Concerns that punitive initial margin requirements for uncleared derivatives could tie up trillions of dollars in high-grade collateral were lessened last week when ISDA announced that it had reached an industry agreement on a standardized initial margin model (SIMM).
Without a standardized methodology, market participants could be forced to overfund intra-day margin accounts, tying up valuable capital and collateral. The ISDA initiative is meant to put everyone in the market on a level playing field, ISDA officials say.
ISDA sent the SIMM for approval to US, European and Japanese regulators, as well as the Basel Committee’s Working Group on Margining Requirements. Regulators have demanded that market participants use compatible methods for calculating margin, or as an alternative, develop a crude table-based approach that would not allow much opportunity for netting.
The latter approach would have sucked some $10 trillion of collateral out of the market, ISDA estimates, whereas the SIMM will only require $1 trillion.