Featured Product

    ISDA on Easing Margin Requirements on OTC Derivatives for Small Firms

    May 03, 2019

    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

    Related Articles
    News

    BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks

    A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.

    July 29, 2022 WebPage Regulatory News
    News

    EBA Publishes Multiple Regulatory Updates for Regulated Entities

    The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.

    July 29, 2022 WebPage Regulatory News
    News

    APRA Consults on Prudential Standard for Operational Risk

    The Australian Prudential Regulation Authority (APRA) is seeking comments, until October 21, 2022, on the introduction of CPS 230, which is the new cross-industry prudential standard on operational risk management.

    July 28, 2022 WebPage Regulatory News
    News

    EC Amends Rule on Securitizations; ESRB Updates Reciprocation Measures

    The European Commission published a Delegated Regulation 2022/1301 on the information to be provided in accordance with the simple, transparent, and standardized (STS) notification requirements for on-balance-sheet synthetic securitizations.

    July 27, 2022 WebPage Regulatory News
    News

    APRA Announces Revisions to Capital Framework for Banks

    The Australian Prudential Regulation Authority (APRA) is announced revisions to the capital framework for authorized deposit-taking institutions to implement the "unquestionably strong" capital ratios and the Basel III reforms.

    July 26, 2022 WebPage Regulatory News
    News

    EBA Examines Remuneration Data and Use of Large Exposure Exemptions

    The European Banking Authority (EBA) published a report that examines the use of certain exemptions included in the large exposures regime under the Capital Requirements Regulation (CRR).

    July 22, 2022 WebPage Regulatory News
    News

    UK Authorities Publish Discussion Paper on Critical Third Parties

    The Bank of England (BoE), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) published a joint discussion paper that sets out potential measures to oversee and strengthen the resilience of services provided by critical third parties to the financial sector in UK.

    July 22, 2022 WebPage Regulatory News
    News

    BoE Issues Update on Ongoing Data Transformation Program

    The Bank of England (BoE) issued a communication to firms to provide an update on the progress of the joint data transformation program—which is being led by BoE, the Financial Conduct Authority (FCA), and the industry—for the financial sector in UK.

    July 21, 2022 WebPage Regulatory News
    News

    EBA Issues Draft Methodology and Templates for 2023 Stress Tests

    The European Banking Authority (EBA) published the draft methodology, templates, and template guidance for the European Union-wide stress test in 2023.

    July 21, 2022 WebPage Regulatory News
    News

    EBA Issues SREP Guidelines and Standards for Investment Firms

    The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly published the final guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for investment firms.

    July 21, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8407