More collateral than ever before is being held to cover cleared and non-cleared derivatives exposures. This is an important risk mitigant and helps to make financial markets more resilient, but that collateral needs to come from somewhere. As the volume of collateral continues to grow, the securities financing transaction (SFT) market has become a critical tool for market participants to quickly generate high-quality liquid assets to meet their derivatives margin calls, but several regulatory impediments can hamper the availability of these markets, especially during periods of stress when they are most needed. This must change to ensure derivatives markets can continue to function smoothly – starting with the treatment of cross-product netting under the capital rules.

According to the latest ISDA margin survey, initial and variation margin collected by the leading derivatives market participants for their non-cleared derivatives exposures reached a record $1.6 trillion at the end of 2025. A further $423.5 billion of initial margin was posted by all market participants to major central counterparties for their cleared interest rate derivatives and credit default swap transactions.

That’s a lot of high-quality assets that need to be sourced, sometimes at short notice. Recent crises have shown that spikes in margin requirements during market volatility can force firms to sell assets because of a lack of other options, worsening the disruption. The SFT market offers a vital avenue for firms to generate cash and other high-quality assets at speed, but these markets can come under pressure during stress, hampered by a lack of bank intermediation capacity.

We must tackle this issue to ensure the continued smooth functioning of derivatives and other key markets. In a recent ISDA paper, we highlighted the main regulatory and structural challenges affecting the availability of SFTs and recommended several targeted adjustments to support resilient and efficient SFT markets.

One of the central issues is the recognition of cross-product netting under the Basel III capital framework. Under the current standardized approach for counterparty credit risk (SA-CCR), banks are not able to recognize the risk offsets in a portfolio that combines derivatives and SFTs, even when those exposures are subject to a legally enforceable cross-product master netting agreement. While these offsets can be recognized under the internal model method, this option is not available for US banks under the new Basel III endgame proposal – despite them being among the biggest participants in the SFT markets. This means capital is out of sync with risk, putting a strain on bank balance sheets that may affect their capacity to provide liquidity, especially in stressed markets.

The rise in required collateral for derivatives means this is an issue that needs to be solved, but the forthcoming introduction of US Treasury clearing mandates – with the associated increase in collateral – makes this an urgent problem.

The recent US Basel III endgame proposal takes an important step forward by allowing non-cleared derivatives and repo transactions – including trades between clearing members and their clients – to be recognized in the SA-CCR calculation. However, the proposed methodology allows only limited recognition of offsets across products under a master netting agreement and falls short on producing a genuinely risk-sensitive outcome. In practice, capital requirements remain materially overstated relative to the risk of an economically hedged portfolio.

We believe further changes are needed and will be engaging with US regulators to discuss the limited impact of the current proposed methodology and suggest an appropriate, risk-sensitive recalibration that more accurately reflects the risk-reducing effects of cross-product netting, consistent with sound management, legal enforceability and market practice.

Derivatives and SFTs have become intrinsically linked – the growing amount of collateral required to support cleared and non-cleared derivatives exposures means firms need unfettered access to SFTs at all times to maintain safe and efficient derivatives markets. We have an opportunity to address one of the impediments to resilient SFT markets – cross-product netting. We should take it.