UMR Margin Documentation (Reg IM and Reg VM)

Harry Jho LLC is a law firm specializing in prime brokerage, ISDA-documented OTC derivatives, and securities finance. The Firm is active in UMR (Reg IM and Reg VM) and other regulatory re-papering initiatives, and has advised both dealers and hedge funds through the Reg VM, Reg IM, and LIBOR repapering initiatives.

This page explains what margin documentation under the uncleared margin rules involves, which documents are typically negotiated, and how the Firm supports clients through a repapering.

At a glance

• Who we act for: banks and broker-dealers, through the Firm’s Dealers Team, and hedge funds, through the Firm’s Funds Team. The two practices are separate and independent, with physical and informational walls between them.
• What we document: ISDA Master Agreement Schedules and Credit Support Annexes, together with the related variation margin and initial margin documentation described below.
• How we staff it: experienced senior attorneys supervising the Firm’s Analysts. Our Analyst team is the largest of its kind in the industry and is uniquely positioned to support large-scale re-papering projects.
• How we fit in: as a variable resource alongside in-house Legal, Documentation, Treasury, and Operations teams, from first distribution to post-negotiation tracking.
• The Firm: The Firm was founded in 2007. The Firm has over 60 professionals, over 50 of them Analysts, across both teams (Dealers and Funds) and three offices (New York, Winter Springs/Orlando area, and Miami). All of the Firm’s attorneys are admitted to practice in New York State.

Key terms

• Uncleared margin rules (UMR): rules that require the exchange of margin on OTC derivatives that are not centrally cleared. In the US they were adopted by the prudential banking regulators and the CFTC, with SEC rules for security-based swaps, and comparable rules apply in other jurisdictions, following the BCBS-IOSCO framework for non-centrally cleared derivatives.
• Reg VM and Reg IM: market shorthand for the variation margin and initial margin requirements under those rules.
• Variation margin (VM): collateral exchanged, typically daily, to cover the current mark-to-market exposure on a portfolio of uncleared derivatives.
• Initial margin (IM): collateral posted by each party to cover potential future exposure. Regulatory IM is generally held by a third-party custodian in segregated accounts.
• IM threshold: the amount of initial margin exposure, measured at the level of the consolidated group, below which IM does not have to be exchanged (up to $50 million under the US rules).
• Phase-in: the IM requirements were phased in from September 2016 through September 2022, with each phase defined by the size of a group’s uncleared derivatives activity (average aggregate notional amount, or AANA).
• ISDA SIMM: the ISDA Standard Initial Margin Model, a common industry methodology for calculating regulatory initial margin.
• Credit Support Annex (CSA) and Credit Support Deed (CSD): the ISDA collateral documents that sit alongside an ISDA Master Agreement and set out how collateral is calculated, transferred, held, and returned.
• Collateral Transfer Agreement (CTA): an ISDA initial margin document that separates the mechanical collateral terms from the security agreement, which is chosen to match the location and governing law of the custodial accounts.

Documents in a margin repapering

A UMR repapering usually touches several layers of documentation for each trading relationship:

• The ISDA Master Agreement and Schedule, including amendments needed to bring a legacy trading relationship within the new margin terms.
• Variation margin documents, such as the 2016 Credit Support Annex for Variation Margin (VM) (Security Interest – New York Law), its English law title transfer counterpart, amendments to legacy Credit Support Annexes, and the ISDA 2016 Variation Margin Protocol.
• Initial margin documents, such as the 2018 Credit Support Annex for Initial Margin (IM) (Security Interest – New York Law), the 2018 Credit Support Deed for Initial Margin (IM) (Security Interest – English Law), and Collateral Transfer Agreements with the related security agreements (including bank custodian forms).
• Custodial documents for segregated initial margin, such as account control agreements and custody or triparty collateral arrangements with the custodian.
• Eligible collateral, thresholds, and operational terms, including the elections that Legal, Treasury, and Operations need to agree before margin can move.

How the Firm supports a repapering

Our model is to support, not replace, in-house negotiators. As our clients’ needs evolve, we expect to switch back and forth between different service levels. Depending on the project, we can:

• prepare initial distributions for in-house negotiators, who then take over after the first mark-up;
• provide documentation support while Legal leads all calls, or lead calls and manage negotiations on behalf of Legal;
• assist Legal in reaching out to Treasury for approval, either by preparing materials for Treasury or by coordinating directly with Treasury on behalf of Legal;
• cover a select group of negotiations, then transition them to an in-house negotiator after a training period;
• provide ‘full-time negotiator equivalent’ services, where our team is allocated to deals as if we were the equivalent of a certain number of negotiators; and
• provide operational assistance to Legal and/or Treasury to manage post-negotiation processes and in-house trackers.

On the buy side, the Funds Team negotiates ISDA documentation, together with Credit Support Annexes, with dealers on behalf of its fund clients. Members of the Funds Team have led reviews of the impact of new financial regulations on clients’ trading contracts, including designing and implementing Reg VM and Reg IM documentation approaches for a premier hedge fund. On the sell side, the Dealers Team has advised dealers through regulatory repapering initiatives including Reg VM, Reg IM, and LIBOR. See Buy-Side Coverage and Sell-Side Coverage for the teams.

Why Harry Jho LLC

• ISDA documentation depth. As ISDA’s counsel, the Firm drafted the documentation and led the working groups that produced the Master Confirmation Agreements used for the flow trading of equity swap and option products in the US and Europe. Harry Jho also drafted the 2011 ISDA Equity Derivatives Definitions and the Equity Matrices.
• Scale. The Firm is built around its team of non-attorney paralegals, whom we title Analysts. They integrate with in-house documentation teams and work under the close supervision of senior staff, which ensures consistency and quality in their work product.
• Both sides of the market. Separate Dealers and Funds practices, each with its own Analyst team, separate computer systems, and information barriers between them.
• Market experience. The Firm has advised clients through the global financial crisis, customer defaults, exchange closures, regulatory repapering initiatives, GameStop, Archegos, and the Russian exchange closures and sanctions.
• Security. The Firm’s information security program has been certified to the ISO/IEC 27001:2022 standard.

Frequently asked questions

Related: ISDA Documentation Backlog Support · Harry Jho · Reference.

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