Is Now The Time to Optimise Your Initial Margin?

• Total Initial Margin across the industry now stands at $1.265Trn, an all time high.
• Initial Margin requirements across the industry have increased by $831bn since 2016.
• These increases, along with higher rates leading to higher funding costs, continue to drive a focus on optimisation across the industry.
• We look at the latest ISDA and CCPView data.

Initial Margin

ISDA have just published the latest edition of the “ISDA Year-End Margin Survey”:

We have covered previous versions of this survey, which are always worth a re-read because you can laugh at any predictions we made in the past!

1. FOR THE FIRST TIME, WE SEE OVER $1TRN IN INITIAL MARGIN
2. HOW MUCH MARGIN? 2019 EDITION
3. ISDA MARGIN SURVEY 2018
4. MARGIN FOR NON-CLEARED DERIVATIVES (2017 Margin Survey)
5. HOW LARGE WILL INITIAL MARGIN BE FOR UNCLEARED SWAPS?

Sifting through all of those reveals that between $650-800bn in extra IM was anticipated by ISDA as a result of the Uncleared Margin Rules:

Since we last wrote about Initial Margin, Phase Six firms have since gone live in September 2022. This is nicely illustrated once again in the ISDA timeline:

$326 Billion

Summarising the latest ISDA report in 3 bullets is pretty straight-forward this year:

• The survey covers 32 firms – 20 phase-one, five phase-two and seven phase-three entities (which is the same as in 2021).
• These 32 firms collected $325.8bn of Initial Margin in 2022.
• This is a 7% increase (+$22bn) on last year (2021 saw $304.1bn collected – see my previous blog here).

The chart nicely shows how the increase for uncleared initial margin slowed considerably in 2022. You would not have expected that given the background of market turmoil recently – Kwasi Kwarteng, US Rates anyone?

The Clarus chart above shows;

• Total Uncleared IM has now tripled, from $107bn to $326bn between 2017 and 2022.
• The increase from 2021 to 2022 was a the smallest increase on record!
• Recall that 2021 saw a huge jump, of $86bn in IM. 2022 saw just $22bn added for uncleared derivatives.
• The big jump in 2021 was due to the large increase in number of covered counterparties, with Bloomberg quoting 196 more “firms” (potentially covering more than one legal entity each) being covered as of September 2021.
• Clearly Phase Six firms did not have anywhere near the same impact on IM as Phase Five.
• This is despite the fact that around 775 firms may have been in-scope in September of last year:

However, please note that these figures will have been captured before the recalibration (higher!) to ISDA SIMM that occurred with v2.5. For more on that, and how CHARM is used by firms to analyse the effects of these calibration exercises, please see Amir’s earlier blog:

Total Initial Margin is now over $1.2Trn

A 7% increase (+$22bn) of uncleared margin being posted during 2022 sounds relatively palatable – particularly when we consider how many more firms are now in-scope.

However, this number needs to be put in context with what has happened in other product areas over the same time period. How did Initial Margin change in Cleared OTC Derivatives and in Exchange Traded Derivatives (futures)? Maybe the Uncleared Margin Rules are causing more counterparties to choose Cleared products (to enjoy more netting for example)?

CCPView provides all the data you could ever need on Initial Margin. Since 2016, CCPView shows the following:

Showing;

• From 2021 to 2022, uncleared IM increased by $22bn to $326bn (+7%).
• Cleared IM increased by $60bn to $381bn (+19%).
• ETD IM increased by $24bn to $558bn (+4%).
• Total Initial Margin now stands $1.265Trn.
• The total IM in the market increased from $1,160bn in 2021 to $1,265bn in 2022, a total increase of $106bn (9%).

Putting further context on this, let’s look at how the relative portion of the IM burden has evolved:

Showing;

• Uncleared IM made up 19% of the total IM burden back in 2017 when first introduced.
• This has risen, and now rests at 26%.
• (26% of total IM doesn’t seem too bad, when we consider that 1,000+ legal entities are now being captured by the uncleared margin rules).
• Cleared OTC accounted for 31% in 2017 and remained at 30% in 2022.
• The share of IM posted versus Exchange Traded Derivatives (futures) has slowly decreased over time. It was at 50% in 2016 and has now decreased to 44% of the total.

Total Initial Margin

As stated earlier, we looked at the ISDA estimate of “$800bn” in IM, and thought maybe $650bn was more reasonable. As highlighted above, we should not only look at the amount of Uncleared IM. This is because the Uncleared Margin Rules are as much an economic mandate to clear as they are to generate more IM in uncleared markets. What we can say is that between Q4 2016 (when there was no bilateral IM) and end of 2022 the total IM collected by the derivatives industry has increased by $831bn:

In Summary

• Total Initial Margin now stands at $1,265 billion.
• This has increased by $831bn since 2016.
• The biggest contributor to the increase in IM from 2021 to 2022 was Cleared OTC derivatives (+$60bn).
• Despite another 700+ firms being captured by Phase Six rules for Uncleared Derivatives, the increase in uncleared IM was relatively slight this year at $22bn (+7%).
• As IM has continued to increase, so has the cost of funding this Initial Margin as Rates have increased substantially.
• This suggests that optimisation will become increasingly necessary across the industry to manage IM costs.