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BCBS/IOSCO IM Update (July-19) - Two Waves are better than one? Five Key Takeaways






The full BCBS/IOSCO statement issued on 23rd July 2019 can be seen here. In summary, BCBS/IOSCO 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

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.

The alternative approach heavily debated in the industry was to move back the entire Phase 5 by a year. A full delay for all firms would not have solved any of the recognised problems, with large numbers likely to have kicked the can down the road for another year.

The original question was whether all global regulators would back BCBS/IOSCO’s statement? The working assumption has always been that they will, with US, Singapore, Hong Kong, Korean and Australian regulators already doing so.


So what does this mean in terms of the volume of in-scope groups for the new Phases 5 and 6? Clearly two waves are better than one in terms of the lower split of firms now caught in each.

ISDA have provided industry volume estimates for Phases 5 and 6, shown in the table below.

Group and relationship volume estimates by IM Phase

Group and relationship volume estimates by IM Phase

The two obvious headlines here are that:

  1. From the 1,089 new groups estimated for the original Phase 5, now roughly a third are caught in the new Phase 5 (Sept-20), with the remaining two thirds caught in Phase 6 (Sept-21)

  2. A noticeably higher % of Phase 5 relationships (28-41%) vs Phase 6 relationships (15-23%) will breach the $/€50mm exchange threshold and therefore have to deliver the full set of Legal-Custodial-Operational changes

FIVE key takeaways

See our five key takeaways below, assuming that BCBS/IOSCO’s guidance will ultimately be backed by all global regulators.

1. More time for the small guys, USE IT WELL

Just to be clear, if your firm’s expected AANA is still between 50bn and 750bn then you’re still very much in-scope for Phase 5 Sept-20 compliance. So no change for you i’m afraid….

But, for firms with an AANA between 8-50bn, the headline most will take home is that they have an extra year.

The real message here is that, even if your firm finds itself in-scope for Phase 6, in Sept-21, the time available needs to be used productively.

Let’s not forget that plenty of the smaller firms would likely not have been ready for Sept-20. Firms can’t afford to let history repeat itself for Phase 6.

We’d strongly recommend that firms keep the momentum going rather than parking up their delivery, then going through the pain of re-starting further down the line. Especially for those firms who already have an in-flight programme and/or allocated funding.

Also remember that the bigger tidal wave is definitely Phase 6. Firms are well-advised to beat the inevitable industry queues by getting a headstart on their delivery. If they can, then Phase 6 firms should seriously consider going live in advance of 1st September 2021 in order to avoid those queues.

2. LOWER volumes per phase, but now TWO tidal waves

The trick here is not to get excited about the lower group volumes for each of the newly proposed phases.

For the new Phase 5, 314 new groups is still a huge number, more than 10 times bigger than largest Phase to date.

This still leaves approx. 775 new Phase 6 groups. A scary number, despite the extra year’s delay.

If these numbers stack up, we’re really talking here about two tidal waves rather than one.

Albeit with Phase 5 a fair bit smaller than Phase 6.

But perhaps even more scary is the fact that Phase 6, in Sept-21, clashes with the death of all IBOR rates - are firms really going to have the resources in place to support two such huge Reg deliveries in parallel?

3. (SLIGHTLY) Reduced industry bottlenecks

A direct consequence of the reduced number of firms per Phase is a slight relief on the IM industry bottlenecks.

No doubt that a single Phase 5, with 1,100 new groups, would have resulted in unbearable industry bottlenecks. Legal teams, Custodians and the Vendors delivering new IM services would all struggle to deal with those volumes.

But bear in mind that bottlenecks existed throughout Phases 1 to 4, especially within Legal teams and at the Custodians.

So let’s be clear, the bottlenecks will become bigger for Phases 5 and 6. But it could have been worse!

On the more positive side, the creation of Phase 6 means that industry vendors and Custodians alike will have more time to prepare for the last Phase. This will allow them to plan and improve the scalability of their onboarding processes in preparation for the second, far bigger wave of firms.


AANA calculations will now come into 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.

AANA is, at its simplest level, a gross notional aggregation of all in-scope OTC trades (including delivered FX). With that in mind, some firms will be working out their ability to compress their portfolio and sneak in under the 50bn. Likewise firms will be looking at whether they can clear more products than they’re doing today.

All in all, AANA calculations will be getting plenty of love in coming months. Want to learn more about AANA calculations? See our related post here.

5. IN-SCOPE? focus on the 50MM EXCHANGE Threshold

For in-scope firms then BCBS/IOSCO’s Mar-19 exchange threshold guidance should become front and centre of attention.

The guidance means that relationships with exposure below the $/€50mn exchange threshold will not need to perform the full set of operational readiness changes (Legal-Custodial-Operational). Remember that calculations are still required by all in-scope firms to monitor IM numbers against the exchange threshold.

This is a big topic that deserves proper focus. See our related post here which describes the impact of the threshold guidance in more detail. Also see our related webinar with Cassini here, where we break down how firms can manage their 50mm thresholdl.

The threshold guidance is complimentary to the Phase 5/6 split and has already been backed by multiple regulators, with more likely to follow.

What should in-scope firms do next? If not done already, the priority should be to gain an early view of which relationships are likely to breach the exchange threshold, and by when. Only then will firms be able to understand their compliance scope and plan out their IM delivery with confidence.

For example, if 23 of 25 trading relationships for firm X will confidently stay below the exchange threshold, then the scope of Legal-Custodial-Operational change will be focused only on those 2 breaching relationships.

Our Threshold Breach Assessment service gives firms precisely that view, in addition to the associated breach timeframe estimates. See our related post here.

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Watch out for more content going forwards.


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