ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

For much of the past decade, regulation has been the biggest driver of change in the derivatives market, and for good reason. Such has been the scale of the requirements and the frequency of the deadlines that compliance has been the priority for most market participants. But there comes a time when we need to take a broader, more strategic view, rather than only looking to clear the next regulatory hurdle.

Collateral management and post-trade services are great examples of where ISDA is looking to our members for this strategic assessment. In recent years, firms have been so focused on meeting urgent regulatory requirements that there hasn’t been an opportunity to consider how collateral management processes should ideally function, along with contagion processes such as margin call netting, compression, and access to eligible collateral.

In an effort to identify opportunities for greater automation, more standardization, reduced operational risk and lower cost, ISDA launched three surveys last month covering collateral management transformation, legal documentation and post-trade services and processes. Feedback is due by September 5 and we will further develop our priorities after that.

A critical part of the collateral management transformation initiative will be getting input from end users and their administrators, as well as custodians – they all play an integral role in efficient collateral management. The aim is to pinpoint priority issues and areas of innovation, and to drive successful collaboration across the industry.

This doesn’t mean we are neglecting the ongoing demands of regulation, of course. We have been resolutely focused for some time on the September 2020 compliance date for regulatory initial margin (IM) requirements. With our analysis showing the number of in-scope firms would jump by roughly 20-fold, we’ve flagged the very real concerns about the capacity of these entities to comply in time.

Regulators have recently made important changes that will reduce the risk of a documentation bottleneck. Last month, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) recommended a split in the phase-five implementation schedule over two years, giving smaller, less systemically important firms an extra 12 months to prepare.

This is an important and welcome development. Our analysis shows about one-third of the 1,100 entities and one-third of the 9,000-plus relationships originally in scope for phase five will still have to meet the September 2020 deadline, but the remainder will now have until September 2021 to comply.

An earlier clarification from the BCBS and IOSCO that counterparty relationships below a €50 million IM exchange threshold won’t have to meet documentation, custodial or operational requirements also helps. Of those counterparty relationships that are still in-scope from September 2020, between 28% and 41% are likely to breach the IM exchange threshold within the first two years of their regulatory IM obligation.

These changes will go some way to mitigating the capacity concerns, but there’s still plenty of work for us to do. One priority is to encourage national regulators to adopt the BCBS/IOSCO’s revised implementation schedule consistently across jurisdictions. And at the same time we will continue our work to improve the delivery of collateral and post-trade services and to build a framework that is safe, efficient, and fit for the 21st century.

We welcome participation in the surveys. If your firm is interested in contributing, contact marketinfrastructureandtechnology@isda.org.

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