INITIAL MARGIN AANA CALCULATIONS -
The AANA (Average Aggregated Notional Amount) calculations define whether firms are in-scope for each Initial Margin phase.
Learn here how LATTER PHASE FIRMS CAN perform KEY TASKS BEFORE, DURING AND AFTER THEIR AANA calculation.
On 23rd July 2019 BCBS/IOSCO recommended the introduction of new Initial Margin phases Phase 5 and 6.
The full BCBS/IOSCO statement can be seen here. In summary, BCBS/IOSCO have recommended:
Extending the last phase of Initial Margin by a year, via the creation of a Phase 6
As a result, the original tidal wave of Phase 5 groups - 1,100 based on ISDA’s estimates - would be split across newly organised Phases 5 and 6:
Phase 5 would go-live in Sept-20, but now with an increased AANA threshold of $/€50bn
Phase 6 would go-live in Sept-21, using the original Phase 5 AANA threshold of $/€8bn
No change has been suggested for Phase 4, which would continue to go-live Sept-19, with an AANA threshold of $/€750bn
We should start by saying that BCBS/IOSCO’s statement generally makes sense to us.
BCBS/IOSCO’s approach sees the benefit of avoiding a single tidal wave of firms and would give more time to the smaller firms to get ready. But at the same time it maintains the industry focus on IM compliance and sticks to its original principles.
All-in-all, BCBS/IOSCO’s recommendation seems a fair compromise.
We’re expecting global regulators to follow BCBS/IOSCO’s lead. If they do, see ISDA’s estimates for in-scope groups caught within the new Phases 5 and 6 above.
If so, AANA calculations will now come in vogue like never before.
Firms close to the 50bn AANA will be assessing whether they’re in-scope for the new Phase 5 in Sept-20, or whether they can find a way to escape and step back into Phase 6. If AANA is just north of 50bn, we expect firms to get creative, as we’ve seen for previous Phases.
All in all, AANA calculations will be getting plenty of love in coming months. Read on for more information on the calcs themselves.
HOW SHOULD FIRMS CALCULATE THEIR AANA?
In a nutshell, the AANA calculation is pretty much as you’d expect:
The gross aggregation of notional for all in-scope OTC trades under the same group over a three-month period, then divided by a prescribed number of days to give a notional average.
There are jurisdictional differences, but the calculation itself is not so difficult. As with anything in finance, problems arise due to data - whether silo’d or poor quality - which can make it tough to aggregate trading from multiple systems or multiple entities under the group.
There are some great industry resources already out there that define the mechanics of the AANA calculation. So we won’t try to recreate the wheel here, but what we will do is break down the key steps for firms to follow. These are often not clear and easily misunderstood.
The key steps required before, during and after a firm’s AANA calculation are:
Confirm your jurisdiction or jurisdictions. It might sound crazy to even include this step but the key point here is that some firms are regulated in multiple jurisdictions, so they will need to perform an AANA calculation per jurisdiction. There have even been scenarios in previous phases of firms exceeding the AANA calculation in one jurisdiction but not another, due to slightly different calculations.
Confirm whether you are an in-scope entity. Simplistically, if your group/entity/fund was in-scope for Variation Margin then you’ll likely be a potential in-scope party for Initial Margin.
There are jurisdictional differences in entity scope. The US rules only apply directly to Swap Dealers (SDs) and Major Swap Participants (MSPs) and indirectly to Financial End Users (FEUs). The EU rules catch a broader scope of groups and apply to Financial counterparties (FCs) and Non-Financial counterparties exceeding the clearing thresholds (NFC+), which are defined here - https://www.esma.europa.eu/clearing-thresholds.
Confirm your AANA calculation period. Different jurisdictions have different AANA calculation periods. You didn’t expect them to be the same, surely?!! :)
The US calculation period is the three months from June to August 2019, whereas the EU calculation period is from March to May 2020. The US regulators have been smart here, as their earlier AANA calculations are likely to focus the attention of US firms on their IM delivery before their EU counterparties…..not only does this increase the chance of compliance for the US firms but they also benefit from the first grab at specialist market resources, which are likely to be squeezed.
Perform your AANA calculation(s)…..NOW, for ALL JURISDICTIONS. Regardless of the jurisdictional differences in the AANA calc period, the AANA calc should be run by all potential Phase 5 firms NOW.
For EU firms, this can be done by using a proxy three-month period to mirror the March-May 2020 regulatory period. If EU firms wait until end-May 2020 to perform their AANA then they’re leaving themselves with 3 months to deliver what could be a front-to-back change programme that would typically take 15 months+….hopefully there won’t be firms left in this camp.
In terms of the mechanics of the calc itself, this is where we’ll defer to the strong industry resources that already exist.
For US AANA calculations, see ISDA’s helpful resource here - https://www.isda.org/a/pe6ME/AANACalculationUS_20190529_FINALv2.pdf.
For EU AANA calculations, and the differences between EU and US calculations, see Acadiasoft’s resource here - https://www.acadiasoft.com/umr_compass/acadiasofts-guide-to-calculating-average-aggregate-notional-amount-aana/.
Be warned that for funds coming into scope within Phase 5, the AANA should be calculated for each fund in isolation (or at sub-fund level for umbrella agreements), rather than at the fund manager-level. This means that any funds managed by multiple fund/investment managers will need to aggregate their trading across all of these relationships to perform their AANA.
Also note that physically-settled FX are in-scope for the AANA calculation for all jurisdictions, despite the fact they’re out of scope for margin exchange - figure that one out, but the rules are rules and we’re best to assume they won’t be removed from the AANA calc now.
AANA >Phase 5 Threshold? Move quick. There’s no time to waste for firms breaching the Phase 5 threshold, which are therefore in-scope for Sept-20. Once they know they’re in-scope they’ll need to move fast to kick-off early tasks such as setting up the programme, finding a programme sponsor and allocating resources.
It’s also important to inform your Dealer counterparties that your firm is in-scope. The ISDA resource embedded within step 4 above contains the best ways to self-disclose to your counterparts.
New Phase 5 firms also have a steep learning curve to understand the changes that will impact them. There are helpful resources for these firms, including our free Initial Margin Health check - click here - which gives firms access to our specialists to guide them through the key IM rules, changes, challenges and solutions.
In terms of delivery scope, BCBS/IOSCO’s March-19 guidance is expected to mean that only those firms with exposure breaching the exchange threshold (€/$50mill at group-to-group level) will need to deliver the full set of custodian, operational and legal changes. See our first of two related posts here for an overview of the BCBS/IOSCO guidance and its impact.
Based on BCBS/IOSCO’s guidance, and an assumption that it will be translated into regulation (CFTC, Canada, Hong Kong and Singapore regulators have already given it public backing), we believe a Threshold Breach Assessment is a critical first step for in-scope firms to understand whether and when their relationships will breach the exchange threshold. The idea is to produce upfront SIMM and Schedule forecast calculations which can then be used to assess if an exchange threshold breach is likely. Again, see our related post here for more details.
Only when firms have this view do we believe that they will be able to confidently confirm their IM delivery scope and plans.
AANA <€/$8bill? Continue to calculate.
Two scenarios here. Firstly, a US firm calculates their AANA for the regulatory calculation period and is below the $8bill. Good news right? Well yes, the firm is out-of-scope, at least under the US jurisdiction.
But that firm will still need to continue to calculate AANA each subsequent year to ensure that they don’t breach the threshold at a future point in time. Otherwise those firms with a small current portfolio but a far larger portfolio going forwards would unfairly be able to escape the rules. Let’s not forget that that same firm may also need to perform their AANA calculation for the EU, or other jurisdictions, if it has multiple regulated jurisdictions….
Secondly, an EU firm may run a proxy calc which comes in below the €8bill. This seems positive news, but the reality is that calc has still not been performed for the regulatory calc period.
So what are the next steps? Honestly that depends on how close the calc result is to the €8bill. If a firm is close then they might try to protect themselves from breaching the €8bill for the regulatory calc period - maybe via portfolio compression or a slight change in trading strategy (e.g. more voluntary clearing). Those firms unable to affect their trading patterns may choose to kickstart their IM programme as a safety net.
There’s no single right answer here but what’s clear is that firms should be incredibly careful about downing tools and assuming no action is required.
Hopefully that helps. Please get in touch via the form below with any related questions.
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