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.

Throughout the coronavirus crisis, global regulators have moved quickly and decisively to provide important regulatory relief, recognizing that firms need to devote all available resources to ensuring business continuity, managing severe market volatility and supporting the real economy. An important announcement late last week – the delay of Basel III by a year – is a big help in achieving that.

The postponement of Basel III until January 2023 means banks have extra time to prepare for the Fundamental Review of the Trading Book (FRTB), the revised credit valuation adjustment framework and the phase-in of the output floor, among other things. Each of these entail complex modelling implementation, data collection and testing, which needs to be done well in advance of the start date. With most bank staff working from home and focused on maintaining critical bank operations, bandwidth for other implementation initiatives is virtually non-existent.

It’s now over to national authorities to adopt these revised timetables – some, including the Australian Prudential Regulation Authority, the Japanese Financial Services Agency and Canada’s Office of the Superintendent of Financial Institutions, have already taken action. In Europe, regulators will also need to decide whether to delay reporting requirements under the FRTB standardized approach, currently scheduled for implementation in 2021. ISDA will track the implementation schedule at the national level, and will update the COVID-19 section of our website accordingly.

ISDA greatly appreciates the responsiveness and quick action of the Basel Committee on Banking Supervision and other national authorities. Providing certainty now will give important reassurance to firms on how to manage scarce resources.

However, we would urge regulators to go further and to provide similar certainty to those small entities due to come into scope of initial margin requirements in September 2020 and September 2021. According to ISDA analysis, an estimated 3,616 counterparty relationships will have to comply this year, followed by another 5,443 in 2021. With firms focused on their coronavirus response, there is no spare capacity to run the necessary average aggregate notional amount calculations, implement and test margin calculation systems, establish custodial relationships and negotiate new documentation.

Regulators have taken an important step in modifying the timetable for the capital framework. Without similar flexibility on margin, smaller derivatives users could find themselves unable to access the derivatives markets at a time of unprecedented volatility.

Coronavirus developments, including information on market closures, regulatory relief and electronic execution, can be found here. Please email if you have any questions.

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