On May 29, the International Swaps and Derivatives Association (ISDA) issued calculation guidance for swap market participants seeking to determine if they might become subject in 2020 to mandatory initial margin requirements for swaps executed with swap dealers registered with the Commodity Futures Trading Commission. Under both the CFTC margin rules and the margin rules adopted by the prudential regulators for bank swap dealers, any “financial end user” (as defined in the margin rules) that is not already subject to mandatory initial margin for trades with swap dealers will become so on September 1, 2020, if it has “material swaps exposure.” An entity will have “material swaps exposure” for 2020 if the entity and its margin affiliates have a daily average aggregate notional amount (DAANA) of uncleared swaps, uncleared security-based swaps, foreign exchange forwards and foreign exchange swaps with all counterparties for June, July and August of this year that exceeds $8 billion, where such amount is calculated only for business days.
The ISDA guidance is both a reminder that the 2019 material swaps exposure calculation period begins on June 3 and a five-step guide to the actual calculation of DAANA for a particular entity. Since the margin rules only capture swap dealer counterparties that are financial end users, no other types of entities need to do the DAANA calculation. A financial end user that does not have material swaps exposure based on its 2019 calculation must repeat the same calculation in 2020 and each subsequent year until it does exceed the $8 billion DAANA level. When that happens, the entity will become subject to initial margin when trading with a swap dealer on January 1 of the following year (i.e., a financial end user that has material swaps exposure based on a calculation performed for June, July and August of 2020 will become in scope for initial margin on January 1, 2021).
The definition of “financial end user” is available here.
The ISDA guidance is available here.