2019 FinReg Outlook: The Calm Before the Storm

Start Preparing for Initial Margin Wave 5 Now or Regret it Tomorrow Though there is no major regulatory implementation this year, the final phase of the global Initial Margin (IM) rules for uncleared derivatives is looming on the horizon next year. In September 2020, the threshold for being in scope of the rules drops dramatically from $750 billion to $8 billion in uncleared derivatives. According to the International Swaps and Derivatives Association, the final phase of the IM rules will capture at least 1,000 entities and over 9,000 trading relationships. This will be a significant event across the financial industry because the IM rules impact not just in-scope entities but also broker-dealers, custodians, and market infrastructure. In-scope asset managers will need to update or create new workflows to their existing collateral management processes. Unlike the Variation Margin rules, the IM rules require both counterparties to post collateral that must be reconciled daily. The IM collateral must be held in a pledge account at an unaffiliated custodian, with a separate pledge account for each counterparty relationship. A trilateral account control agreement, which governs how custodians can move collateral in and out of the pledge account, is required for each counterparty and custodian relationship. IM rules will require substantial work by asset managers and require coordination with various counterparties to ensure full compliance. Firms should use 2019 to begin their plans to comply with these substantial new regulatory requirements. 2019 FinReg Outlook: The Calm Before the Storm    9