ISDA’s note is intended to provide guidance and strategic perspectives on the possible benefits of further standardizing elements of the current ISDA Variation Margin CSA.
With the implementation of the new margin rules, a large number of counterparties will need to amend existing CSAs and replace them with new agreements, or put in place a CSA for the first time, in order to comply with the variation margin requirements on March 1, 2017. ISDA has published the ISDA 2016 Variation Margin Protocol, which contains various ‘Methods’ that parties can use to make these changes. Different counterparties have different preferred methods of bringing their documentation into compliance with the margin rules.
While the margin rules for non-cleared derivatives will reduce some of the scope for optionality for trades under the remit of the rules, there will remain significant latitude for optionality within CSAs. But where parties are putting in place a new CSA, either for the first time or to replace an existing CSA, they have an opportunity to use standardized collateral terms, and the ISDA Variation Margin Protocol provides a mechanism for this. They may also achieve more standardized terms by bilaterally negotiating bespoke amendments to existing CSAs that reduce optionality.
Adoption of more standardized variation margin terms by market participants, whether through creation of a new CSA or through more standardized amendments to existing CSAs, would promote safer and more efficient markets by facilitating price discovery and increasing transparency. Further standardization of terms within the CSA could also have other benefits by simplifying and standardizing market processes and reducing potential margin disputes, such as valuation differences.
Standardization of terms is not the only consideration for parties when agreeing their collateral terms, and fully standardized terms may not be appropriate for all counterparties. But all parties should consider the benefits to be reaped from increased standardization. For many, the March 1, 2017 regulatory date may be a good opportunity to make a change, but the optimal level of market standardization may not be adopted in a single step. Market participants should continue to review their collateral terms and consider how they could benefit from greater standardization, even after the regulations are live.
Full note
© ISDA - International Swaps and Derivatives Association
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