What is an AANA calculation? What are the steps that firms should follow before, during and after their AANA calculations? What are the jurisdictional AANA differences? Lots of AANA questions being asked for the latter phases of Initial Margin. This post will help.
Based on BCBS/IOSCO guidance, the original tidal wave of Phase 5 groups - 1,100 based on ISDA’s estimates - is now split across Phases 5 and 6:
- Phase 5 went live in Sept 2021, with an increased AANA threshold of $/€50bn
- Phase 6 will go live in Sept 2022, using the original Phase 5 AANA threshold of $/€8bn
- No change was made for Phase 4, which went live in Sept 2019 with its original AANA threshold of $/€750bn
AANA calculations are now hugely important for smaller firms trading uncleared OTC derivatives. Phases 5 and 6 are two huge tidal waves compared to the previous phases, catching unprecedented volumes of mainly buy-side firms.
AANA calculations are required to confirm which phase each firm’s parent group, or funds, are in-scope for.
The truth is that AANA calculations will be getting plenty of attention from now on. Read on for more information on the calculation steps.
The high-level AANA calculation methodology sounds pretty simple:
"The gross aggregation of notional for all in-scope OTC trades under the same group over a three month period, then divided by a prescribed number of days to give a notional average."
Indeed the calculation itself is not so difficult. So what are the challenges?
At Tonic we have had to perform AANA calculations and validations across multiple Initial Margin phases. We know first-hand the challenges that Phase 5 and 6 firms can face with their AANA calculations, which arise in several trending areas.
- Data consolidation - Incomplete or inaccurate data can make it tough to pull the required trade data together. Likewise silo’d data from multiple sources can be a challenge to normalise into a single format before successfully aggregating i.e. from multiple IT systems, or multiple entities under the same group.
- Jurisdictional differences - The reality is that different jurisdictions do have different AANA calculation rules, with differences existing for calculation period, methodology and product scope. Firms will need to perform separate AANA calculations per jurisdiction, including their counter parties’ jurisdictions, to define which phase they are in-scope.
- Lack of regulatory guidance - There are some product types that are trickier than others to calculate the gross notional for, as it’s not always clear which notional should be used (products with multiple notional legs, amortising notionals, etc) . There is also no explicit regulatory guidance for AANA calculations per product type, which can make firms feel uncertain about whether they are calculating correctly.
- Treatment of funds - If your firm is the principal owner of a fund, be aware that some funds will be treated as independent entities for their AANA calculations. Under EU rules this includes funds classified as UCITS, or AIFs managed by AIFMs. However, if a fund does not meet the ‘independent’ classifications then it may be treated as part of the overall parent group, which typically means a far larger AANA result. Understanding the treatment of funds for each of your firm’s jurisdiction(s) will be key to confirming your Initial Margin phase.
- Multi-manager funds - For multi-manager funds the AANA can only be accurately calculated via the consolidation of trading across all managers for that fund. Each fund manager will not have sight of the fund’s trading under the other fund managers, so will not be able to provide a complete AANA calculation. Instead AANA for multi-manager funds will typically fall back to the principal fund owner, who will only the complete trading view if they are able to consolidate trading across all managers.
There are some good industry resources already out there that define the mechanics of the AANA calculation. So we won’t try to recreate the wheel here, but what we will do is break down the key steps for firms to follow. These steps are often not so clear and easily misunderstood.
With that in mind, here we walk through the key steps required before, during and after a firm’s AANA calculation.
1. Confirm your jurisdiction(s)
Jurisdictional AANA calculation methodologies can differ, as you’ll see in steps 3 and 5. There have even been examples in previous phases of in-scope firms exceeding the AANA threshold in one jurisdiction but not another, due to calculation and FX rate differences.
Firms are often regulated in multiple jurisdictions, so will need to perform an AANA calculation per jurisdiction.
Likewise firms should also be performing AANA calculations as per the rules for their counter-parties’ jurisdictions, which can also pull them into scope.
2. Confirm whether you are an in-scope entity
Simplistically, if your group/entity/fund is in-scope for Regulatory Variation Margin for uncleared OTC derivatives then you’ll likely be a potential in-scope party for Regulatory Initial Margin.
There are jurisdictional differences in entity scope. The US rules typically only apply directly to Swap Dealers (SDs) and Major Swap Participants (MSPs) and indirectly to Financial End Users (FEUs).
The EU rules catch a broader scope of groups and apply to Financial counter-parties (FCs) and Non-Financial counter-parties exceeding the clearing thresholds (NFC+), which are defined here - https://www.esma.europa.eu/clearing-thresholds.
Even firms outside of the regulated jurisdictions are often brought into scope via their counter-parties, who must comply with the Initial Margin rules.
3. Confirm your AANA calculation period
You didn’t expect all jurisdictions to have the same calculation period did you? :)
See here for ISDA’s useful artefact outlining the different AANA calculation methodologies per jurisdiction.
The good news is that for Phase 6, which is now Sept-2022, we expect the three-month calculation period to be March to May 2022 for the vast majority of jurisdictions, with the exception of the US Prudential rules.
4. When should we perform AANA calculation(s)?
AANA calculations should be run by all potential Phase 6 firms NOW, if not done already.
This can be done by using a proxy three-month period to mirror the regulatory calculation period. We’d strongly advise firms to then replicate that AANA calculation at a regular ongoing frequency (i.e. monthly), to ensure the early identification of any trade portfolio changes that may move your firm from one phase to another.
If a Phase 6 firm does wait until the end of May 2022 to perform their AANA then they’d be leaving themselves with only 3 months until the 1st Sept go-live date. 3 months to deliver what could be a front-to-back change programme that would normally take 18 months+ for firms due to exchange collateral….hopefully there won’t be many firms following this approach!
5. The calculation itself
In terms of the mechanics of the calculation, the simplest place to start is the industry resources that already exist.
For US AANA calculations, see ISDA’s helpful resource here - https://www.isda.org/a/2SjTE/AANACalculationUS_12.21.20.pdf
For EU AANA calculations, and the differences between EU and US calculations, see Acadia’s resource here - https://www.acadia.inc/umr-compass/calculating-aana
Product type notes
There are product-level ambiguities that exist for the AANA calculation, mainly because the regulations do not stipulate the calculation methodology at product type-level.
We’ve described a couple of the key problem areas below, but be warned that there are more!
Physically-settled FX - Physically-settled FX are in-scope for the AANA calculation for all jurisdictions, despite the fact that they’re out of scope for margin exchange. Make sense? Probably not, but the rules are rules and we can safely assume physical FX won’t be removed from the AANA calc now.
Equity options - These can be problematic due to different cross-jurisdictional treatment. However, they’re permanently out of scope under US rules (they’re treated as securities), and at time of writing they are temporarily excluded under EU rules until January 2024. But just to confuse us, equity options have always been in-scope for some other jurisdictions (e.g. Japan, Australia).
As per our comments earlier on, it is critical for principal owners of funds to understand how each of their funds is treated for AANA within each in-scope jurisdiction.
For a fund to calculate its AANA independently, outside of the parent group, it will have to meet certain criteria. That criteria will change per jurisdiction. For example, under EU rules funds will have independent AANA calculations if they are defined as UCITS, or AIFs managed by AIFMs. However, if a fund does not meet the ‘independent’ classifications then it may be treated as part of the overall parent group.
These are key factors that firms should understand as early as possible, as the treatment of an independent fund vs the parent group may determine the compliance phase.
6. AANA >Threshold? Move quick, use time wisely
There’s no time to waste for firms breaching the Phase 6 threshold, who are therefore in-scope for Sept-2022 go-live.
Once firms have confirmed they are in-scope they will need to move fast to kick-off early tasks such as educating all internal stakeholders, setting up the programme, finding a programme sponsor and identifying relevant resources and expertise.
It is also important to inform your Dealer counter-parties that your firm is in-scope. The ISDA resource embedded within step 5 above contains the best ways to self-disclose the fact you will be in-scope to your counter-parties. Newly in-scope firms have a steep learning curve to educate themselves on the front-to-back changes that will impact them. There are helpful resources out there for these firms, including our free Initial Margin Health check, which gives firms access to our specialists to guide them through the key IM rules, changes, challenges and solutions.
In terms of delivery scope, BCBS/IOSCO’s March-2019 guidance means that only those firms with exposure breaching the exchange threshold (€/$50mill at group-to-group level) will need to deliver the full set of custodian, operational and legal changes.
Based on BCBS/IOSCO’s guidance, a Threshold Breach Assessment is a critical first step for all in-scope firms to confirm their compliance scope and plans.
The outcome of a Threshold Breach Assessment is the creation of forecast SIMM and Grid exposure calculations across all of a firm’s relationships. These can then be used to assess if and when exchange threshold breaches will take place. Only then will a firm be able to confidently plan out its compliance tasks, including those operational readiness activities.
7. AANA <€/$8Bill? Continue to calculate
A scenario for some firms is that they will run an early proxy AANA calculation with a result below the €8bill threshold.
This feels like good news, as the firm seems to be out of scope. However, the firm has not performed the calculation for the regulatory calculation period. Each firm must therefore repeat the calculation between March to May to confirm whether they are in or out of scope.
Another key point is that, from the first proxy calculation onwards, each firm should continue to calculate on a regular, ongoing basis to track any changes in trading and therefore their AANA calculation results. We know firms that have suddenly breached an AANA Phase threshold, due to a quick change in their uncleared trading volumes, leading to a very rushed IM readiness programme, with a high risk of unfit solutions.
In parallel, firms may try to future-proof themselves from breaching the AANA threshold, maybe via portfolio compression or a change in trading strategy (e.g. more voluntary clearing). Those firms unable to successfully reduce their uncleared OTC trading, or with an expected future increase in trading volumes, will be well-advised to progress full-speed with their IM programme.
What’s clear is that firms should be incredibly careful before they down tools and assume no action is required.
Confirmed as out of scope for Phase 6? Don’t forget that even if a firm stays below the 8bn AANA threshold for Phase 6, they will come in-scope in subsequent years if their gross notional rises above the 8bn. So keep on calculating….
CloudMargin + Tonic offer an AANA service you can trust, allowing our clients to accelerate compliance readiness and pro-active key decisions.
We combine industry-leading advice with best-in-class technology via our joint AANA service.