June 17, 2019

ISDA published a paper that highlights the main areas of difference in the implementation of margin requirements for non-cleared derivatives across jurisdictions and makes recommendations on how to resolve these variations. The paper discusses differences in implementation in key areas such as eligible collateral requirements, initial margin model governance obligations, misalignments in initial margin product scope, settlement time frames, and treatment of inter-affiliate transactions.

Jurisdictions across the globe have implemented margin requirements for non-cleared derivatives, largely in line with the standards agreed by BCBS and IOSCO. Since implementation of the first phase of the requirements in 2016, the U.S., EU, Japan, and others have extended the requirements in line with the phase-in schedule agreed by BCBS and IOSCO. The consistency in requirements has enabled ISDA to develop and implement industry solutions to aid compliance, including standard initial margin and variation margin documentation, the ISDA Standard Initial Margin Model (ISDA SIMMTM), and ISDA Create—Initial Margin, an online tool for negotiating and executing initial margin documents. Nonetheless, differences in the implementation across jurisdictions still exist in certain key areas such as eligible collateral, settlement time frames, and treatment of inter-affiliate transactions. These inconsistencies create unnecessary complexity and costs for derivatives users and contribute to market fragmentation.

While initial margin and variation margin reduce counterparty credit risk and have the potential to mitigate systemic risk, divergence in the implementation of margin requirements across jurisdictions contributes to market fragmentation, increases the cost and complexity of cross-border trading, and decreases access to global liquidity pools. Aligning margin requirements in the mentioned key areas would significantly reduce these negative market effects without compromising overall policy objectives. By means of illustration, the paper outlines the requirements of the U.S., EU, UK, Japan, Singapore, Hong Kong, Australia, Switzerland, and Canada.

 

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Keywords: International, Banking, Securities, Margin Requirements, Counterparty Credit Risk, OTC Derivatives, ISDA

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