Financial Markets and Funds partner Ilene Froom spoke with Risk Intelligence regarding the UK Prudential Regulation Authority's (PRA's) issues with the International Swaps and Derivatives Association (ISDA) Standard Initial Margin Model (SIMMTM). The PRA's comments and proposed changes could result in delays to the uncleared margin rules (UMR) timeline. Ilene stressed the importance of consistency in initial margin (Reg IM) requirements for over-the-counter derivatives market, especially when higher Reg IM requirements could create difficulties and an uneven playing field. She stated, "That ISDA, in conjunction with market participants, developed SIMM has been a huge benefit to the derivative market." Ilene noted that ISDA will work with the PRA and other regulators to resolve issues, but changes will impact not only phase 6 firms, but also those in the earlier phases that have been using SIMM for UMR compliance.

Of particular concern are issues related to the minimum threshold of $50 million that most jurisdictions set before initial margin must be collected or delivered. Ilene indicated that financial firms are monitoring that threshold with their counterparties to defer the typically time-consuming documentation process. They may start negotiating the documentation and putting the infrastructure in place for initial margin under UMR when the relevant exposure reaches a certain level, such as $25 million. "If there are changes to how parties have to apply SIMM or account for and determine shortfalls, those exposures can ratchet up and may result in liquidity drains during times of stress, and counterparties may have to begin the documentation process sooner rather than later."

Should the PRA ultimately prioritize a test besides SIMM, or require additional tests to supplement SIMM, it could spell trouble for firms. She added, "A hedge fund not directly subject to UK margin rules that can choose a counterparty with which it has to post less onerous margin may opt to trade with that firm instead, potentially hurting UK dealers."

"Uncleared Margin Rules Reach Final Phase, but the PRA Has Questions," Risk Intelligence, September 16, 2022