On 6 January 2020, the International Swaps and Derivatives Association (ISDA) published a guide intended to provide a general overview of the cross-border application of certain margin rules for non-cleared derivatives.
Given that a significant number of counterparties will fall within the scope of initial margin requirements for non-cleared derivatives in 2020 and 2021, the focus on the applicability of the rules to cross-border trading relationships has increased.
However, analysing multiple foreign rule sets, identifying situations where different rules will apply, and understanding whether substituted compliance could reduce the compliance burden all present practical challenges. Thus, firms will need to understand the relevant aggregate average notional amount calculations, the initial margin thresholds applicable to their trading relationships, and the substantive requirements they will be required to meet.
The ISDA guide outlines the cross-border and substituted compliance rules under different margin regimes, before using this framework to examine the applicable rules for the EU, the US and Japan. It focuses on the position of an entity that is either directly subject to margin rules or is obliged to comply with the margin requirements of its counterparties, rather than the position of an entity which is a swap dealer.
Regarding scope, the guide focuses solely on legal entities. The guide examines the following rules:
- The US Commodity Futures Trading Commission;
- The US prudential regulators;
- The US Securities and Exchange Commission;
- The European Commission; and
- The Japan Financial Services Agency.