ISDA published a guide to the cross-border application margin rules for non-cleared derivatives in US, EU, and Japan. The guide describes the cross-border and substituted compliance rules under different margin regimes and uses that framework to examine the applicable rules for US, EU, and Japan. The guide focuses on the position of an entity that is not a swap dealer but is either directly subject to margin rules or is obliged to comply with the margin requirements of its counterparties.
A large number of counterparties will come into the scope of initial margin requirements for non-cleared derivatives in 2020 and 2021. This has increased the focus on the applicability of the rules to cross-border trading relationships. However, practical challenges exist in analyzing multiple foreign rule sets and identifying situations in which different rules will apply as well as in understanding whether substituted compliance is available to reduce the compliance burden. Firms will need to understand the different aggregate average notional amount (AANA) calculations that are relevant to them, the initial margin thresholds that apply to their trading relationships, and the substantive requirements they will have to meet. This ISDA guide is intended to facilitate understanding of these rules. The guide looks strictly at the legal entity level to determine whether an institution is domestic or foreign. So, if a US group has a trading subsidiary that is established in France and registered with the CFTC as a swap dealer, then EU would be the domestic jurisdiction for that French legal entity and the US would be a foreign jurisdiction. Note that both regulated entities and covered counterparties under a jurisdiction’s margin rules may be domestic or foreign
The guide covers the three separate sets of margin rules from SEC, CFTC, and the prudential regulators (comprising Farm Credit Administration, FDIC, FED, FHFA, and OCC) in the United States. The US margin regimes define regulated entities by registration requirements under the Dodd-Frank Act for swap dealers, major swap participants, security based swap dealers, and major security based swap participants. The starting point for analyzing the cross-border application of the US rules is that they apply to domestic and foreign regulated entities when facing domestic or foreign covered counterparties, unless a cross-border exclusion applies or substituted compliance is available.
Additionally, the guide explains that margin regimes in EU and Japan are similar in that regulated entities are generally limited to entities organized or established in the jurisdiction, although with some exceptions. An alternative investment fund established outside EU and managed by an EU alternative investment fund manager (AIFM) that is authorized or registered in accordance with the Alternative Investment Fund Managers Directive (AIFMD) is a regulated entity for EU rules. Similarly, a Japanese branch of a foreign country entity that is registered in Japan as a financial instruments business operator and a Japanese branch of a foreign bank or foreign insurance company that is registered in Japan as a registered financial institution) is a regulated entity for the Japan rules. The EU and Japan rules apply to domestic regulated entities (and to this limited scope of foreign regulated entities) when facing any covered counterparty, regardless of location.
Related Link: Guide (PDF)
Keywords: International, Europe, Asia Pacific, Americas, EU, Japan, US, Banking, Securities, Insurance, Swaps, OTC Derivatives, Margin Rules, AANA, ISDA
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