Phase 5 IM relief: BCBS/IOSCO today announced its recommendation to split the IM phase 5 implementation over a two-year period

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) today issued a statement recommending a split of the initial margin (IM) phase 5 implementation over a two-year period, granting a one-year extension to those phase 5 firms with an average aggregate notional amount of uncleared swaps (an AANA) equal to or greater than $/€8bn and less than $/€50bn.

BCBS/IOSCO performs an advisory role and therefore confirmation of the extension by local regulators will be required. In the U.S. this would be effected by the U.S. Commodity Futures Trading Commission and in the EU by the three European Supervisory Authorities. We would expect these local regulators to follow the guidance of BCBS/IOSCO and therefore, assuming that this is the case:

• from 1 September 2020, phase 5 would apply to firms with an AANA equal to or greater than $/€50bn and less than $/€750bn; and
• from 1 September 2021, a new phase 6 would apply to firms with an AANA equal to or greater than $/€8bn and less than $/€50bn.

The statement will come as welcome relief to those firms that would benefit from the one-year extension and builds upon a March 2019 statement from BCBS/IOSCO which, among other things, clarified that documentation, custodial and operational requirements do not need to be put in place until the $/€50m initial margin threshold is exceeded (which we summarised in an earlier post). 

Our advice remains the same: firms affected by the final phase of the implementation of IM requirements should start preparing now. The sheer volume of relationships that will be brought into scope on 1 September 2020 and again in 2021 is likely to result in capacity problems for brokers, custodians and service providers. With the potential risk that firms which leave matters too late may be unable to trade, steps such as agreeing custodial relationships and negotiating compliant documentation should be taken well in advance of the relevant deadline.