Uncleared Margin Rules – AANA Calculation Guidance

December 2019

As most people already know by now the first step in complying with the uncleared margin rules (UMR) is determining if your firm is in-scope for the regulation. The way to do this is to calculate your “Average Aggregate Notional Amount” or AANA.

Mark Demo, AcadiSoft and Prabhat Singh, Capco share their insights:

To calculate your AANA is to sum the total outstanding notional amount of non-cleared derivative positions during the prescribed period on a gross notional basis.

For larger firms whose AANA calculation far exceeded the highest gross notional threshold, the calculation was largely a moot point.

But for firms caught in the later phases, one slight difference of interpretation could make all the difference between being in-scope, subject to the regulations (and everything that entails) vs out of scope free and clear of the compliance burden. A delay in compliance by September 1st due to miscalculated AANA could adversely impact trading relationships.

The purpose of this analysis is narrowly focused on answering the question of how to determine the gross notional amount for different derivative products when calculating your AANA.

See other AcadiaSoft and ISDA documents published here and here for the time periods in various jurisdictions when firms are required to perform their AANA calculations, the methodology to use and which products to include or exclude from your calculations.

For better or worse, none of the prudential regulators gave any guidance on how the gross notional amount should be calculated for various derivative products (for AANA or Grid based exposure calculations) when proposing their rules.

AcadiaSoft is a market leader for initial margin solutions and Capco has helped a number of clients in the UMR compliance process. Both firms have received many questions from in-scope firms on this topic, especially for some derivative types such as equity options, FX options and variance swaps where the trade term sheet typically does not include the $ notional amount and the trade is booked in trading systems as quantity rather than notional amount.

For some derivative products, the notional amount is clearer, since it is stated on the derivative trade’s term sheet (for example interest rate swaps, credit default swaps).

For FX forward transactions, firms should use one of the two currencies’ quantities. For example, if you have a USD/BRL FX forward trade for 1,000,000 USD / 4,194,500 BRL, you can use the 1,000,000 USD as the notional.

For equity options, firms can represent the notional as the “number of contracts (or quantity) * strike price”.

It’s also important to note that the position being long or short does not impact the calculations, since regulators do not consider delta adjusted or offsetting positions for AANA calculations.

End User Exemption (EUE)

Another question being raised by Phase 5 and 6 clients related to this topic is the identification and treatment of trades with counterparties who qualify for an EUE (for example “small depository institutions, small Farm Credit System Institutions and small credit unions with total assets of $10 billion or less”).

Regarding EUE, it is important to note that if a swap is eligible for an exemption from the clearing mandate, it may also be eligible to be excluded from the AANA calculation (see Section 23.150(b) of the CFTC rule). The challenge firms face is how to flag and appropriately account for these exemptions at the trade level. In most cases these EUE’s are not stored at the booking system level but rather defined by the structure of the trade. Capco’s advice to Phase 5 and 6 clients is to analyze their in-scope trade population not only by trade type but also from the perspective of counterparty type and trade structure before including them for AANA calculations.

Once a firm determines if they are in-scope for the rules based on performing their AANA calculation, they should begin the process of disclosing this to their counterparties by completing the ISDA Self Disclosure template that can be found here.

For more information on calculating AANA contact: [email protected] or [email protected]