Consultative Document on Margin Requirements for Non-Centrally-Cleared Derivatives
Summary
SIFMA provides comments to the Working Group on Margining Requirements of the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) on the Consultative Document on margin requirements for non-centrally-cleared derivatives.
Excerpt
Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
Centralbahnplatz 2
CH-4002 Basel
Switzerland
Sent by email to: [email protected]
Secretariat of the International Organization of Securities Commissions
C/ Oquendo 12
28006 Madrid
Spain
Sent by email to: [email protected]
Re: Consultative Document: Margin Requirements for Non-Centrally-Cleared Derivatives
Ladies and Gentlemen:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on the captioned consultative document (the “Consultation”) issued by the Working Group on Margining Requirements (the “WGMR”) of the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”). SIFMA welcomes the attention of BCBS and IOSCO to the international harmonization of margin requirements for non-centrally-cleared derivatives.
I. OVERVIEW
Margin requirements for non-centrally-cleared derivatives are a key component of the overall reform program initiated by the Group of Twenty (“G-20”) in 2009. These requirements will potentially have a significant impact on users of non-centrally-cleared derivatives and derivatives market intermediaries and, as a result, the real economy. These impacts will be felt both in times of market stability and, likely with even greater effect, in times of market stress. Our members believe it is critical that international supervisors adopt margin requirements that are consistent and effectively balance financial stability with liquidity and cost trade-offs. We strongly support the efforts of the WGMR to accomplish these objectives.
We agree with the WGMR that margin requirements for non-centrally-cleared derivatives can have important systemic risk mitigation benefits. We also welcome the WGMR’s recognition that these benefits must be considered in relation to the reduced liquidity that would result from derivative counterparties’ providing liquid, high-quality collateral to meet these requirements. These impacts must, however, be considered in the context of the cumulative impact and interrelationship of other core components of regulatory reform that also
have potentially significant liquidity impacts.
These other core components include increased capital requirements, heightened liquidity requirements and single counterparty credit limits. Consider, for example, that new credit value-adjusted capital charges are required to capture dynamic changes in counterparty creditworthiness. Or that expected future exposure computations must be calibrated based on stressed inputs. Increased asset value correlations also capture market stress impacts on asset correlations. Heightened exposure assessments for capital purposes are also now required to capture and reflect wrong-way risk. Significant increases in centrally-cleared swaps arising from mandatory clearing and related margin and guarantee fund requirements will also place further
significant demands on market liquidity. And, single counterparty credit limits impose limits on interconnectedness. In fact, both margin rules and counterparty exposure limits address the same issue – counterparty risk. Therefore, we believe that margin rules should be a fundamental component of counterparty rules and should not be written or implemented as independent
requirements.