in-scope counterparties
TLDR: Preparing for, complying with, and executing proper IM under the new UMR framework will be extremely difficult in the BEST of situations and conditions. Those who were not proactive and started late and/or have not yet started......will be up a creek with no paddle should they exceed thresholds and get Marge knocking on the door
What are some of the steps involved for NISC's?
ISDA provides a short--but not exhaustive--list that NISC's will need to check at least twice in preparation for IM
STEP 1: Identify in-scope entities early
STEP 2: Make early disclosures to counterparties
STEP 3: Exchange information on compliance
STEP 4: Identify special cases
STEP 5: Establish custodial relationships
STEP 6: Prepare for compliance
STEP 7: Negotiate/execute documentation
STEP 8: Finalize preparations
EDIT: Shoutout to u/shart_leakage for pointing out something I completely overlooked making this DD. Prior to her time at ISDA, Tara Kruse was a Managing Director and Global Head of Credit Derivatives Documentation at BEAR STEARNS!! From 2000 to 2007!!!!
EDIT # 2: Thanks to u/cowboy_up_1970 for the great idea of adding ISDA Members to this DD. Something else I also did not think of. List can be found here.
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There were a few interviews that were under-represented during the whole buy freeze in January. This was one of them.submitted by ringingbells to wallstreetbets [link] [comments]
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