A Fund Manager’s Guide to the Initial Margin Rules for Uncleared Swaps (Part One of Two)

Regulators in the U.S., E.U. and other jurisdictions are in the process of implementing margin requirements for uncleared over-the-counter derivatives transactions, including rules regarding bilateral posting of initial margin (IM Rules). Although the IM Rules in the U.S. and the E.U. will not take effect until September 1, 2020, compliance with them requires advance planning, and many swap dealers are beginning to contact their clients to determine which of them will be in scope and when. Affected funds will be required to amend existing uncleared swap documentation (or enter into new documentation); establish custody relationships; determine the amount of initial margin (IM) they will be required to post and collect; and monitor threshold calculations. In this guest article, the first in a two-part series, Sidley Austin partners Elizabeth Schubert and Leonard Ng, along with associate Kate Lashley, provide an overview of the IM Rules and discuss the IM threshold that affected parties may adopt; the requirement to segregate IM; the changes an affected fund will be required to implement to accommodate compliance; and the models and methodologies available to calculate IM. The second article will explore which funds will be in scope of the IM Rules and review the timing for the implementation of the IM Rules. For a discussion of the variation margin requirement, see “Steps Hedge Fund Managers Should Take Now to Ensure Their Swap Trading Continues Uninterrupted When New Regulation Takes Effect March 1, 2017” (Feb. 9, 2017). For additional insight from Ng, see “What Are the Implications for Investment Managers of the Revised Prudential Framework for E.U. Investment Firms?” (Mar. 22, 2018); and “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

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