ISDA welcomes the opportunity to respond to the Financial Stability Board’s (FSB) Derivatives Assessment Team’s (DAT) consultative report on incentives to centrally clear over-the-counter (OTC) derivatives, and supports the work of the FSB in evaluating of the effects of Group-of-20 financial regulatory reforms. We appreciate that the FSB is evaluating not only the regulatory reforms individually, but also – importantly – how they intersect. We also welcome an analytical framework that supports post-crisis regulatory objectives while rationalizing the regulatory framework where appropriate.
ISDA members support clearing, which is an effective means to reduce counterparty risk and increase the resilience of the financial system. The clearing market infrastructure operates well, and the global approach to clearing has achieved significant reductions across many facets of systemic risk. Clearing brings a number of inherent benefits, including: multilateral netting; reduction in credit risk; operational efficiency; and a robust default management process. Many firms clear voluntarily due to these inherent benefits.
Further incentives to clear are created through the regulatory framework. Regulations such as the non-cleared derivatives margin rules and certain capital requirements apply across a broad range of products and counterparties, regardless of whether such products are suitable for clearing, or whether such counterparties pose systemic risk. As a result, these regulatory incentives may not always be appropriate. We appreciate that the DAT report seeks to identify where this may be the case.
Our key recommendations fall into the following broad subject areas:
Recalibration of the capital framework;
Flexibility in the clearing mandate;
Need to increase clearing capacity; and
Fostering harmonization where sensible.
ISDA also advocates for making non-cleared margin requirements more risk appropriate. These proposals will be the subject of a separate paper.