Banks exchange $1 trillion in collateral from phase one of uncleared margin rules

Initial margin collected by phase one firms for their non-cleared derivatives totalled $173.2 billion, an increase of 10% compared to year-end 2018.

Over $1 trillion in collateral was collected from banks and swaps dealers that fell under the first phase of the initial margin rules for uncleared derivatives exchanged, according to the derivatives industry body. 

According to a survey from the International Securities and Derivatives Association (ISDA), initial and variation margin collected by the 20 phase one-firms, such as investment banks, for their non-cleared derivatives transactions totalled $1.07 trillion at the end of 2019.

Initial margin collected by phase one firms totalled $173.2 billion, an increase of 10% compared to year-end 2018, of which $105.2 billion of collateral was collected by banks that were required to under the global uncleared margin rules (UMR). 

The survey also found that the majority of initial margin posted composed of government securities, making up 83.9% of regulatory initial margin received, while other securities represented 16.1%. This is because initial margin covers potential future exposures, and therefore collateral posted has to be bankruptcy remote.

Meanwhile variation margin covers mark-to-market movements and can change daily. Variation margin a firm receives from a non-cleared position might be required to cover the variation margin of a cleared derivative, and can be implemented more easily with cash. As a result, the survey showed 82.6% of variation margin composed of cash, while 14.3% was government securities.

The largest investment banks and swaps dealers with an average aggregation notional amount (AANA) of over $3 trillion became mandated under the rules from March 2017. The initial margin rules were then phased-in over the past two years for smaller-sized and regional banks, as well as some large hedge funds and asset managers. 

Initial margin levels are expected to significantly increase after phase four firms (with a threshold of $750 billion) became mandated in September last year, however the majority of buy-side firms have had their deadline pushed back by a year due to the unfolding effect of the coronavirus on their preparations. 

Sharp rises and falls in global financial markets caused by the COVID-19 outbreak has resulted in firms facing huge margin calls, putting additional operational pressure at a crucial time where many are struggling to stay afloat.

Private and institutional investors, as well as corporates, have seen increased collateral demands from their banks and prime brokers for being on the wrong side of their OTC derivatives trades.

According to technology vendor Hazeltree, margin calls increased by more than 20% over the months of February and March 2020, in comparison to historic average margin calls, across institutional clients trading collateralised derivatives.

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