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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 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.

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 Initial Margin can down the road’ for another year.

BCBS/IOSCO’s latest guidance therefore feels like the smarter option. Now the question is whether the global regulators will all back BCBS/IOSCO’s statement? The working assumption is that they will.


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.

Volume estimates by IM Phase

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%) vs Phase 6 relationships (15%) 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, based on that assumption that BCBS/IOSCO’s guidance will be backed by 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 50 and 750bn then you’re still very much in-scope for 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 i.e. don’t do a Brexit!

Let’s not forget that plenty of the smaller firms would likely not have been ready for Sept-20. This is especially the case for those firms with a higher complexity delivery. 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 funding allocated.

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.

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

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

For the new Phase 5, 314 is still a huge number of groups, more than 10 times bigger than the Phase 4 total, which as it stands will be the biggest Phase we’ve seen 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 LIBOR and all other associated rates - are firms really going to have the resources in place to support two such huge Reg deliveries at once?

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 tidal wave would have resulted in unbearable industry bottlenecks. Legal teams, Custodians and now the Vendors delivering new IM services are all likely to have constraints dealing with the anticipated volumes.

Bear in mind that these bottlenecks existed for the relatively low volumes of Phases 1 to 3, and now also for Phase 4.

So let’s be clear, these bottlenecks will still be there for Phases 5 and 6. In fact, they’ll get a lot bigger than anything we’ve seen so far. But, assuming the relief is backed, 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 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.

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, or maybe even at its most extreme level see if they can novate away from certain trade positions.

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

Post-AANA, for those firms confirmed as in-scope, especially for the new Phase 5, then BCBS/IOSCO’s Mar-19 exchange threshold guidance becomes centre of attention.

The guidance means that relationships with exposure below the $/€50mm 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.

The threshold guidance has already been backed by CFTC and the Canadian and Hong Kong regulators, with more likely to follow suit. A key point here is that this guidance is complimentary to the Phase 5 and 6 guidance.

This is a big topic that deserves proper focus. See our related webinar with Cassini here, which breaks down how firms should approach the 50mm threshold in far more detail.

The priority for in-scope firms 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 confidently plan out their IM delivery.

Our Threshold Breach Assessment gives firms that view. See our related post here.

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