The ISDA Chief Scott O'Malia offered recommendations to ease the requirements of the initial margin standards for the non-systemically important counterparty relationships. He urges policymakers to adopt these recommendations with the aim to provide relief for counterparty relationships that do not exceed the certain initial margin exchange threshold.
As per the BIS-IOSCO announcement from March 2019, counterparty relationships that are above a specified derivatives notional threshold, but that fall below the EUR 50 million initial margin exchange threshold, are not obliged to meet documentation, custodial, or operational requirements. Based on ISDA research, roughly 1,100 counterparties with approximately 9,500 bilateral relationships will come into scope once the derivatives notional threshold falls from EUR 750 billion to EUR 8 billion in September 2020. The BCBS-IOSCO statement means many of these newly in-scope relationships—about 6,000—will not need to have new documentation or custodial accounts in place because their initial margin exposure is less than EUR 50 million. However, it is not yet clear whether or how the guidance will be implemented by national authorities. The BCBS-IOSCO statement also does not completely eliminate the compliance challenge for these smaller firms. These entities will still need to continually calculate and monitor threshold levels, implement initial margin calculation systems, identify in-scope transactions, and run regular initial margin calculations. This will create a significant ongoing burden for firms that do not pose any systemic risk and regulators should take the necessary steps to exclude these non-systemic firms from meeting the requirements entirely.
ISDA supports the recommendation by CFTC Chairman J. Christopher Giancarlo for U.S. regulators to unambiguously provide relief for counterparty relationships that do not exceed the USD 50 million initial margin exchange threshold under U.S. requirements. ISDA hopes that this approach will be adopted globally to ensure consistent application of the rules. By focusing on risk and readiness, there is a far better chance that those firms that will be required to exchange initial margin will be ready by the September 2020 compliance deadline. ISDA has three other recommendations for policymakers:
- Physically settled foreign exchange swaps and forwards should be excluded from the EUR 8 billion compliance threshold calculation—a recommendation that is consistent with the risk-based approach.
- Initial margin model governance requirements that exist in several non-U.S. jurisdictions for firms that use the ISDA Standard Initial Margin Model (ISDA SIMM) should be removed for non-dealer entities. ISDA has already established a governance and testing regime to back-test and validate ISDA SIMM assumptions and this is shared with global regulators on an annual basis. ISDA also shares data on ISDA SIMM performance with regulators every three months. Consequently, there is no further need to require non-dealer firms to establish a redundant and costly oversight regime.
- Regulators need to provide the appropriate regulatory relief to all legacy swap transactions that might come into scope due to contractual changes brought about by either Brexit or benchmark reform.
Finally, the ISDA Chief urges regulators to work now to align the rules with the key policy objective of mitigating systemic risk in advance of the phase-five deadline of September 2020, which is only 16 months away.
Related Link: News Release
Keywords: International, Banking, Securities, OTC Derivatives, Initial Margin, Non-Centrally Cleared Derivatives, SIMM, Legacy Swaps, ISDA
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