Financial industry groups urge regulators to rethink initial margin requirements.
With rules on margin requirements for non-centrally cleared derivatives “near final,” several industry groups are making a last-minute pitch for regulators to suspend requirements for initial margin (IM).
“While we recognize that the proposals for margin requirements are considered to be ‘near-final,’ we still harbor grave concerns regarding the initial margin (IM) requirements,” wrote the leaders of ISDA, IIF, AFME and SIFMA. “We respectfully ask that you consider withdrawing or suspending any IM requirements until their consequences have been fully analyzed and clarified.”
Although the comment period for the rules ended March 15, the groups felt their concerns were urgent enough “to write to [regulators] separately from the responses [it] provided to the BCBS-IOSCO on the Second Consultative Document.” The letter was addressed to the Chairman of the BIS Stefan Ingves, Mark Carney at the Bank of Canada, William Dudley at the New York Fed, Greg Medcraft at IOSCO and Paul Tucker, Chairman of the Committee on Payment and Settlement Systems (CPSS).
The Second Consultative Document Margin requirements for non-centrally cleared derivatives was released in February 2013, and established the policy framework agreed to by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO). The framework establishes minimum standards for margin requirements for non-centrally cleared derivatives.
One of the problems many see in the February consultative document is that it introduces a new measure that would require universal two-way initial and variation margin for financial entities, meaning both parties to the trade would have to post margin. Currently, both initial and variation margin requirements are negotiated between counterparties. Variation margin tends to be applied more often than initial margin, but in many circumstances counterparties do not currently exchange variation margin, so for them this would represent a new requirement.
According to the letter from industry groups, other issues include:
- The outright quantum of margin required even in “normal” market conditions is very significant. Increased IM requirements in stressed conditions will result in greatly increased demand for new funds at the worst possible time for market participants.
- The IM requirements could force market participants to forego the use of non-cleared OTC derivatives and either: (1) choose less effective means of hedging, or (2) leave the underlying risks unhedged, or (3) decide not to undertake the underlying economic activity in the first instance due to increased risk that cannot be effectively hedged.
- The IM requirements should not be used as a tool to meet objectives of policymakers to reduce risk by encouraging more clearing. No incentive is sufficient to safely clear non-clearable derivatives, and an incentive that seeks to encourage such practices is inconsistent with efforts to create robust and resilient clearinghouses.
Since the comment period is closed, there’s no indication yet regulators are still listening.