Image for Manisha Dorawala's blog about the VM Protocol

In the financial industry, some major events are occurring. On March 1st of this year, the Variation Margin Protocol (VM Protocol or VM Big Bang) officially went into effect in order “to help market participants comply with new rules on margin for uncleared swaps, by providing a scalable solution to amend derivatives contract documentation with multiple counterparties. The Protocol addresses documentation changes necessary to comply with the variation margin requirements.” These documentation changes are applicable to many companies and people who are involved in the market. For an in-depth explanation of the rules and what they mean, check out this post for an explanation of the rules.

What is the VM Protocol?

The International Swaps and Derivatives Association, Inc. (ISDA) developed and published the VM Protocol in order to help those companies and people involved in the market to adjust to the new margin rules that are going into effect this year. The VM Protocol is a way to help these entities ensure that they “create new or amend existing credit support documentation to reflect the requirements of the Margin Rules.”

The Protocol mainly focuses on parties that may be affected by the new Margin Rules that apply to uncleared derivative trades. The VM Protocol allows those affected to choose one of three options: “amend any existing credit support annex (“CSA”) to become compliant with the Margin Rules, retain existing CSAs and enter into new CSAs based on the existing CSA (with changes necessary to satisfy the Margin Rules), or enter into new CSAs based on ISDA’s 2016 Credit Support Annex for Variation Margin (VM).”

How does the VM Protocol help?

If you’re someone who is going to be affected by the new Margin Rules, you’re likely wondering how the VM Protocol can help you out. Benefiting from the Protocol is a two-step process done through the ISDA. First, you must send the ISDA a letter stating your intention to adhere to the VM Protocol. Your second step is to take a questionnaire, either online or as a hard copy, and then send that questionnaire to the ISDA. All of the adherence resources can be found on ISDA’s website. As of right now, there is no cut-off date for complying with the Protocol, but the ISDA does have the right to set one.

Being proactive is the best way to get ahead of these Margin Rules. By learning whether or not your interests are protected by the VM Protocol and how to go about adhering to the Protocol, you can protect yourself and other parties and continue doing successful business.