The Uncleared Margin Rules

Who must post initial margin, and when

After 2008, regulators decided that a derivative not cleared through a CCP should still be margined as if it might be. The Uncleared Margin Rules, from the BCBS–IOSCO framework, require variation margin on uncleared trades between covered entities and, for the largest users, two-way initial margin held at a third-party custodian. They were phased in over six years by the size of each group’s derivatives book, and the last phase pulled in hundreds of buy-side firms that had never exchanged initial margin before.

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. The phase-in
5. Risks to watch

Key terms

• Uncleared Margin Rules — Regulations, based on the BCBS–IOSCO framework, requiring margin on derivatives not cleared through a CCP.
• AANA — Average aggregate notional amount of a group’s uncleared derivatives, the test for being in scope for initial margin.
• IM threshold — Up to €50 million of initial margin per counterparty relationship, at group level, below which no IM need be called.
• Minimum transfer amount — Up to €500,000, combined across variation and initial margin, below which no transfer is made.
• Segregation — Holding initial margin with an independent custodian so it is protected if the collecting party defaults.
• Schedule-based IM — The standardised alternative to a model: a percentage of notional by asset class and maturity, adjusted for netting.

Every key term, A to Z

In practice

Dealers, asset managers, pension funds and insurers with uncleared books monitor AANA each year and SIMM daily. The last two phases created a market for outsourced IM calculation and threshold monitoring, and for tri-party custody, because many firms were too small to build them in-house.

Read next

• Collateral and the CSA — The cash and bonds that back an OTC exposure
• The ISDA Architecture — The paperwork that makes every other product possible
• ISDA SIMM — The model behind uncleared initial margin

In the app, The Uncleared Margin Rules carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.