Certain buy side market participants, including pension schemes and asset managers, will be required under EMIR/UK EMIR to exchange initial margin on most of their uncleared OTC derivatives transactions from 1 September 2022. Your pension scheme will be affected by this upcoming regulatory requirement if it uses uncleared OTC derivatives with an aggregate notional amount above EUR8bn. Where your OTC derivatives usage is below this amount, you will not be affected, but your investment manager may require confirmation of the level of your scheme's overall OTC derivatives use.
UK EMIR is the UK version of the European Market Infrastructure Regulation (EMIR), which was on-shored into UK law following the end of the Brexit implementation period on 31 December 2020.
EMIR/UK EMIR brought in various risk-reducing regimes, including mandatory clearing for certain OTC derivatives transactions, mandatory exchange of initial and variation margin for non-cleared OTC derivatives transactions, and post-trade reporting requirements.
Exchange of variation margin has been mandatory since 2017 for most counterparties to OTC derivatives. Mandatory exchange of initial margin for uncleared OTC derivatives has however been phased in over several years, based on a counterparty's trading volume, calculated by notional amount.
This note focuses on the upcoming final phase-in date applicable to the mandatory initial margin requirement, which is set to take effect on 1 September 2022 and will apply to a range of buy-side market participants such as asset managers and pension schemes. This final phase-in is referred to as "Phase 6".
Firstly, pension schemes should work with their investment consultants and investment managers to assess whether the AANA of their OTC derivatives transactions will bring them within scope of Phase 6.
If the scheme is in scope, the following preparations will be necessary:
- Notify investment managers and derivatives counterparties that the scheme will fall within scope of Phase 6
- Determine which custodians will be used by counterparties
- Determine the preferred methodology for valuation of initial margin (e.g. grid, ISDA SIMM, etc)
- Consider impact of choice of collateral on liquidity and funding
- Consider operational requirements that may be needed to enable compliance
- Begin negotiation of relevant documentation, taking into account factors such as jurisdiction of custodians.