NEW YORK, Nov 28 (IFR) - As global regulators continue to
hammer out new regulations that will make over-the-counter swaps
more costly, the International Swaps and Derivatives Association
is looking to salvage the bespoke, uncleared swaps market from
what it considers to be dangerously high margin requirements.
The industry group on Tuesday released a quantitative impact
study estimating that between US$1.7trn and US$10trn would be
needed, depending on the use of specific models, to satisfy
initial margin requirements for uncleared swaps laid out by an
existing joint proposal from the Basel Committee on Banking
Supervision and the International Organisation of Securities
That squeeze on high-grade assets and cash would come on top
of an approximate US$800bn tab for collateral on clearable
swaps, estimated by the Bank of England and the Bank for
International Settlements in separate reports. Standardised
swaps are expected to be mandated into a cleared environment in
the US in the first half of next year.
It will come as little surprise that the derivatives lobby
is pushing back on rules that will at best make uncleared trades
far more expensive and at worse kill off the market altogether.
Bespoke derivatives, which make up around 20% of the total OTC
derivatives notional outstanding according to ISDA, have long
been an important source of profit for dealers.
Nonetheless, there is genuine concern across the industry
that end-users will be unable to hedge specific risks via the
uncleared market if the global supervisory groups recommend an
overly onerous two-way initial margin requirement, as opposed to
a one-way or zero IM requirement.
"The sensible approach would be to mandate universal
variation margin without thresholds (with the usual exemptions)
and have an observation period to review over time whether
further specific measures relative to initial margin are
necessary," Eric Litvack, head of regulatory strategy at Societe
Generale and ISDA Board Member, told IFR.
Variation margin is calculated on a daily basis and
collected when a contract moves against a counterparty to cover
its expected losses. Initial margin is posted at the outset of
the trade and covers the possible multiplier effect of having
one counterparty default on a trade.
ISDA argues that on top of being hefty, the proposed initial
margin requirements are pro-cyclical as they will result in
greatly increased demand for new collateral posting during
stressed market conditions.
"Corporates, sovereigns, supranational organisations and
investment firms use [uncleared swaps] in their financing and
funding activities, and they are needed for the proper
functioning of the housing markets," said Robert Pickel, chief
executive of ISDA in a release.
"ISDA believes that current margin proposals for non-cleared
swaps could have a harmful impact on those vital markets and on
Regulators believe raising margin requirements for
derivatives is central to preventing another financial crisis
and are likely to be reluctant to cede ground in the face of
industry push back.
A key mission of the G20 regulatory reforms is to increase
the transparency and robustness of the derivatives markets by
encouraging the trading of swaps on exchanges. Levying initial
margin requirements on uncleared swaps is viewed as a major tool
in encouraging that migration.
But ISDA hopes to make a stand on the issue, arguing that
tailored solutions cannot be cleared due to the lack of
liquidity in bespoke contracts and that uncleared swaps must not
be made so costly as to eliminate hedging capabilities.
The US$1.7-10trn estimate from ISDA comes from an analysis
of submissions to the BCBS-IOSCO's own working group, offered
anonymously by market participants during a consultation period
earlier this year. The BCBS-IOSCO has said they plan to release
final guidelines by the end of 2012.
The US Commodity Futures Trading Commission introduced its
own uncleared swaps margin rules ahead of the BCBS-IOSCO
proposals, but quickly retracted and re-released proposals to
put themselves on a timeline more closely aligned with the
global supervisors after being vilified for jumping the gun.
The uncleared swaps margin debate is just one of many
footnotes within a larger international regulatory narrative.
Today, the CFTC is set to host a group of international
regulators behind closed doors to discuss the CFTC's reach in
applying Dodd-Frank, a contentious topic that has roused
criticism from international regulators towards the US.
And on Thursday, the CFTC is hosting a public meeting
unexpectedly scheduled last week to discuss the mandatory
clearing determination, at which they are expected to vote on
rules to set the mandate in motion.
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