This 2021 updated edition of Suggested Operational Practices for the OTC Derivatives Collateral Process (the SOP) substantially revises the guidance that ISDA has previously provided to the market on the operation of collateral agreements

ISDA has published a paper on the suggested operational practices for the OTC derivatives collateral process below is an excerpt from the published document:

Introduction

This 2021 updated edition of Suggested Operational Practices for the OTC Derivatives Collateral Process (the SOP) substantially revises the guidance that ISDA has previously provided to the market on the operation of collateral agreements, including the 2013 interim updated edition of the Suggested Operational Practices for the OTC Derivatives Collateral Process. This is largely in response to the evolution of regulation governing the collateral management process during the past 8 years.

In response to the financial crisis, the G-20 mandated the Basel Committee on Banking Supervision (BCBS) and Board of International Organization of Securities Commissions (IOSCO) to develop consistent global standards for non-centrally cleared over-the-counter (OTC) derivatives. In September 2013, BCBS-IOSCO published a global policy framework and timetable for OTC derivative margin reform which aimed to reduce systemic risk by ensuring collateral is available to offset losses caused by the default of a derivatives counterparty.

A key element to this is the requirement that financial firms and systemically important non-financial entities exchange Variation Margin (VM) and Initial Margin (IM) to mitigate counterparty credit risk from uncleared OTC transactions. VM ensures that the current value of a derivative is collateralized and was already a standard feature of the OTC market. IM was traditionally less common but is designed to ensure there is a margin "buffer" to protect against potential losses following a change in value of a derivative position occurring between a counterparty closing out a position upon default of its counterparty and the last exchange of VM.

The previous SOP documents were published prior to the finalizing of many global regulators’ rules impacting collateral, including IM.

Download the full pdf below or via the original ISDA link here