Time for Recalibration – IQ January 2019

It’s traditional to start the New Year with a few predictions. When it comes to forecasting the priorities for derivatives markets, however, this year’s list is easier than most to put together: Brexit, benchmark reform, margin, cross-border issues and technology.

On Brexit, 2018 ended with some positive news – the rollout of the European Commission’s contingency plan for a no-deal Brexit on December 19. Crucially, this included a temporary equivalence decision aimed at reducing disruption in the central clearing of derivatives. But with the Brexit date fast approaching, there’s still plenty of uncertainty about the form of the UK’s exit from the European Union (EU) and what it will mean for derivatives users.

Significant progress was made on benchmark reform in 2018, but this will continue to be a key priority in 2019 – particularly with the transition period for the EU Benchmarks Regulation set to expire at the end of the year. Work to implement robust fallbacks for derivatives referenced to certain key interbank offered rates will also be a focus, building on the final results of an ISDA consultation on technical issues related to new benchmark fallbacks, published in December.

On margin, preparations for the September 2019 and 2020 phase-ins of initial margin requirements will pick up pace, as market participants get ready for a much larger universe of in-scope entities. Industry solutions – such as ISDA Create – IM, a new online platform for producing, delivering, negotiating and executing initial margin documentation – will be crucial. But there are also growing voices calling for the phase-five compliance threshold to be reviewed, following evidence showing that the bringing of a large number of small entities into scope will not contribute to a reduction of systemic risk – contrary to one of the key policy objectives of the rules.

Cross-border harmonization has long been a key priority for ISDA, but the issue is likely to come to further prominence with the Japanese presidency of the Group of 20. Eliminating regulatory and market fragmentation has been identified by the incoming presidency as a key issue, and ISDA will continue to contribute by providing data, analysis and proposed solutions.

Finally, the adoption of new technologies will pick up pace, as firms look to reduce costs and improve efficiencies. Developments like the ISDA Common Domain Model will help ensure standardization and facilitate interoperability across firms and platforms.

These issues – and many others – will form the basis of ISDA’s work for 2019. A last prediction: ISDA will continue to develop standards, documentation and mutualized industry solutions to help firms meet the challenges for this year and in the years ahead.

This issue of IQ focuses on margin requirements for non-cleared derivatives. The full issue is available by clicking on the PDF link below.

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