The Impact of the COVID-19 pandemic on the Uncleared Margin Rules and LIBOR



Mark McLaughlin

Analyst 1

Monday 27 July 2020

With COVID-19 still having an effect globally, there is concern within the Financial Services Industry over the ability to meet regulatory compliance deadlines. In a joint letter, the International Swaps and Derivatives Association (ISDA), the International Capital Markets Association (ICMA) and the Alternatives Investment Management Association (AIMA), on behalf of other industry associations, urged global regulators to delay the implementation of the Uncleared Margin Rules (UMR).

The financial crisis of 2007 highlighted the need for improved transparency in the Over-The-Counter (OTC) derivatives markets. Further regulation of the instruments and participants was necessary to limit excessive and opaque risk-taking and to mitigate the systemic risk posed by OTC derivatives transactions, markets, and practices.[i] In September 2013, the Basel Committee on Bank Supervision and International Organization of Securities Commissions (BCBS and IOSCO) published a global policy framework and a ‘phased’ timetable for OTC derivative margin reform, which aimed to reduce systemic risk by ensuring collateral is available to offset losses caused by counter-party default.

The first phase, beginning in September 2016, involved the largest derivative dealers in global finance negotiating, agreeing and executing Initial Margin (IM) documentation. Phase 1 exclusively included financial institutions whose aggregate month-end average notional amount of non-centrally cleared derivatives exceeded 3 trillion USD/EUR.[ii] Since then, through Phase 2 in March 2017 until the beginning of Phase 4 in September 2019, financial institutions with gradually less Aggregate Average Notional Amounts (AANA) entered into IM compliant documentation with paired entities in their own phase, and also with those parties in-scope during earlier phases.

At the outbreak of COVID-19, the sector was in the middle of implementing Phase 5 of the reform. Given that the latter phases affect a significant majority of counter-party groups, there are industry-wide concerns that COVID-19 will severely impact their ability to meet regulatory compliance deadlines.

In its letter, ISDA explained that, although their members have robust business continuity plans in place, the unprecedented disruptive nature of COVID-19 severely inhibited members from meeting the documentation and operational requirements of the original regulatory compliance dates. ISDA Chief Executive Officer, Scott Malia, went further, highlighting that COVID-19 has resulted in “little or no spare capacity to deploy and test infrastructure, run Average Aggregate Notional Amount (AANA) calculations and implement margin calculation systems … IM requirements present an insurmountable hurdle for the industry given the rapid escalation of the coronavirus outbreak”.[iii]

With staff displaced and repurposed, working from home became the norm, and focus shifted towards the management of market volatility. The industry was, rightly, concerned with the scale and difficulty of implementation, as well as the adverse impact on their investors as a consequence of diverting resources from risk management.[iv]

In April 2020, BCBS and IOSCO, the primary global standard setters for the prudential regulation of banks from 28 jurisdictions, agreed to extend the final two implementation phases by one year. This extension is to provide additional operational capacity for firms to respond to the immediate impact of COVID-19 and, at the same time, facilitate covered entities that may be in-scope to act diligently to comply with the requirements by the revised deadline.[v] This is the second time that the implementation of the margin requirements, which were agreed for reform by the G20 in 2011, has been delayed. In 2015, the BCBS and IOSCO agreed to delay the implementation of the margin requirements after taking into account the operational and legal complexities that were involved.[vi]

The table below details the updated Regulatory IM Phase-In Schedule for Europe and the USA, illustrating a one-year extension to Phase 4, and delay for Phases 5 & 6.

UMR implementation is not the only initiative threatened by the unprecedented disruptive nature of COVID-19. The London Inter-Bank Offered Rate (LIBOR), a series of benchmarks illustrating the average cost to banks of unsecured borrowing, is set to be discontinued in 2021. LIBOR rates are among the most widely used benchmarks in global financial markets, determining interest rates for an estimated total of around US$400 trillion financial contracts.

In 2015, the UK Risk Free Working Group (RFRWG) on Sterling Risk-Free Reference Rates, which was established in 2015 to develop alternative RFRs for use instead of LIBOR-style reference rates. [i] The LIBOR transition is underway, and graph 1 below from the Bank of England’s Interim Financial Stability Report illustrates a significant reduction of LIBOR submissions based directly on market transactions. Graph 2 below illustrates the increase in the value of transactions underpinning Sterling Over Night Index Average (SONIA), the RFRWG recommended risk-free rate administered by the Bank of England.

Graph 1

Graph 2

At the end of April, in a joint statement published on the website of the Financial Conduct Authority (FCA), the RFRWG and Bank of England acknowledged the challenges posed by COVID-19 and conceded that it will not be feasible to complete transition from LIBOR across all new sterling LIBOR linked loans by the original end of Q3 2020, deadline.[i] In May 2020, the Bank of England published their Interim Financial Stability Report noting that the financial sector has a key role in ensuring that sufficient liquidity is available to support households and businesses as a consequence of the COVID-19 disruption, which may have an impact on some aspects of regulatory transition programs.[ii]

The European RFR working group equivalent is considering whether to delay its transition program due to the devastating impact of COVID-19 on the Eurozone.[iii] The RFRWG has issued a statement with an updated timeline for the LIBOR transition. They stated that there will likely be continued use of LIBOR-referencing loan products into Q4 2020 in particular, to maintain the smooth flow of credit to the real economy. Taking these factors into consideration the RFRWG recommended that:

  • By the end of Q3 2020, lenders should be in a position to offer non-LIBOR linked products to their customers.

  • After the end of Q3 2020, lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternatives.

  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.[iv]

Arguably, firms can continue to launch new products with benchmarks or performance fees linked to LIBOR until the end of Q3 2020. However, the regulatory deadline for LIBOR at the end of 2021 has not changed and industry bodies continue to endorse preparations for its discontinuation. The already significant challenge posed by LIBOR has been exacerbated by COVID-19, leaving many firms facing an uphill struggle. Delay or no delay, this is still an urgent and enormous challenge.

At FinTrU we have supported our clients through previous UMR phases and have a proven track record of assisting our clients with regulatory compliance. We can help you navigate your requirements for IM Phase 5 and Phase 6, and LIBOR transition, offering cost-effective solutions to assist with project management, drafting, negotiation, client outreach, and more.



[I] Basel Committee on Banking Supervision - Board of the International Organization of Securities Commissions publication, “Margin requirements for non-centrally cleared derivatives”, September 2013.

[II] Ibid

Scott O’Malia, ISDA Chief Executive Officer, “Coronavirus : Delay to IM Deadlines”, March 2020.

[III] Secretariat of the Basel Committee on Banking Supervision, “Margin Requirements for Non-Centrally Cleared Swaps Margin – Impact of COVID-19 on Initial Margin Phase-In", March 2020.

[IV] Basel Committee on Banking Supervision - Board of the International Organization of Securities Commissions, “Margin requirements for non-centrally cleared derivatives”, April 2020.

[V] Basel Committee on Banking Supervision - Board of the International Organization of Securities Commissions, “Margin requirements for non-centrally cleared derivatives”, March 2015.

[VI] The Working Group on Sterling Risk-Free Reference Rates, “A factsheet calling time on LIBOR, why you need to act now”, January 2020.

[VII] The Bank of England’s Financial Policy Committee, “Interim Financial Stability Report”, May 2020.

[VIII] European Central Bank, ”Teleconference of the working group on euro risk-free rates”, April 2020.

[VIII] The Working Group on Sterling Risk-Free Reference Rates, ” Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans”, April 2020.

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