Considering the challenges posed by the COVID-19 pandemic, ISDA submitted a letter on behalf of 21 industry associations and their members requesting BCBS, IOSCO, and global regulators to suspend the current timeline for the initial margin phase-in to allow market participants to focus their resources on ensuring continued access to the derivatives market. Given the uncertainty, ISDA recommends that revised deadlines for phase-five and phase-six implementation be set once the overall impact of COVID-19 is known. ISDA also stresses that it is essential that markets remain open, wherever possible, to ensure critical payments and transactions can be fulfilled and firms are able to manage their exposures—a position set out in a letter to FSB and IOSCO and in a joint letter to US authorities last week.
Regulators have previously taken in recognition of the challenges that the initial margin rules will pose to smaller firms. Last July, for example, BCBS and IOSCO extended the phase-in timeline to give the smallest entities an extra year to comply. According to the ISDA analysis, that means 3,616 counterparty relationships will have to meet the requirements in September 2020, rather than the initial 9,059. Even with this change, though, the number of firms in scope for phase five is far in excess of the number that has had to comply so far—and this would have posed a compliance challenge even in normal times. In the current situation, meeting the documentation and operational requirements would be all but impossible in an environment of staff shortages, remote working, and extreme market volatility.
The phase-five implementation date of September 2020 may seem a long way away, but much of the preparation needs to be done now. With the focus on business continuity, little or no spare capacity is available to deploy and test infrastructure, run average aggregate notional amount (AANA) calculations, and implement margin calculation systems. AANA calculations are necessary for hundreds of counterparties to determine whether they will be subject to the regulatory initial margin requirements. All in-scope counterparties also need to calculate and monitor initial margin amounts. That means the impact of keeping the current phase-in dates will extend far beyond the number of relationships that will actually need to exchange initial margin. In light of the unprecedented circumstances, ISDA is urging global regulators to announce a delay to phase five sooner rather than later. ISDA CEO also pointed out that the largest, most systemically important firms would still be required to meet initial margin requirements, thus mitigating risk in the derivatives market.
While urging the authorities to keep markets open during this time, ISDA point out that it does have a well-established process in place to deal with market closures and the impact on derivatives. However, even with this process, working through the practical implications of a market closure is complex and time-consuming, especially at a time when most institutions have few resources to spare. It can also lead to fragmented, imperfect outcomes.
- Letter to BCBS and IOSCO
- Comments of ISDA CEO
- Keeping Markets Open
- Letter to FSB and IOSCO
- Letter to US Authorities (PDF)
Keywords: International, Banking, Insurance, Securities, OTC Derivatives, Initial Margin, Timeline, COVID-19, BCBS, IOSCO, ISDA
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