Joint Trades Final Stages of Initial Margin Phase-In Comment Letter

The final phases of uncleared margin rules (UMR) implementation present serious logistical challenges. In-scope market participants face a number of major hurdles, which are exacerbated given the number of counterparties expected to come into scope. These include large scale efforts to re-document every bilateral relationship in accordance with UMR, operationally set up third-party segregated accounts and adopt IM modeling to minimize the dispute resolution process, among other key tasks.

To better understand the scope of these challenges, ISDA undertook a data collection. The data covers 16,340 separate legal counterparties, with 34,680 individual relationships. Based on the current regulatory requirements, we estimate the following impacts for Phase 5 of UMR:

  • Over 1,100 newly in-scope counterparties (NISCs), which have over 9,500 new relationships with other counterparties subject to UMR.
  • Each of the 9,500 new relationships requires new or amended documentation that must be tested and uploaded into systems.
  • Up to 19,000 segregated IM custody accounts must be set up and tested (two per relationship, for the posting and collection of IM).
  • Depending on the IM calculation method, between 26-45% of the smallest counterparties, and 69-78% of counterparty relationships, are unlikely to exchange any IM at all, as they fall below a $50 million IM exchange threshold. As such, these counterparties will be required to engage in IM preparations despite the fact they will not exchange IM.

Thus, the analysis shows that IM implementation as currently planned will bring into scope counterparties that pose no systemic risk and will actually exchange little or no IM, while still being subject to the full panoply of implementation and compliance burdens. Targeted recalibrations that more appropriately tailor IM requirements to the relevant risks are warranted, and can be achieved without impairing the ability to meet the policy objectives of mitigating systemic risk.

At the same time IM should be calibrated to address the specific risks such non-centrally cleared derivatives pose, as central clearing is sufficiently incentivized directly. Central clearing has grown steadily since clearing mandates were implemented in 2013, incentivized by the associated benefits of multilateral netting. It is not necessary or appropriate to impose prohibitive IM requirements on Phase 5 counterparties that pose little systemic risk as a further incentive to clear. From a cost-benefit perspective, a large portion of Phase 5 counterparties will not exchange material (or, in many cases, any) amounts of IM, yet they will still face the same significant implementation and compliance burdens and ongoing costs as those that will, without any attendant benefit in terms of systemic risk mitigation. In fact, imposing such burdens and costs may have an inapposite impact on the policy goals of regulators, as NISCs are deterred from utilizing derivatives to effectively manage their risk.

Based on the quantitative analysis, ISDA, the Securities Industry and Financial Markets Association (SIFMA), the American Bankers Association (ABA), the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) and the Institute of International Bankers (IIB) have made a number of targeted recommendations regulators may implement to mitigate the negative impacts market participants will face during the final stages of UMR implementation. Without timely and, to the greatest extent possible, globally consistent regulatory action, there will be insurmountable hurdles to UMR implementation for many market participants, limiting access to the derivatives market.

The Associations recommend that global regulators modify UMR as follows:

A. Recalibrate IM requirements to more appropriately address systemic risk

  1. Raise the Gross Notional Threshold for Phase 5 to EUR/USD 100 Billion ,or the equivalent in the currency of other UMR
  2. Remove physically settled foreign exchange swaps and forwards from aggregate average notional amount calculations for Phase 5

B. Remove Burdens to Use Globally Approved IM Models, including the ISDA SIMM

  1. Exempt Phase 4-5 non-dealer counterparties from prudential-style governance of IM models designed for bank capital standards. Model governance requirements for broadly accepted, regulator approved internal IM models such as SIMM should be limited to entities brought in scope by Phases 1, 2 and 3 and their portfolios.
  2. Exempt non-dealers from any SIMM approval (and/or pre-approval) under EU and Japanese UMR In addition, the Associations request that global regulators clarify that regulatory IM-compliant documentation need not be required until a counterparty’s regulatory IM calculation exceeds a certain sub-threshold.

The rationale and evidence for these requests are set out in further detail in the attached PDF.


Documents (1) for Joint Trades Final Stages of Initial Margin Phase-In Comment Letter