ISDA Publishes Steps for Calculating Phase-Five AANA for US Regulation

By Regulatory News

May 29, 2019

ISDA has prepared and published an informational document to assist market participants that may be subject to the phase-five initial margin requirements in the U.S. This document summarizes and explains the requirements for calculating the average aggregate notional amount (AANA) for phase-five between June 01 and August 31, 2019, for a compliance date of September 01, 2020. The phase-five initial margin calculation period in the U.S. is June-August 2019—not March-May 2020 as in other jurisdictions. The U.S. non-cleared margin regulations require an earlier calculation period than other jurisdictions to determine whether a party is in-scope for initial margin.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

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Effective Date: June 18, 2019

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Proposed Rule 1

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Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

Under the regulations for the margining of non-cleared derivatives, which have been established by the CFTC and U.S. prudential regulators (the U.S. rules), a party trading derivatives products covered by these rules may be subject to requirements to exchange variation margin and initial margin. The U.S. rules apply directly to registered swap dealers and major swap participants and indirectly to “financial end users.” If a financial end user has an AANA of in-scope, non-cleared derivatives transactions greater than USD 8 billion, then the initial margin requirements will apply (in addition to variation margin). The U.S. rules use the term “material swaps exposure” to refer to an AANA greater than USD 8 billion. The definition of “financial end user” includes various types of financial entities and both U.S. and non U.S. entities.

A party that is already exchanging variation margin with counterparties that are swap dealers subject to the U.S. rules, may also be indirectly subject to U.S. regulatory initial margin requirements. Therefore, it is necessary for that party to calculate the AANA for its consolidated group of entities to determine whether it exceeds the U.S. threshold for Phase 5. The AANA calculation must be conducted at the principal level—that is, aggregated across investment managers, if applicable.

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Keywords: Americas, US, Banking, Securities, OTC Derivatives, Margin Requirements, Notional Amount, AANA, ISDA

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