Uncleared Margin Rules: AANA Threshold, SIMM, and Segregation

The uncleared margin rules are a set of Dodd-Frank derivatives regulations that require swap dealers, major swap participants, and their financial counterparties to exchange collateral on any over-the-counter swap that does not clear through a registered clearinghouse.¹ Two types of collateral are in play: variation margin, exchanged daily to cover mark-to-market losses, and initial margin, a buffer against potential future losses if a counterparty defaults. Variation margin applies to essentially every uncleared swap between a dealer and a financial end user. Initial margin only applies once a firm’s corporate group crosses $8 billion in aggregate average notional amount (AANA) of uncleared derivatives. The framework finished phasing in September 2022, but AANA is measured every year, so a firm that grows past the threshold in a future window comes into scope.

Who Is Covered

The rules pivot on “covered swap entities,” a category that includes registered swap dealers, major swap participants, and their SEC-regulated security-based equivalents. These firms carry the broadest obligations: they must both collect margin from and post margin to their counterparties on every uncleared swap.² A swap dealer is any firm dealing in swaps as a regular part of its business; a major swap participant holds positions large enough to pose systemic risk. Both must register with the CFTC and meet ongoing capital and conduct standards.³

The other side of the trade matters just as much. When a covered swap entity faces a “financial end user,” the margin rules apply. The CFTC defines that group broadly: banks, broker-dealers, investment advisers, insurance companies, pension funds, private funds, farm credit institutions, and a long list of other regulated financial firms.⁴ If you are a financial entity trading uncleared swaps with a registered dealer, you are almost certainly subject to variation margin. Whether you also owe initial margin depends on the AANA test.

The Commercial End-User Exception

Not every organization that uses swaps is caught by the rules. The Commodity Exchange Act carves out an exception for non-financial companies using swaps to hedge commercial risk. A manufacturer hedging raw material costs or an airline locking in fuel prices can elect the end-user exception so long as the company is not a financial entity, the swap is tied to hedging or mitigating a genuine business risk, and the company notifies the CFTC of how it meets its financial obligations on non-cleared swaps. The statute also treats banks, credit unions, and farm credit institutions with total assets of $10 billion or less as eligible, pulling small community lenders out of a framework built for major financial players.⁵

Electing the exception is not automatic. The reporting counterparty must submit notice of the election and identify which party qualifies. Additional details, such as whether the swap hedges commercial risk and how the firm meets its financial obligations, can be reported annually or trade by trade. Companies whose boards have approved the general decision to enter exempt swaps must disclose that as well if they file with the SEC.

The $8 Billion AANA Threshold

The trigger for initial margin is a firm’s Aggregate Average Notional Amount, calculated across its entire corporate group. For CFTC purposes, you take the daily average of month-end notional amounts across every outstanding uncleared derivative during March, April, and May of the relevant year, summed across all affiliates and all asset classes.⁶ If the result exceeds $8 billion, the group has “material swaps exposure” and initial margin becomes mandatory beginning that September.

Although the six-phase rollout finished on September 1, 2022, the calculation is not a one-time exercise.⁷ A firm that crosses $8 billion in a future measurement period comes into scope; a firm that dips below may fall out, but should keep monitoring. For the September 1, 2026, compliance date, the relevant window is March, April, and May of 2026.

Variation Margin

Variation margin reflects the day-to-day change in the market value of an uncleared swap. When a position moves against you, you owe your counterparty enough collateral to cover the loss. When it moves in your favor, they owe you. This exchange happens every business day, preventing unrealized losses from piling up between the parties.⁸

A covered swap entity must collect or post variation margin on or before the business day after execution, and each business day after for the life of the trade. In practice most variation margin settles in cash because cash carries no haircut and avoids valuation disputes, but government securities and other qualifying assets are also permitted.⁹

There is no minimum notional threshold for variation margin. Every covered swap entity that trades uncleared swaps with another swap entity or financial end user must exchange it, regardless of portfolio size. A minimum transfer amount, generally capped at $500,000, prevents wiring trivial sums back and forth, but once the outstanding amount crosses that floor, the full transfer is due.

Initial Margin

Initial margin is a separate buffer for potential future losses during the period it would take to close out a defaulted counterparty’s positions. Where variation margin addresses today’s mark-to-market, initial margin addresses the risk that prices move further against you during the days it takes to unwind or replace the portfolio after a default.¹⁰ The calculation assumes a ten-day liquidation horizon, reflecting the realistic time needed to find replacement trades for complex, illiquid instruments.

Initial margin only becomes mandatory between a covered swap entity and a counterparty whose corporate group has material swaps exposure. Even then, the rules provide a $50 million threshold per counterparty relationship: if the calculated initial margin between two consolidated groups is below $50 million, no initial margin needs to change hands. The covered swap entity may reduce the required amount by this threshold, but cannot double-count any portion already applied to trades with affiliates of the same counterparty.¹¹

Unlike variation margin, initial margin is two-way: the covered swap entity must both collect it from and post it to a financial end user with material swaps exposure.² The symmetry is deliberate. If only one side posted, the non-posting party would carry no skin-in-the-game cost and the systemic protection would be incomplete.

SIMM or the Standardized Grid

Firms have two options for calculating initial margin. Most large dealers use the ISDA Standard Initial Margin Model, or SIMM, a risk-sensitivity-based calculation maintained and recalibrated by ISDA. The current version, SIMM 2.8+2506, reflects a semiannual calibration cycle introduced in 2025 that updates risk weights using market data through June 2025.¹² SIMM breaks risk into six classes (interest rates, qualifying credit, non-qualifying credit, equity, commodity, and foreign exchange), calculates delta, vega, and curvature components within each, and aggregates across the portfolio.¹³

The alternative is the standardized table built into the regulation itself, often called the grid. It applies a fixed percentage to the notional value of each trade based on asset class and duration:¹¹

Interest rate swaps: 1% (0–2 years), 2% (2–5 years), 4% (5+ years)
Credit: 2% (0–2 years), 5% (2–5 years), 10% (5+ years)
Foreign exchange: 6%
Equity: 15%
Commodity: 15%

The grid is simpler but almost always produces higher margin amounts because it cannot recognize diversification or offsetting positions within a portfolio. SIMM treats a long position in one interest rate swap as a partial hedge against a short position in another; the grid treats each trade independently. For firms with large, diversified portfolios, SIMM’s savings are substantial, which is why it has become the dominant industry approach.

Eligible Collateral and Haircuts

Not every asset qualifies. The regulations limit eligible collateral for initial margin to a defined set of high-quality, liquid instruments:⁹

Cash in U.S. dollars, major currencies, or the settlement currency of the swap
U.S. Treasury bonds and bills
U.S. agency debt backed by the full faith and credit of the government
Publicly traded GSE debt
Foreign sovereign debt (and ECB debt) assigned low risk weights under applicable capital rules
Securities of the BIS, IMF, and similar multilateral development banks
Common stock in the S&P Composite 1500 or a comparable liquid index
Redeemable interests in money market funds that invest solely in qualifying assets

Each non-cash asset carries a haircut, a discount that accounts for potential price declines between the time collateral is posted and the time it might need to be liquidated. A Treasury bill maturing next month gets a small haircut because its price barely fluctuates. A 20-year government bond could move several percentage points in a week and might count for only about 88–92% of its market value depending on the specific regulatory regime and custodian. Longer duration and lower credit quality both push haircuts higher. Firms must apply these discounts daily when determining whether they have posted or collected enough collateral.

Custodial Segregation

Initial margin cannot sit on the collecting party’s balance sheet. Both sides must post it to an independent third-party custodian that is not the posting firm, the collecting firm, or any of their affiliates.¹⁴ The custodian holds the collateral in a segregated account, kept separate from its own assets and those of both trading parties.

The custodial agreement must include two critical protections. First, the custodian is prohibited from rehypothecating the collateral, meaning it cannot lend it out, repo it, or otherwise use it for its own purposes. The one exception is that cash collateral may temporarily sit in a general deposit account while the custodian uses it to purchase qualifying securities, and that purchase must happen within a reasonable timeframe. Second, the agreement must be legally enforceable even in bankruptcy or insolvency proceedings. The point is that if your counterparty fails, the collateral you posted is not swept into the bankruptcy estate; it stays available to cover the losses from unwinding your trades.

Setting up custodial accounts is one of the most time-consuming parts of coming into scope. Firms need extensive know-your-customer and anti-money-laundering documentation, corporate formation records, authorized signer lists, and negotiated account control agreements that define who can access the collateral and when. For a firm entering scope for the first time, this administrative work often takes months.

Documentation You Need in Place

Before any collateral changes hands, the two trading parties need a legal framework. The ISDA Master Agreement serves as the foundation, establishing the general terms for all derivative transactions between the firms. Layered on top is a Credit Support Annex specifying the collateral mechanics: what assets each party will accept, what haircuts apply, and the operational details of margin transfers. A specialized regulatory CSA is commonly used to align the terms precisely with the margin rules rather than reflecting a purely bilateral negotiation.

Every firm subject to the margin rules must also obtain and maintain a Legal Entity Identifier, the unique 20-character code assigned under the global LEI system. The CFTC requires that every counterparty to a reportable swap be identified by an active LEI in all recordkeeping and reporting to swap data repositories. The LEI must be renewed annually; an expired identifier causes data repositories to reject submissions, potentially triggering a reporting violation.

Operational plumbing needs attention too. Parties must exchange standing settlement instructions with specific bank account details and custodian references. They must agree on eligible collateral schedules so daily operations don’t stall on whether a particular bond or equity is acceptable. And for initial margin, the account control agreement with the custodian must clearly define the procedures for releasing collateral if one party defaults or disputes a margin call. Completing all of this before entering into new uncleared swaps is a regulatory prerequisite.

Daily Operations and What Happens on Failure

The operational cycle runs daily. Each morning, both parties independently value their outstanding portfolio, comparing current market data against the previous day’s positions to calculate what variation margin and initial margin is owed. Once the numbers are final, the party owed collateral sends a formal margin call, typically through an electronic platform such as AcadiaSoft that timestamps and logs the request. The counterparty has until the end of the business day after execution, or after the requirement is triggered, to verify the calculation and transfer the assets.

Disputes happen regularly. Two firms can arrive at different valuations for the same exotic swap, or they may disagree about the haircut on a particular collateral asset. Standard practice is to agree in advance, through the CSA, on a reconciliation process and escalation timeline. There is no single mandatory clock governing how quickly a dispute must resolve before it becomes an event of default; that timing is set by each pair’s contract. In the meantime, the undisputed portion of the margin call should still be transferred.

Persistent failure has real teeth. Under the ISDA Master Agreement, a failure to deliver collateral within the agreed grace period can constitute an event of default. The non-defaulting party gains the right to terminate all outstanding trades, close out positions at current market value, and net the amounts owed. The collateral held at the custodian can then be applied against any remaining exposure. Getting this right requires tight coordination between a firm’s trading desk, risk management, legal team, and back-office operations.

Cross-Border Reach

Uncleared margin rules are not unique to the United States. The framework was designed by the Basel Committee on Banking Supervision and IOSCO, and jurisdictions around the world have adopted their own versions. This creates overlap when a U.S. registered swap dealer trades with a foreign counterparty, or when a foreign dealer’s swap is guaranteed by a U.S. person.

The CFTC’s cross-border rule draws a line based on whether the covered swap entity is a U.S. person and whether any U.S. person guarantees the obligations. A U.S. covered swap entity, or any non-U.S. entity whose obligations are guaranteed by a U.S. person, must comply with the full set of U.S. margin requirements. When posting initial margin to a non-U.S. counterparty, the U.S. entity may satisfy its posting obligation by following the foreign jurisdiction’s rules, provided the CFTC has issued a comparability determination for that jurisdiction.¹⁵

Non-U.S. covered swap entities with no U.S. guarantee face a more nuanced set of rules. They generally must comply with U.S. margin requirements, but exclusions are available for trades where neither the non-U.S. entity nor its counterparty has a U.S. guarantee and the counterparty is not a U.S. person. Substituted compliance is also available where the CFTC has found the home-country rules comparable. As of early 2026, the CFTC has issued comparability determinations for margin requirements covering the European Union, Japan, and Australia.¹⁶

The definition of U.S. person turns on where a firm is organized and where its principal place of business sits. An entity organized under U.S. law, or one whose senior officers primarily direct and control its activities from a U.S. location, is treated as a U.S. person. Factors like having U.S.-based employees or computer servers do not, by themselves, make an otherwise foreign entity a U.S. person.

Penalties for Getting It Wrong

The consequences of noncompliance go beyond reputational damage. The CFTC’s inflation-adjusted civil monetary penalties, current as of January 2025, can reach up to $1,487,712 per violation for manipulation-related infractions. For non-manipulation violations, penalties for registered entities can exceed $1.1 million per violation.¹⁷ These amounts adjust annually for inflation and represent the maximum per-violation cap, not a typical fine. In practice, enforcement actions often involve multiple violations stacked across many trading days, so the total exposure can escalate quickly. A firm that miscalculates its AANA, misses its scope date, or trades without proper documentation exposes itself to both regulatory action and counterparty-level consequences, since a trading partner who discovers you should have been posting margin but were not has grounds to terminate outstanding trades.

1
Office of the Law Revision Counsel. 7 USC 6s – Registration and Regulation of Swap Dealers and Major Swap Participants
2
eCFR. 17 CFR 23.152 – Collection and Posting of Initial Margin
3
eCFR. 17 CFR Part 23 – Swap Dealers and Major Swap Participants
4
eCFR. 17 CFR 23.151 – Definitions Applicable to Margin Requirements
5
Commodity Futures Trading Commission. Final Rule on End-User Exception to the Clearing Requirement for Swaps
6
International Swaps and Derivatives Association. Calculating Phase 5 and Phase 6 AANA for US Regulations
7
Commodity Futures Trading Commission. Initial Margin Phase 5 Economic Analysis
8
eCFR. 17 CFR 23.153 – Collection and Posting of Variation Margin
9
eCFR. 17 CFR 23.156 – Forms of Margin
10
Bank for International Settlements. Margin Requirements for Non-Centrally Cleared Derivatives
11
eCFR. 17 CFR 23.154 – Calculation of Initial Margin
12
International Swaps and Derivatives Association. ISDA Publishes ISDA SIMM Methodology Version 2.8+2506
13
International Swaps and Derivatives Association. ISDA SIMM Methodology
14
eCFR. 17 CFR 23.157 – Custodial Arrangements
15
eCFR. 17 CFR 23.160 – Cross-Border Application
16
Commodity Futures Trading Commission. Comparability Determinations for Substituted Compliance Purposes
17
eCFR. 17 CFR 143.8 – Inflation-Adjusted Civil Monetary Penalties