On 1st March 2017, the rules relating to mandated variation margin on uncleared OTC derivatives start in various jurisdictions across the globe. In the EU, the rules affect those classified as “FC” and “NFC+” under EMIR. Many energy companies are “NFC-“, and are therefore not affected, although they may well be covered by other jurisdictions. In general the rules require that for any uncleared OTC derivative, an appropriate Credit Support Annex (CSA) is either put in place or amended so that the maximum minimum transfer amount in 500,000 Euros. There is a summary by HSBC here and a webinar by Axiom available here on The OTC Space which explains some of the issues. There are specific rules about netting sets and also the timing of collateral exchanges, which lead to some complexity in a global environment, as explained in this article by Pierre Lebel on The OTC Space.
The rules are accompanied by parallel Initial Margin requirements, which will be phased in over the coming years for most depending on size. They already apply in some cases to the very largest firms.
The upcoming rules have led to a flurry of preparation activity, in terms of operational readiness, having the appropriate capital ready and also in terms of getting the agreements modified. The “re papering” has been facilitated in many cases by the use of the “ISDA Variation Margin Protocol” which allows changes to be applied to CSAs on a multi lateral basis using a tool called “Amend 2.0″(see here). Many in the industry are not yet ready, and this has lead to a letter of no Action Relief being issued by the CFTC (see here for an article by Rob Daly on MArket Media)). This will provide relief for some. However, as outlined in this article by Shanny Basar on Market Media, many are still caught.
While many in energy and commodities are not yet impacted, some market participants are NFC+, and some will be required to set up regulated entities due to exemption loss because of the Ancillary Activity test. For those outside of scope, it is still important to have familiarity with the rules in case they hit, and also to understand what other counterparties are going through at present.