Let’s start with the good news. The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) last week published a statement highlighting that counterparty relationships that fall below an initial margin (IM) exchange threshold aren’t obliged to meet documentation, custodial or operational requirements.

This has the potential to be an important intervention. Based on an extensive global data collection and analysis exercise conducted by ISDA, a drop in the IM compliance threshold from €750 billion to €8 billion in aggregate average notional amount (AANA) of non-cleared derivatives will capture over 1,100 smaller entities, representing more than 9,500 trading relationships. As it stood, new documentation would have needed to be negotiated with every counterparty, custodial relationships would need to be set up, and IM calculation systems would need to be implemented – requirements that would have stretched industry resources to the limit.

Critically, the vast majority of these entities pose no systemic risk. According to the ISDA data, a significant portion of phase-five relationships – between 69-78%, depending on the IM calculation method used – would end up not having to exchange any IM, because their exposures fall below a €50 million IM exchange threshold.

A word about the ISDA analysis. ISDA has analyzed data that covers 16,340 separate legal entities across the globe, equating to 34,680 individual relationships. Based on this broad industry input and technical analysis, we were able to analyze portfolio IM amounts to show the impact, using both the ISDA Standard Initial Margin Model and the regulatory schedule. No one else has that breadth and depth of data – in fact, no single jurisdiction is able to generate this information to this level of detail without industry input. ISDA is uniquely positioned to aggregate the results.

Now the bad news. The BCBS-IOSCO statement is not a cure-all and raises many questions about its global application and duration. Crucially, it doesn’t entirely remove the burden placed on non-systemically important counterparties. Those firms that fall into scope of the rules (those above the €8 billion compliance threshold) but don’t have to exchange margin (because their exposures with their counterparties fall below the €50 million IM exchange threshold) would still need to continually calculate IM and monitor their threshold levels – meaning they still face a significant compliance burden.

Unless specifically directed otherwise, those firms would need to run initial and ongoing AANA calculations, and would need to test, implement and possibly get regulatory approval for IM calculation systems to monitor whether their relationships are at risk of exceeding the allowable €50 million exchange threshold. Faced with this ongoing burden, phase-five firms may be incentivized to reduce their derivatives exposure well below the threshold level, limiting their ability to effectively hedge.

We maintain the most appropriate solution is to lift the phase-five compliance threshold above the €8 billion level. This will create certainty for smaller firms by pulling them out of scope entirely. We recognize that wherever the threshold is set – whether €8 billion or €100 billion – there will be counterparties on the boundary that will continue to face these challenges. But at a higher threshold, the number of counterparties affected would be much, much lower. Most importantly, we believe lifting the compliance threshold is more aligned with the policy objective of addressing systemic risk.

We’ll continue to work with regulators and share the results of our data analysis. The data paints a clear picture of how to ensure the derivatives markets remain safe and resilient but also efficient.