ISDA and the Institute of International Finance (IIF) welcome the consultative report Review of Margining Practices. The Associations appreciate the large amount of data shared by BCBS, CPMI and IOSCO. The report paints a very accurate picture of the events of 2020 in relation to margin practices.
The Associations broadly agree with the proposed follow up actions and stand ready to support further work on this important topic.
The Associations welcome that the report acknowledges the difference between margin models for cleared exposures and for non-centrally cleared exposures. These differences meant that cleared and non-cleared margin models, especially the ISDA Standard Initial Margin Model (ISDA SIMM® or SIMM), reacted differently to the stress in March 2020.
These differences also mean that the responses to each of the questions in the report were, for most questions, very different between cleared and non-cleared margin models. In these cases, we clearly mark which part of the response covers cleared margin (blue background) or non-centrally cleared margin (green background). Responses applicable to both are on white background.
Centrally Cleared Margin
With respect to cleared margin, the report provides a large amount of data on margin procyclicality: the differences in procyclicality of central counterparties (CCPs) within and across asset classes and the impact of large margin calls on different market constituents. We propose that the whole clearing market (CCPs, clients, clearing members) and regulators agree to a target level of procyclicality that balances the cost of clearing (margin levels) with stability (reduced procyclicality) acknowledging that margin calls during some tail situations may have to exceed this to ensure CCPs are not under-collateralized. We do not propose to further specify anti-procyclicality tools, but rather leave it up to each CCP to adapt its models to achieve the agreed level of risk appetite for procyclicality. Overall, preparedness of market participants could be improved with more transparency. We therefore advocate for improvements in transparency for risk models in general and on procyclicality in particular and better access to margin simulators for a wider range of market participants. We would also like to see improvements in intraday margin call processes. We support the proposed international follow-up work.
Non-centrally Cleared Margin
With respect to non-cleared margin, the report acknowledges the relative stability of ISDA SIMM during the period of analysis but suggests further review of the timeliness of introducing new stress into an IM model and the transparency regarding model performance and remediation practices. With respect to calibration, we believe it is important to consider the many interdependent factors which contribute to the timeframe necessary to recalibrate an IM model like ISDA SIMM, including processes which are required by regulation such as internal model validation approval and regulatory model approval or notification. Although there may be ways to conduct an expedited calibration to incorporate stress into the risk weights for specific risk classes should it be warranted by market conditions, it would be necessary for regulators to consider (i) evidence of material and widespread IM shortfalls which should be immediately addressed at the industry level rather than rely on remediations at the individual portfolio level and (ii) the end-to-end cycle that allows recalibrated parameters to be reflected in the IM calculation for portfolio to determine whether there is sufficient value to warrant an ad hoc calibration. Regarding model performance transparency and shortfall remediation, frequent and robust reporting is provided to global authorities regarding changes to and validation of SIMM, as well as the ongoing monitoring of its performance and the remediation of bilateral portfolios. The SIMM Governance Forum is reviewing any clarifications or enhancements that can be made to the guidelines for remediation of shortfalls under the SIMM Governance Framework.
This consultation response covers the positions of our members that are clearing members and their clients. The paper does not reflect the views of many CCPs, and many of the CCPs are in disagreement with the views expressed herein.