Introduction
On May 9, 2023, the International Swaps and Derivatives Association (ISDA) released its annual survey examining the total initial margin (IM) and variation margin (VM) collected by leading derivatives market participants in 2022. ISDA is an international private trade organization for participants of the over-the-counter (OTC) derivatives market. Examples of market participants include international and regional banks, corporations, governments, and investment managers. ISDA works in three primary areas: reducing counterparty credit risk, increasing transparency, and improving the industry’s infrastructure.[1] In furtherance of its mandate, ISDA conducts annual margin surveys, with the goal of increasing transparency within the derivatives market. ISDA’s annual surveys are a helpful tool for insight into market trends.
The mandatory posting of IM and VM for OTC derivatives is one of the novel regulations that began in September 2016 for the US and Canada.[2] These margin regulations were a product of the G20’s OTC derivative reform initiatives which began in 2009, following the financial crisis of 2008.[3] Using a “phase-in” approach, beginning on September 1, 2016, and continuing every September until 2022, increasing numbers of entities came under the scope of ISDA’s regulatory margin requirements. Phase-one entities were the first to be subjected to the new rules on September 1, 2016. These entities are derivative dealers whose aggregate month-end average notional amount (AANA) of non-centrally cleared derivatives totals more than US$3 trillion.[4] Phase-two entities have an AANA of US$2.25 trillion and became subject to the rules on September 1, 2017. Phase-three entities have an AANA of US$1.5 trillion and became subject to the rules on September 1, 2018. Phase-four entities have an AANA of US$0.75 trillion and became subject to the rules on September 1, 2019. Phase-five entities have an AANA of US$50 billion and became subject to the rules on September 1, 2021. Finally, phase-six entities have an AANA of US$8 billion and were the last group to be subject to the rules, beginning on September 1, 2022.[5]
ISDA’s Annual Margin Survey
ISDA’s Margin Survey collects information on the amount and type of collateral posted for non-cleared and cleared derivatives transactions. A total of 32 derivatives market participants were surveyed for 2022. Of the 32 participants, all 20 phase-one entities participated, five out of six phase-two entities participated, and seven out of eight phase-three entities participated.[6] The survey also reported on the amount of IM collected that was independent amount (IA) received from counterparties not currently within scope of the margin rules.[7] The 2022 ISDA Margin Survey results provide important insight into the current derivatives market as it is the first annual survey since the completion of the “phase-in” approach mentioned above, and includes all six groups of entities currently within the scope of the new margin regulations.
Discussion of survey results
(a) Non-cleared Derivatives
The 32 firms surveyed collected $1.4 trillion of IM and VM combined in 2022. This breaks down into $325.7 billion of IM and $1.1 trillion of VM.
i. Initial Margin
The 20 phase-one firms surveyed collected $307.2 billion of IM for non-cleared derivatives by the end of 2022, representing a 7.4% increase from 2021.[8] This increase in collected IM is most likely a result of the introduction of new non-cleared derivatives transactions subject to the reporting rules.[9] $231 billion of the total IM collected by phase-one firms was required under margin regulations (regulatory IM) and the remaining $76.2 billion collected is attributed to IM collected from transactions with counterparties not currently within the scope of the margin requirements (i.e. IA margin).[10] The IA collected by phase-one entities in 2022 decreased by 7.6% from 2021, with such decrease attributable to more types of derivatives transactions coming within the scope of ISDA’s margin regulations.[11]
In addition to the foregoing, the amount of IM collected by the surveyed phase-two and phase-three entities also grew in 2022, also due to the increase in non-cleared derivatives transactions subject to the reporting rules.[12]
ii. Variation Margin
When it came to VM, phase-one firms collectively collected $983.7 billion of VM for non-cleared derivatives by the end of 2022; which represented a 5.0% increase from the $936.5 billion collected at the end of 2021.[13] The VM collected can be classified into two categories; (i) VM required under global margin regulations (Regulatory VM), or (ii) VM collected for transactions not within the scope of the margin rules (Discretionary VM). In 2022, the amount of Regulatory VM collected by phase-one entities was $695.4 billion, representing a 31.7% increase from the amount of Regulatory VM collected in 2021. Conversely, the amount of Discretionary VM collected by phase-one entities in 2022 decreased. The significant increase in collected Regulatory VM and decrease in collected Discretionary VM is likely due to the expansion of the types of transactions that came within the scope of Regulatory VM.
The phase-two entities and phase-three entities that participated in the survey collected $101.7 billion of VM by the end of 2022, a significant 29.8% increase from the prior year.[14] Like the phase-one entities, the widened scope of the transactions included in regulatory VM likely explains why the amount of collected regulatory VM increased in 2022.[15]
(b) Composition of Collateral
Collateral for both IM and VM is generally composed of some mix of cash, government securities (such as bonds and treasury notes), and other securities. To meet Regulatory IM requirements in 2022, phase-one entities used primarily government securities (amounting to almost 75% of collateral), as well as cash and other securities. The significant usage of government securities is likely due to the fact that margin regulations require that IM is stable and ‘bankruptcy remote’, as government securities are.[16]
Collected VM, however, is notably mostly made up of cash. 73.8% of Regulatory VM and 68.4% of Discretionary VM received in 2022 was made up of cash. The greater reliance on cash margin collected for VM is because VM collected for non-cleared derivatives exposure may be used to cover the VM of a cleared hedge position, which is easier accomplished with cash than securities.[17]
(c) Cleared Derivatives
The amount of IM collected for cleared derivatives in 2022 was $384.4 billion, representing an 18.8% increase from the $323.4 billion of IM collected for cleared derivatives in 2021.[18] The Margin Survey focused on two types of cleared derivatives – interest rate derivatives (IRD) and credit default swaps (CDS).[19]
iii. Interest Rate Derivatives
The amount of IM collected for cleared IRD totaled $314.3 billion in 2022, representing a 19.8% increase over the amount collected in 2021. ISDA attributes the increase as a result of higher rates volatility and additional risk build within certain European buy-side firms.[20] IRD open interest from five major central counterparties (CCP) totaled $425.8 trillion. In 2021, the amount totaled $396.6 trillion.[21]
iv. Credit Default Swaps
The amount of IM collected for cleared CDS increased by 14.8% from 2021 and totaled $70.1 billion. This growth was primarily a result of an increase at ICE Clear Credit.[22] The total CDS open interest collected from four major CCPs in 2022 was $2.9 trillion compared to the $2.6 trillion of CDS open interest collected in 2021.[23]
Conclusion
Analyzing the 2022 ISDA Margin Survey indicates that the overall collected margin for both IM and VM has increased from 2021, as well as a demonstrated increase in collected margin across all sizes of participating entities. Staying up-to-date on ISDA’s annual surveys assists market participants in understanding the past, current, and future trends of amounts of margin collected for OTC derivatives.
Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Structured Finance and Securitization Group.
[1] https://www.isda.org/about-isda/.
[2] ISDA Margin Survey Year-End 2022, pg. 16, <https://cdn.aws.isda.org/2023/05/09/isda-margin-survey-year-end-2022/?_zs=7CMoQ1&_zl=CLU77> [ISDA Margin Survey].
[3] Over-The-Counter Derivatives, Federal Reserve Bank of New York, <https://www.newyorkfed.org/financial-services-and-infrastructure/financial-market-infrastructure-and-reform/over-the-counter-derivatives#:~:text=G20%20Leaders%20agree%20on%20reforms,for%20non%2Dcentrally%20cleared%20contracts. >
[4] ISDA Margin Survey at pg. 16.
[5] Ibid.
[6] ISDA Margin Survey Press Release, <https://www.isda.org/2023/05/09/isda-margin-survey-shows-1-4-trillion-in-margin-collected-at-year-end-2022/>.
[7] ISDA Margin Survey at pg. 3.
[8] Ibid.
[9] Ibid at pg. 6.
[10] Ibid at pg. 7.
[11] Ibid.
[12] Ibid at pg. 9.
[13] Ibid at pg. 7.
[14] Ibid at pg. 10.
[15] Ibid at pg. 8.
[16] Ibid.
[17] Ibid at pg. 11.
[18] Ibid at pg. 13.
[19] Ibid.
[20] Ibid.
[21] Ibid at pg. 15.
[22] Ibid at pg. 13.
[23] Ibid at pg. 15.
