New rules requiring counterparties to post ‘variation margin’ in relation to their uncleared over the counter (OTC) derivatives contracts, including interest rate and inflation swaps, come into effect on 1 March 2017. The new rules are relevant for:
- trustees who have entered into OTC derivatives contracts directly; and
- trustees whose investment managers have entered into OTC derivatives contracts as agent on their behalf.
If you fall within these categories, we would encourage you to speak with your investment managers as soon as possible to ensure you are ready for the implementation date.
The new rules are not relevant for trustees who only invest in pooled funds.
Variation margin is collateral collected daily by a counterparty to reflect daily changes in the mark-to-market value of its OTC derivatives. Unlike in respect of the clearing obligation, there are no exemptions for pension schemes when it comes to margining and, therefore, these new rules will apply to all OTC derivatives entered into by the scheme (or on their behalf) other than certain classes of derivatives which are temporarily exempted (such as physically settled FX forwards).
In order to comply with these rules, it is very likely that new documentation or amendments to existing documentation will be required. This could include amending existing Credit Support Annexes (“CSAs”) and/or adhering to the 2016 ISDA Variation Margin Protocol. In addition, you may need to update internal procedures to ensure that risk management procedures for the exchange of variation margin are effective and to ensure that collateral arrangements are enforceable.
This video provides a more detailed analysis of the new margin rules.
In addition to the variation margin obligation, pension schemes will, as of 1 September 2020, also be within the scope of the requirement to exchange initial margin. This will only apply if the aggregate volume of OTC derivatives entered into by a scheme exceeds EUR 8 billion.