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The margin rules proposed by the European Supervisory Authorities (the "ESAs") require IM to be segregated from proprietary assets on the books and records of a third party holder or custodian, or via other legally effective arrangements. In addition, the rules require cash IM to be segregated individually, unless other legally effective arrangements are in place to segregate it from proprietary assets.
In his letter, Stephen O’Connor illustrates the unintended consequences arising from the IM segregation requirements.
The number of new accounts that would be required across the market to comply with the IM segregation requirements to be set up in 2015 is 8,000. Post December 2015, each dealer is likely to face off to an increasing number of custodians, as each dealer may appoint different custodians. Dealers will need to control and reconcile both held and posted IM collateral positions across these custodians.
According to ISDA, the estimated number of new accounts is of a magnitude greater than all the accounts that have been opened to date. And, it represents another significant undertaking which will be necessary to the implementation of the proposed margin requirements and lends further support to its August 19th letter submitted to the WGMR regarding timing issues for margin rules for uncleared derivatives.