10 APRIL 2017


The topic of uncleared margin rules (UMR) and its implementation have been circulating the financial industry for the past year. The big day of 1st March 2017 – the deadline for Variation Margin (VM) compliance – has passed, but we are now starting to see how the industry’s response to the challenge of repapering is unravelling. Some worrying statistics are showing that on 1st March only 10.45% of Credit Support Annexes (CSAs) had been successfully repapered across the industry. Larger institutions fared better than smaller ones, with larger institutions having a higher rate of compliance, but even these firms had no more than a quarter of their documentation complete. Hence, we need to look at what lessons can be learnt to better prepare for the Initial Margin (IM) deadline later this year on 1st September.

Current State of the Market

The majority of banks fell significantly behind their original remediation plans for a variety of reasons. Banks underestimating operational challenges, delays in the availability of industry guidance from ISDA, quality issues with legacy data, and limited internal stakeholder coordination around negotiations all contributed to the failure to comply by 1st March. Also, the expectations to complete negotiations via the ISDA protocol had proven unrealistic, as many counterparties demanded bilateral negotiations, which were time and resource intensive.

Non-compliance Risk

As regulators around the world assessed the state of the market, they issued a six-month grace period for certain financial dealers. Now banks must comply with both VM and IM rules by 1st September this year, otherwise, the industry risks trade freezes which could disrupt the market. Furthermore, if dealers do not manage to utilise this grace period, it may indicate an additional risk of missing the IM deadline as well.

Lessons Learnt

So what have we learned from this VM failure and what can we do to prevent this happening with the IM deadline 1st September?

Firstly, it is vital to look at the process of repapering that financial institutions attempted to follow. The Variation Margin Protocol (VM Protocol) published by ISDA was intended to facilitate compliance with margin rules in various jurisdictions. It outlined three main methods by which the so called “repapering” of OTC derivatives’ legal documentation could happen. Even though firms were given the 2016 VM Protocol to follow, it proved to bring more complexity than clarity. For example, some clauses that were negotiated in the Protocol made sense from a legal point of view, but not so much from a practical point of view because they were unsupported by the current market systems. This goes to show the importance of testing existing systems and databases to identify where improvements need to be made.

Second, it is important to recognise that simple, but time-consuming tasks like preliminary data cleansing can prove crucial for timely compliance. Getting started early with clean data could mean the difference between timely compliance and frozen trades. Closing out old, dormant accounts is also a way to use data cleansing to lessen the repapering burden.

Taking negotiations in-house could also save time in the repapering process. Instead of taking a bespoke approach towards each counterparty, banks should consider utilisation of existing templates and negotiations playbooks. This would reduce the number of exceptions and hence, time and resources that would have to deal with them.

Coordination between different actors needs to be improved. For example, implementing process maps can be a key tool in requirement gathering and stakeholder communication. Another outstanding problem with repapering that financial institutions need to think about is how they will continue the process as part of their “business-as-usual”. To meet the initial deadline, a lot of companies relied on external vendors to assist them in this compliance exercise. However, a more efficient solution needs to be found for successful BAU.

Despite the guidance provided by the 2016 Variation Margin Protocol, many banks and financial institutions need to create new processes to manually review and map all in-scope data points from their CSA documentation. This data is needed in order to ensure UMR compliance, efficient reporting and collateral optimisation. To meet the challenge of repapering, trading institutions need to utilise the advantages that new technology offers to them for processing, reviewing and mapping of relevant contracts and data. The quality of data output is crucial to efficiently capture and transfer data into downstream risk and trading systems. Financial technology is the future of regulatory compliance and banks should seek to embrace it, rather than fear it. It has the potential to save time and resources, which can be dedicated to other activities. How the industry will respond to the repapering test remains to be seen in the coming months.


[1] ISDA 2016 Variation Margin Protocol, 17 November 2016, http://www2.isda.org/functional-areas/wgmr-implementation/isda-2016-variation-margin-protocol/ (accessed 01 March 2017)

[2] Prepare for margining: an Update on the new EU margin rules and the ISDA 2016 Variation Margin Protocol, 08 December 2016, https://www.dlapiper.com/en/us/insights/publications/2016/12/global-financial-markets-insight-11/2prepare-for-margining/ (accessed 01 March 2017)

[3] VM/IM Repapering: Learning the lessons from the ‘Big Bang, 13 March 2017, http://www.drsllp.com/blog/wgmr/vmim-repapering-learning-lessons-big-bang/ (accessed 30 March 2017)

[4] The State of Uncleared Margin Reform Remediation, 01 February 2017, http://www.businesswire.com/news/home/20170201005433/en/Axiom-Releases-Pulse-Report-State-Uncleared-Margin (accessed 30 March 2017)

[5] CFTC Implements Phase-in Period for New Variation Margin Requirements, 20 February 2017, http://www.derivationslaw.com/2017/02/cftc-implements-phase-period-new-variation-margin-requirements/ (accessed 30 March 3017)