GLOBAL – The International Swaps and Derivatives Association (ISDA) has urged the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO), currently in charge of revamping guidelines for uncleared derivatives trades, to drop their proposals to impose initial margin requirements.
In a letter sent to five policymakers – including Stefan Ingves, chairman of the BCBS; Greg Medcraft, chair of the IOSCO board; Mark Carney, chairman of the Financial Stability Board; Paul Tucker, chairman of the Committee on Payment and Settlement Systems; and William Dudley, chairman of the Committee on the Global Financial System – the ISDA said it had "grave concerns" regarding the initial margin requirements the BCBS-IOSCO Committee intends to introduced for non-cleared derivatives.
Pension funds across Europe have voiced similar concerns, criticising the BCBS-IOSCO for failing to set clear rules on the issue.
Last month, the UK National Association of Pension Funds (NAPF) urged the committee to provide "urgent" clarification on the amount of collateral pension funds would be required to post for inflation swaps under non-cleared trades, as this could impact their hedging strategies.
In its letter, the ISDA added that initial margins did not appear to meet any objective cost-benefit analysis.
"We also do not believe that, as currently drafted, they will contribute to the shared goal of reducing systemic risk and increasing systemic resilience," it added.
"In fact, the reverse might be true: the proposed requirements might significantly reduce market liquidity, tax the banking system and the global economy and introduce dangerous pro-cyclical risks. And all for no real tangible benefit."
It went on to say that the amount of margin required even in "normal" market conditions was very significant.
It argued that increasing initial margins requirements in "stressed conditions" would result in "greatly increased demand" for new funds at the worst possible time for market participants.
It also stressed that such margin obligations for non-centrally derivatives trades could force market participants to forego the use of non-cleared OTC derivatives.
Those market players, according to the association, would either choose less effective means of hedging, leaving the underlying risks unhedged, or simply decide not to hedge in the first place due to increased risk that cannot be effectively hedged.
The ISDA called on policymakers to review their position on margin rules currently being drafted by the BCBS-IOSCO Committee.
"We respectfully ask that you consider withdrawing or suspending any IM [initial margin] requirements until their consequences have been fully analysed and clarified," it said.
The new rules for derivatives trades are to meet the requirements agreed at two G20 summits in 2009 and 2011.
In 2009, G20 leaders initiated a reform programme to reduce the systemic risk of over-the-counter (OTC) derivatives markets, with one measure aiming to pull all derivatives contracts currently traded in OTC through central clearing.
However, mandatory clearing requirements will capture only standardised OTC derivatives, while non-standardised products, including inflation swaps, will continue to be non-centrally cleared and remain subject to bilateral counterparty risk management.
In 2011, the G20 leaders agreed to add margin requirements on non-centrally cleared derivatives to the reform programme and asked the BIS-IOSCO to draft the new rules for such deals.
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