Isda has selected the financial benchmarks arm of the InterContinental Exchange to build and operate a crowd-sourcing utility for the industry-developed Standard Initial Margin Model for managing the exchange of collateral backing uncleared swaps transactions.
ICE Benchmark Administration, which manages key financial indexes including Libor and IsdaFix, was selected following a public tender.
New rules that take hold in September 2016 require swaps counterparties to post initial margin on their derivatives transactions and exchange daily variation margin to reflect the changing value of those trades.
The centralised crowd-sourcing solution enables industry participants to use broad consensus results to determine risk buckets and weightings when calculating margin under the Isda Simm.
While risk weights for some asset classes are clear, allocation of net sensitivity values for some asset classes must be generated to each risk factor and mapped consistently to a particular risk bucket under the Simm.
The utility will accept data from all participants that are in scope for the new margin rules and analyse that data to produces the consensus results.
The new rules are a huge upheaval for the US$630trn OTC swaps market, requiring huge infrastructure upgrades to calculate and exchange collateral efficiently.
Isda believes that a standard methodology could slash trillions of dollars off initial margin requirements under the new rules. The industry body’s working group on margin rules calculates that IM requirements under the Simm total around US$1trn across the market, compared to US$10trn under a table-based calculation. Isda also believes that the standard methodology will reduce the potential for disputes and permit timely and transparent dispute resolution.
Initial margin requirements kick in for participants with outstanding swaps notionals in excess of €3trn in September 2016 – thought to encompass around 30 to 40 counterparties. Additional participants will be brought into the regulation in four separate waves, with the final group – those with €8bn–€750bn notional – subject to the rules from September 2020.
The largest dealers will post variation margin next September while a six-month phase-in has been added to bring the remainder of participants on board by March 2017.
Isda retains an oversight role and will work closely with ICE Benchmark Administration to ensure that the utility is developed with an appropriate governance structure.