Publications & Events
White & Case Derivatives Insight – The Delta Report

Two Months After The Margining Big Bang – The State Of Play


As we reported in our December 2016 issue of the Delta Report, the derivatives market has been working steadily towards a Q1 2017 phase-in commencement in respect of the rules for margining of non-cleared derivatives (the "Margin Rules"). The regulatory technical standards submitted by the European Commission (following review, discussion and amendment of the version submitted to them by the European Supervisory Authorities ("ESAs")) were published in the Official Journal of the European Union in December 2016[1] and entered into force on 4 January 2017. From 4 February 2017, counterparties who each had a group aggregate average notional amount of EUR 3 trillion for non-cleared derivatives[2] were required to begin posting both initial margin ("IM") and variation margin ("VM") (with a phase-in then commencing on such date through to 1 September 2020). On 1 March 2017, it was intended for there to be a market "big bang" bringing all FC's and NFC+'s[3] within scope of the obligation to post VM in accordance with the Margin Rules. However, this represented a herculean task for the derivatives market and, across dealers, the average combined execution rate of CSAs which were ready to trade was estimated at less than 3 per cent. shortly prior to the deadline[4]. Clearly some form of delay or relief was necessary, although regulators around the world have responded to such requests with varying degrees of sympathy[5]. This article looks to provide detail on the nature of that relief in the European Union ("EU") as well as outlining the key current issues for market participants arising from the Margin Rules and the related documentation and processes finally being put to the test.



Despite the market working flat-out to achieve compliance in line with the implementation timeline (as described above), the sheer volume of re-papering and (in many cases) new documentation required by the Margin Rules meant that many users have been unable to meet the strict deadlines imposed. It was reported by the Investment Adviser Association at the end of January 2017 that, for non-dealers, 92% of participating firms reported completion of 10 or fewer regulatory-compliant credit support documents[6]. In particular (and as further outlined below), the lack clarity around settlement timing, issues around the application of the "Minimum Transfer Amount" ("MTA"), the need to draft documents for compliance with multiple margining regimes, assessing how to apply the requirements for counterparties in non-netting jurisdictions and disharmonised global effective dates have all led to significant delays in finalising the necessary documentation. This was particularly acute in the EU given the Margin Rules only took final form in October 2016. Likewise, many users with existing documentation have been reluctant to agree a new document that removes protections and bespoke terms in such existing documentation that are still permitted under the Margin Rules. This has significantly reduced the ability of larger institutions to roll out a template form that can be quickly agreed with counterparties.

As such, the race for compliance is now focused on ensuring that all necessary documentation is in place as soon as possible and that every effort has been made to advance the process with counterparties trading after 1 March 2017 without compliant documentation in place.


Implementation Timeline – Europe

As mentioned above, from 1 March 2017 it was planned for there to be a market "big bang" in the EU bringing all FCs and NFC+s within scope of the obligation to post variation margin in accordance with the Margin Rules (the "1 March VM Requirements").

Following the actions of the US regulators[7], the ESAs opted to issue a similar (although more limited) statement granting a degree of flexibility for certain parties who were required to comply with the 1 March VM Requirements.

On 23 February 2017, the ESAs issued a statement explaining that, unlike in other jurisdictions (such as the US), the ESAs lack the power to issue no-action letters or formally disapply (on a temporary or permanent basis) any directly applicable EU legislative text. However, it was noted that the implementation of the 1 March VM Requirements was an issue for the industry and appeared to "mainly pose a challenge for smaller counterparties" (i.e. smaller FCs on the buy-side of the market and NFC+s). Taking this into account, it noted that, although the ESAs still expect Competent Authorities (being the relevant regulator in each EU member state) to generally apply their risk-based supervisory powers to enforce applicable legislation, in this context they may take into account:

  • the size of the exposure to the counterparty in question and its default risk;
  • the steps the parties have taken to document progress towards full compliance; and
  • the availability of alternative arrangements to ensure that any non-compliance is contained (such as using existing credit support documentation that may not be compliant with the Margin Rules (e.g. in respect of timing, collateral stated to be eligible for posting etc)).

The ESAs noted that the statement was not intended to entail general forbearance from the 1 March VM Requirements. Rather, Competent Authorities should, on a case-by-case basis, assess the degree of compliance and progress by parties subject to the 1 March VM Requirements.

The ESAs did not state a hard deadline by which this flexibility around enforcement will end, it is noted that they expect "the difficulties to be solved in the coming few months and [in any case] that transactions concluded after 1 March 2017 remain subject to the obligation to exchange variation margin".


UK Financial Conduct Authority

Following the ESAs statement, the UK Financial Conduct Authority ("FCA"), being the Competent Authority in the UK, issued a press release, welcoming the statement from the ESAs and confirming that it will look to take a "risk- based approach and use judgement as to the adequacy of progress, taking into account the position of particular firms and the credibility of the plans they have made". It is noted that, where full compliance has not been achieved, the FCA expects a demonstration of how:

  • the relevant parties subject to the 1 March VM Requirements have made "best efforts" to achieve full compliance; and
  • the parties will achieve compliance in a short a time as practicable for all transactions that are in-scope for the purposes of the Margin Rules. The FCA also noted that it will expect full compliance within "a few months".


Impact for Market Participants

While less formal than the relief granted by other regulators globally, the statement by the ESAs is nevertheless helpful in mitigating concerns for larger FCs/ dealer banks operating in Europe (and, in respect of the FCA statement, in London in particular) around trading with counterparties where they do not yet have documentation in place that is compliant with the Margin Rules. Given the ESA statement and the FCA press release note that assessment of compliance (and any subsequent enforcement action) will be carried out on a case-by-case basis, parties should work to ensure that they have in place a detailed internal roadmap to full compliance in place, clear, documented steps showing progress for each counterparty and evidence that any existing credit support arrangements are being utilised. This should assist Competent Authorities with exercising their discretion appropriately where smaller FCs and NFC+s are concerned.


Key Current Issues

Minimum Transfer Amount

In the context of VM, the MTA represents the maximum unsecured credit exposure that parties are now permitted to have at any given time as the Margin Rules no longer permit the inclusion of a "Threshold" and require collateral equal the full mark-to-market exposure within a netting set[8] to be posted.

In the context of both IM and VM[9], this provision[10] looks to avoid minor amounts of collateral moving back and forth between the parties as a result of small movements in the mark to market of the outstanding transactions (or the model in the case of IM) within a netting set, thereby creating an unnecessary administrative burden. The Margin Rules provide that the MTA may not exceed EUR 500,000 for each netting set[11]. It may be divided between the two counterparties to the netting set and may also be applied to the combined amount of IM and VM to be posted; however, it cannot exceed EUR 500,000 in total[12]. Once the Minimum Transfer Amount is reached, the full amount must be posted.

The provision has caused an operational headache for a number of market participants and, in particular, for funds where the fund manager trades using one netting set for the benefit of a number of sub-funds. The Margin Rules do not make any express provision governing how the Minimum Transfer Amount should be calculated in those circumstances. It is arguable that the strict wording of the rules therefore requires Minimum Transfer Amounts to be calculated on the basis of the legal entity, rather than at individual account level – an approach that would present operational difficulties for fund managers and their counterparties. Dealers have been working with their clients to put in place bespoke arrangements to avoid ending up with an MTA for simplicity of zero but this has put further strain on agreeing the documentation within the timeframes originally set by regulators and the position for the purposes of the Margin Rules remains unclear[13].

Non-netting jurisdictions

The Margin Rules make specific provision for OTC derivatives with counterparties in third countries where the legal enforceability of close-out netting or collateral protection cannot be ensured ("non-netting jurisdictions"). The Margin Rules[14] set out two possible approaches and related obligations for EU counterparties facing entities established in non-netting jurisdictions. These are as follows:

  • Article 31(1) of the Margin Rules, which provides that if the legal review[15] is unable to confirm that the netting agreement and, where used, the exchange of collateral is legally enforceable at all times or (if applicable) the legal review[16][17] is unable to confirm that the collateral segregation requirements can be met, then EU counterparties are required to collect collateral on a gross basis and are not required to post collateral; and
  • Article 31(2) of the Margin Rules, which provides that if the legal review confirms that collecting collateral even on a gross basis is not enforceable at all times, then EU counterparties are permitted to not post or collect collateral, provided that transactions with such entities do not exceed 2.5% of the total portfolio of OTC derivatives contracts of the relevant EU counterparty and its group.

The original wording of this provision was subject to significant lobbying by industry groups during the consultation period for the Margin Rules with market participants arguing for a blanket carve-out for the exchange of collateral with counterparties based in non-netting jurisdictions. Article 31 represents the compromise position agreed by the ESAs. However, this has presented further issues with establishing the circumstances in which it can be said that "collection… even on a gross basis is not enforceable". Clearly a country-by-country assessment to establish whether this is necessary, which will involve additional cost and time in jurisdictions where industry standard opinions on the enforceability of collateral arrangements (and/or segregation arrangements) have not yet been published. Once advice is obtained, EU counterparties should, at a minimum, be looking to establish the following:

  1. Is close-out netting a recognised legal concept in the relevant non-netting jurisdiction and will it be enforceable (as the Margin Rules require) under the laws of that jurisdiction?
  2. Is the exchange of collateral (either on a security interest or title transfer basis, as applicable) with counterparties based in the relevant non-netting jurisdiction considered to be enforceable under the laws of that jurisdiction?
  3. Where the parties would be required to exchange IM, are there any laws that require or provide for the ability to segregate margin that has been posted?
  4. On the basis of the answers to questions (1) to (3), is there legal certainty that close-out netting, the exchange of collateral and (where applicable) segregation arrangements will, at all times, be enforceable?

If the answer to question (4) is in the negative, then parties should be in a position to avail themselves of the exemption in Article 31(2), up to the mandatory limit for the portfolio of 2.5 per cent.[18] In this regard, it is important to note that Recital 18 of the Margin Rules in respect of third countries recognises the need "to avoid that it becomes impossible for Union counterparties to trade with counterparties in those jurisdictions". This would also seriously impact the ability of EU counterparties to trade with such jurisdictions in contrast to other jurisdictions where the rules are less prescriptive.

To assist counterparties who wish to rely on Article 31(1), the relevant ISDA working group has published two supplements to the ISDA 2016 Variation Margin Protocol (the "VM Protocol"), which set out amendments to the "New CSA" that is generated by the VM Protocol to allow for either "gross/gross" or "gross/net" margining[19] (the "Non-Netting Supplement"). However, it has been reported that certain buy-side counterparties in non-netting jurisdictions are stating that they would not be willing to sign-up to an agreement to post gross and receive no collateral back[20]. One may therefore query whether counterparties will instead try to push as much trading into the Article 31(2) bucket (which is subject to the 2.5 per cent. cap) as is possible within the scope of the legal reviews that can be obtained. In summary, trading with counterparties in non-netting jurisdictions is likely to require considerable analysis where they trade with an EU based counterparty subject to the Margin Rules.

As may be apparent, this has also created further issues with how to apply the MTA to credit support annexes which adopt this wording. The working group has also published an amendment agreement[21] (the "MTA Amendment Agreement") to address this scenario. Under the approach envisaged by the Non-Netting Supplement, the MTA is split by the parties and allocates 50 per cent. of the originally selected MTA to each delivery/return amount as a "gross MTA" or "net MTA". The MTA Amendment Agreement allows the parties to replace that approach by defining a "gross MTA" or "net MTA" to equal the full amount of the originally selected MTA (or insert a different amount).

Transfer Timing – Variation Margin

The Margin Rules provide in Article 12 that VM must be posted on the same business day (with allowance for time-zone differences) or within two business days for where either (a) IM is posted and an additional amount has been provided to cover the two business day gap or (b) no IM is due but an additional amount has been posted to cover the two business day gap (i.e. non-regulated IM).

As was argued throughout the consultation process, this appeared unworkable, particularly for buy-side market participants who often have chains of custodians and sub-custodians to instruct in order to transfer margin. It was clarified during the final debates on the Margin Rules in the European Parliament that the obligation is to post (i.e. to give an instruction to transfer funds/ collateral) on the same day of demand; however, this doesn't require same day settlement to occur. The market position settled upon has therefore been reflected in a revised supplement to the VM Protocol[22] which provides that transfer requests received before the "Notification Time" [23] will be initiated on the same business day and those received after the "Notification Time" specified on the next business day. Cash margin is then expected to settle, at the latest, on the next business day and securities in accordance with the customary procedure for settling through clearing systems.

Applicability of US Margin Rules to EU Based Subsidiaries

Another issue that has generated significant concern, particularly in the structured finance space, is around the extra-territorial application of the margining regime (as issued by multiple regulators in the US) to subsidiaries of US banking institutions based in Europe. Our client note on this topic outlines the issues and the related relief granted by the Commodity Futures Trading Commission in respect of their margin rules[24]. However, as many such subsidiaries are regulated by Prudential Regulators[25] in the US (who have not released corresponding relief pertaining to their (separate) margin rules[26]), it is clear that issues still remain in this regard.



It remains clear two months after the 1 March VM Requirements commencement date that there remains a significant amount of work to do to ensure no party finds itself on a no-trade list. We are still receiving instructions from clients (particularly end-users) who were not aware of their obligations under the Margin Rules having not previously been required to exchange collateral. As this documentation is put into place, particular issues – including but by no means limited to those outlined above – arise which require bespoke amendments for counterparties depending on their jurisdiction of incorporation, credit profile and operational capabilities. In short, plenty of challenges remain in complying with the 1 March VM Requirements and, as time passes, it will become harder to justify relying upon the soft relief granted by regulators, particularly in the EU.


Derivatives Newsletter
May 2017

Read other articles in this issue

Search for more Derivatives Insights


[2] Calculated on the basis of (a) the average of total gross notional amount recorded as of the last business day of each testing month then an average of the 3 numbers is taken (b) including all entities that consolidate accounts (c) including all non-centrally cleared OTC derivative contracts of that group (including intra-group but counted only once) and (d) assessed on an annual basis in March, April and May with requirements applied the same year.
[3] As defined in the Regulation No 648/2012 of the European Parliament and of the Council ("EMIR").
[4] Letter from, among others, the International Swaps and Derivatives Association Inc. ("ISDA") and the European Banking Authority to G20 regulators around the world dated 7 February 2017.
[5] See further the summary table in this issue of the Delta Report which outlines the various reliefs granted by regulators globally.
[6] See SIFMA and IAA letter from 24 January 2017:
[7] See footnote 5.
[8] Defined in Article 1(3) as a "set of non-centrally cleared over-the-counter (OTC) derivative contracts between two counterparties that is subject to a legally enforceable bilateral netting agreement".
[9] Although the MTA is applicable in the context of IM, the Margin Rules also permit counterparties required to post IM to have a threshold amount of EUR 50 million where the counterparties are part of different groups (or do not belong to any group) and EUR 10 million where the counterparties belong to the same group. These are maximum levels below which counterparties can choose not to collect IM.
[10] See for example Paragraph 2 of the English law governed 2016 Credit Support Annex for Variation Margin (VM) (the "VM CSA") and Paragraph 3 of the English law governed 2016 Phase One IM Credit Support Deed (the "IM CSD"). Corresponding provisions can also be found in the New York law governed credit support documentation published by ISDA.
[11] Article 25(1) of the Margin Rules.
[12] Article 25(4) of the Margin Rules.
[13] The Commodities Futures Trading Commission in the United States has noted the urgency of addressing this point and issued a "No-action Letter" that grants exemptive relief related to the application of the minimum transfer amount to separately managed accounts. See:
[14] Article 31(1) of the Margin Rules.
[15] As required by Article 2(3) of the Margin Rules.
[16] Article 19(6) of the Margin Rules.
[17] This is known as a "negative netting opinion". The difficulty is that trying to prove a negative is much harder than proving a positive with acceptable qualifications. No guidance has been provided by the European Securities and Markets Authority or the FSA as to what such an opinion would need to state in order for a jurisdiction to be regarded as a "non-netting" jurisdiction.
[18] It is clear that any trading in excess of that threshold will not be permitted under the Margin Rules.
[19] Parties should note that these changes can also be made to the standard form credit support documentation that is agreed bilaterally (e.g. via Paragraph 11 of the VM CSA).
[20] Instead, such counterparties would be pushing to exchange collateral on a "gross/gross" basis. This is likely to create pricing implications for users.
[21] See above footnote.
[22] See footnote 18.
[23] As defined and as specified in the relevant credit support document.
[24] Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 635 (January 6, 2016), available at
[25] The five Prudential Regulators are the Federal Deposit Insurance Corporation, the Department of the Treasury (the Office of the Comptroller of the Currency), the Board of Governors of the Federal Reserve System, the Farm Credit Administration and the Federal Housing Finance Agency.
[26] Margin and Capital Requirements for Covered Swap Entities, 80 FR 74839 (November 30, 2015), available at


This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2017 White & Case LLP