ISDA analyzed the use of uncleared margin for derivatives as an incentive to clear. In a new white paper that draws on internal research, ISDA concludes, among other things, that: (i) initial margin ("IM") for uncleared derivatives should not be required for counterparties that pose little or no systemic risk and (ii) the role of margin as a clearing incentive should be reconsidered, given other incentives to clear.
With this paper, ISDA seeks to answer two questions: (1) does the scope of the existing IM requirements for uncleared derivatives appropriately achieve the goal of reducing systemic risk, and (2) does the margining of uncleared derivatives incentivize clearing?ISDA essentially answers both of these questions in the negative.
ISDA finds that IM rules are overbroad in scope and should not be required for counterparties that pose little or no systemic risk. In particular, the current threshold (for triggering the requirement) of $8 billion should be raised to $100 billion (or equivalent amounts in non-U.S. regulations). ISDA stated that a small number of the counterparties subject to the IM requirements account for a large majority of the total IM that will be required to be posted under the current rules when fully implemented, and that 80 percent of firms falling within the scope of the margin rules pose little or no systemic risk.
ISDA also found that uncleared derivatives margin requirements are not a central driver of central clearing. ISDA concluded that the policy of making uncleared margin requirements greater than cleared requirements in order to incentivize clearing should be reconsidered. In particular, ISDA cites regulatory capital requirements, the benefits of multilateral netting and the liquidity of cleared products as primary incentives for central clearing.
The paper is the fifth in a series published by ISDA that examines the impact of G-20 derivatives regulation and its effect on central clearing.
Commentary / Nihal Patel
The conclusions in this paper are consistent with the policy recommendations previously made by ISDA (along with a group of other trade associations) to regulators as they expand the scope of initial margin requirements for uncleared derivatives. As with the previous analysis, ISDA rightly questions whether the current requirements - if phased in as contemplated in 2020 - will be overbroad and impose regulatory burdens that do not have a material impact on the policy aim of reducing systemic risk.
The policy recommendations are also worth noting as market participants consider the recent SEC proposal for uncleared derivatives margin requirements. The SEC proposal, unlike the rules adopted by other G-20 regulators, does not contain thresholds before initial margin requirements are applied. (Though it includes other exceptions that limit the scope of the IM requirements versus what other regulators have done.)
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