The International Swaps and Derivatives Association, Inc. (ISDA) has expressed concerns about the increase in initial margin (IM) requirements for non-centrally cleared OTC derivatives under current regulatory proposals.
The industry group analyzed 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 WGMRs Quantitative Impact Study (QIS). As a result, the association says there are three significant industry concerns related to initial margin requirements.
First is that the level of IM required under the BCBS-IOSCO proposal is significant, ranging from $1.7 trillion to $10.2 trillion depending on the model 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, ISDA says, which it claims could increase IM requirements by a factor of three. [This] could have major adverse systemic consequences, ISDA says.
Lastly, the use of thresholds, which are meant to decrease IM requirements, instead will amplify the pro-cyclicality of the IM requirement during market stresses and add to systemic risk concerns, ISDA says.
ISDA believes that current margin proposals for non-cleared swaps could have a harmful impact on those vital markets and on systemic resiliency, says ISDA CEO Robert Pickel. 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.
With regard to the cross-border application of derivatives rules, ISDA also highlighted concerns about the creation of uneven playing fields for market participants, overlapping and duplicative rules and uncertainties in jurisdictional authority.
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, says Stephen OConnor, managing director at Morgan Stanley and chairman of ISDA. 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.
(CG)