Association Issues Margin Analysis and Urges Regulators to Resolve Extraterritoriality Issues
The International Swaps and Derivatives Association, Inc. (ISDA), today published an analysis of initial margin (IM) requirements for non-centrally cleared OTC derivatives under current regulatory proposals.
International rules governing margin requirements for OTC derivatives and the resolution of issues related to the cross-border application of derivatives rules are two of the most important matters facing global regulators and the industry today.
The IM analysis is based upon data submitted by member firms to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) joint Working Group on Margining Requirements (WGMR), as part of the WGMR’s Quantitative Impact Study (QIS).1
The analysis highlights three significant industry concerns. First, the level of IM required under the BCBS-IOSCO proposal is very significant, ranging from $1.7 trillion to $10.2 trillion depending on whether internal models or standardized schedules are used. Second, the increased amount of IM that would be required in stressed conditions will result in greatly increased demand for new funds at the worst possible time for market participants. This pro-cyclicality, which could increase IM requirements by a factor of three, could have major adverse systemic consequences. Third, the use of thresholds, which are designed to decrease IM requirements, will actually amplify the pro-cyclicality of the IM requirement during market stresses and add to systemic risk concerns.
“The ISDA margin analysis outlines the vital role that non-cleared swaps play in the global economy,” said Robert Pickel, ISDA chief executive officer. “Corporates, sovereigns, supranational organizations and investment firms use them in their financing and funding activities, and they are needed for the proper functioning of the housing markets. ISDA believes that current margin proposals for non-cleared swaps could have a harmful impact on those vital markets and on systemic resiliency. The Association supports instead a three-pillar framework for ensuring systemic resiliency that is based upon a robust variation margin framework, mandatory clearing for liquid, standardized products, and appropriate capital standards. The irony here is that the margin rules in current form would increase systemic risk. They could very well harm the financial system they are designed to protect,” Mr Pickel said.
With regard to cross-border matters, ISDA has highlighted concerns at all stages of the legislative process. These issues include the creation of uneven playing fields for market participants, overlapping and duplicative rules and uncertainties in jurisdictional authority. In October 2012, the Finance Ministers of France, Japan and the UK together with EU Internal Market Commissioner Barnier, wrote to express similar concerns, stating: “Regulation across the G20 needs to be carefully implemented, in a harmonised way that does not risk fragmenting global markets.2”Authorities in Australia, Hong Kong and Singapore have also noted concerns regarding the impact on international business and market liquidity.
ISDA warmly welcomes the international dialogue that is now taking place in the area of cross-border issues, as evidenced earlier this month at the public hearing of the Global Markets Advisory Committee (GMAC) of the US Commodity Futures Trading Commission. The Association hopes that real progress can be made on resolving these questions as regulators continue their discussions. It is essential that market participants have clarity about how and where they are regulated. The current uncertainty is damaging to markets.
“A clean, efficient and fair cross-border framework and an appropriate margin regime, centered around robust variation margin, are essential components of the regulatory reform mosaic,” said Stephen O’Connor, ISDA chairman and managing director, Morgan Stanley. “The outcome of policymakers’ decisions for these critical issues will have tremendous implications for global markets and for many thousands of OTC derivatives end-users in the real economy around the world.”
“ISDA absolutely supports the G20 efforts to reduce systemic risk,” said O’Connor at the recent GMAC meeting, noting that market participants are increasingly concerned about cross-border rules which, if poorly implemented ”…will stretch regulators, end users and dealers, and will harm market liquidity.” ISDA notes that market liquidity is already being affected as certain non-US banks have now ceased trading with US entities in a reaction to the reach of the registration requirements of US regulations.
ISDA’s position is that, above all, markets need a level playing field and globally coordinated approach for all rules, with consistency across jurisdictions together with a consistent implementation timeline.
