ISDA appreciates the recent statement by the BCBS and IOSCO on the final implementation phases of the margin requirements for non-centrally cleared derivatives. As the statement notes, “significant progress has been made to implement the framework for margin requirements for non-centrally cleared derivatives.” ISDA supports and has helped to drive this progress in derivatives margining and in the other key areas of the G20’s regulatory reform agenda. These reforms have helped to make the financial system safer and more robust.

We believe the clarifications offered by the BCBS/IOSCO statement with respect to the scope of the initial margin requirements (IM) will be helpful to market participants and to the continued safe, efficient functioning of derivatives markets. These clarifications include that the BSBS/IOSCO (1) do not believe that IM requirements should apply to contracts amended solely as the result of interest rate benchmark reforms, and (2) do not believe the IM framework requires certain documentation, custodial and operational arrangements to be in place if bilateral IM amounts do not exceed the framework’s €50 million IM threshold.

We also very much appreciate that, as per their statement, the BCBS and IOSCO “will continue to monitor the effect of meeting the final stage of the phase-in…” We understand in fact that they are currently engaged in further analysis of the Phase V requirements.

Toward this end, we have shared with policymakers an in-depth and comprehensive quantitative analysis that we conducted on behalf of our members on the impact of the Phase V requirements. This analysis is, to our knowledge, unique in its scope and depth. An overview of the initiative’s methodology and process is included as an addendum to this letter.

Based on our analysis, it is clear that irrespective of the BCBS/IOSCO statement on documentation, custodial and operational requirements under the margin framework, the current Phase V requirements will impose significant costs on hundreds of market participants that pose little or no risk to the financial system and that would be required to post little or no IM. These costs will likely incentivize potential Phase V counterparties to decrease their use of derivatives as an effective hedging tool, notwithstanding their de minimis risk exposure or IM requirements. They would also significantly add to the legal and operational challenges that firms already face as a result of Brexit and benchmark reform.

We would consequently ask respectfully that policymakers consider re-calibrating the current margin framework in the following ways:

• Modify the current €8 billion notional threshold for inclusion in Phase V by making the threshold more risk sensitive in order to clearly exclude counterparty relationships that pose little or no systemic risk. Between 70% and 80% of Phase V relationships that exceed the current €8 billion notional threshold will not post regulatory IM at least two years into their obligations, if ever, as they will not exceed the €50mm IM exchange threshold. By moving to a more risk-sensitive approach, policymakers could ensure that counterparty relationships posing substantial or systemic risk challenges would still be covered by the margin framework, while at the same time avoid imposing costly and burdensome obligations on market participants with little exposure or risk.
• Eliminate physically settled FX swaps and forwards from the Phase V calculation. As you know, market participants are not required to post IM on these products. They are, however, required to include the notional amounts of such transactions in calculating whether they are in scope of the IM rules. A substantial number of Phase V firms — 19% — are in scope only because of this requirement. According to the study conducted by the Office of the Chief Economist, CFTC, nearly 30% of Phase V firms in scope of their data analysis are subject to the IM requirements as a result of these FX transactions.

Click on the attached PDF to read the full letter.