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For Immediate Release
Margin Requirements on Non-Centrally Cleared Swaps Could Increase Risk,
According to ISDA Analysis
Association Issues Margin Analysis and Urges Regulators to Resolve
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.
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.
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Since 1985, ISDA has worked to make the global over-the-counter (OTC) derivatives markets safer and more efficient. Today, ISDA is one of the world’s largest global financial trade associations, with over 840 member institutions from 59 countries on six continents. These members include a broad range of OTC derivatives market participants: global, international and regional banks, asset managers, energy and commodities firms, government and supranational entities, insurers and diversified financial institutions, corporations, law firms, exchanges, clearinghouses and other service providers. Information about ISDA and its activities is available on the Association's web site: www.isda.org.
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A presentation outlining the ISDA analysis of margin for non-centrally cleared swaps is available at ISDA's website.
- $10.2 trillion if all firms used the standard IM schedule provided by the regulators.
- $1.7 trillion if all firms used approved internal models.
- $800 billion if all firms used approved internal models and there was a €50 million exposure threshold between counterparties.
- $4.1 trillion if all firms used approved internal models and there was a €50 million exposure threshold between counterparties.
- $5.1 trillion if all firms used approved internal models and there was no threshold.
- $7.6 trillion if all firms used the standard IM schedule provided by the regulators.
- $1.2 trillion if all firms used approved internal models.
- $600 billion if all firms used approved internal models and there was a €50 million exposure threshold between counterparties.
- $3.0 trillion if all firms used approved internal models and there was a €50 million exposure threshold between counterparties.
- $3.6 trillion if all firms used approved internal models and there was no threshold.
Adding mandatory initial margin to these transactions could harm the economy and potentially threaten, rather than strengthen, the global financial system. Consequently, ISDA believes that a three-pillar framework is appropriate for ensuring systemic resiliency: a robust variation margin framework, mandatory clearing for liquid, standardized products, and appropriate capital standards.
4Source: BIS Working Paper 373, “Collateral requirements for mandatory central clearing of over-the-counter derivatives,” page 20. The paper notes that for cleared portfolios, “Across the G14 dealers, initial margin requirements on IRS portfolios total $15 billion in an environment of low market volatility, rising to $29 billion if market volatility increased to medium and $43 billion if it increased to high. For CDS, total initial margin requirements jump from $10 billion in an environment of low market volatility to $51 billion and $107 billion as volatility rises to medium and high.” For this analysis, ISDA applied the estimate that IM could rise 3x in stressed conditions across the portfolio of unclearable swaps.