April 5, 2019

Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
Centralbahnplatz 2
CH-4002 Basel
Switzerland

Secretariat of the International Organization of Securities Commissions
Oquendo 12
28006 Madrid
Spain

Re: Margin Requirements for Non-Centrally Cleared Derivatives – Final Stage of Initial Margin Phase-In

Ladies and Gentlemen,

The Securities Industry and Financial Markets Association (SIFMA), the American Bankers Association (ABA), the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) and the Institute of International Bankers (IIB) (together, the Associations1) appreciate the efforts of regulators towards developing and implementing margin requirements for non-centrally cleared derivatives. Standards for initial margin (“IM”) requirements for non-centrally cleared derivatives (commonly referred to as the “Uncleared Margin Rules” or “UMR”) are being phased in globally under the Basel Committee on Banking Supervision and International Organization of Securities Commissions (BCBS-IOSCO) Final Framework on Margin Requirements for Non-Centrally Cleared Derivatives (the “Margin Framework”). These requirements are a key aspect of the G20’s financial regulatory reform agenda covering the over-the-counter derivatives markets and market participants, the goals of which our members fully support.2

We appreciate the March 5, 2019 BCBS-IOSCO statement noting that “the [Margin Framework] does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework’s €50 million initial margin threshold.”3 This statement should lead toward a common approach among jurisdictions in this regard. We also welcome BCBS and IOSCO reiterating that they “will continue to monitor the effect of meeting the final stage of phase-in, scheduled for 2020.” We understand that further analysis of Phase 5 IM requirements4 and discussion are currently underway.

However, while the statement offers helpful clarification, we are concerned that it does not address the fundamental issue that the current Phase 5 requirements will present. As we have previously raised to global regulators5, we and our members have serious concerns that the final phase of IM requirements set to begin in September 2020 will bring into scope a large number of relatively small counterparties whose inclusion for IM under the Margin Rules will impose significant cost and operational burdens on many market participants but provide little (if any) additional benefit towards meeting the policy objectives of regulators towards mitigating systemic risks. Many potential Phase 5 entities may in fact be dissuaded from engaging in derivatives transactions which help hedge and manage their risk, in order to reduce their derivatives exposure, given the cost and operational burden of complying with UMR.

We therefore respectfully reiterate our request that policy makers consider recalibration of the current Margin Framework, to more appropriately achieve the goal of mitigating systemic risk by:

• Modifying the current €8 billion notional threshold for inclusion in Phase 5 by making the threshold more risk sensitive in order to clearly exclude counterparty relationships that pose little or no systemic risk; and
• Removing physically-settled foreign exchange swaps and forwards from the AANA calculations for Phase 5, since market participants are not required to post IM on these FX products.

Further, although as noted above, the recent BCBS-IOSCO statement is a helpful clarification, delaying some of the burden for those counterparty pairs that do not breach the €50 million IM exchange threshold, these parties will still be subject to significant ongoing risks and operational burdens:

• Initial and bi-annual AANA calculations (due to different global and US timing requirements)
• Initial (and future, if change of status) self-disclosure to its dealers in applicable jurisdictions after each AANA calculation period
• Implementation or employment of an IM calculator, identify in-scope transactions, identify and tag trade features for IM calculation and regularly run an IM calculation (based on ISDA SIMMTM and/or regulatory schedule) to monitor whether the relationship is at risk of exceeding the allowable €50 million exchange threshold.6

As mentioned, the burdens and risks associated with the above may incentivize smaller Phase 5 counterparties to reduce their derivatives exposure, potentially limiting their ability to
effectively hedge and manage their risk.7

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1 See Appendix for description of the Associations.
2 G20 Pittsburgh Summit (Sept. 24-25, 2009).
3 See https://www.bis.org/press/p190305a.htm.
4 The Phase 5 threshold for inclusion in the IM requirements is an average annual aggregate amount (“AANA”) of €8 billion. Counterparties above that threshold will be required to post IM when it would exceed €50 million.
5 See SIFMA and ISDA White Paper Initial Margin for Non-Centrally Cleared Derivatives: Issues for 2019 and 2020 (July 19, 2018) at https://www.sifma.org/wp-content/uploads/2018/07/Initial-Margin-for-Non-Centrally-cleared-Derivatives-Issues-for-2019-and-2020.pdf and SIFMA, GFMA and other associations letter (September 12, 2018) at https://www.sifma.org/wp-content/uploads/2018/09/Margin-Requirements-for-Non-Centrally-Cleared-Derivatives-%E2%80%93-Final-Stages-of-Initial-Margin-Phase-In.pdf. As demonstrated in data analysis highlighted therein, approximately 1,100 counterparties with an estimated 9,500 bilateral relationships are expected to come into scope of the margin rules at the Phase 5 date. Depending on the method used to calculate the IM amount, between 70-80% of these Phase 5 relationships will not exceed the €50mm threshold at least two years into their regulatory IM obligation, if ever.
6 We would also note previously requested relief connected with the use of internal IM, such as prudential-style model governance designed for bank capital standards as well as model approval (and/or pre-approval) under EU and Japanese UMR.
7 Further, many counterparties coming into scope for Phase 5 are large institutional clients, like pension plans and endowments, who often hire multiple asset managers in addition to managing funds internally. These clients will typically hire these managers to exercise investment discretion over a portion of the client’s assets referred to as assets under management (or AUM) for management in accounts referred to as “separately managed accounts.” Each separately managed account that trades uncleared derivatives will typically have its own netting set corresponding to the ISDA master agreement entered into by the relevant dealer and relevant asset manager with respect to such separately managed account. As a result, collateral movements for initial or variation margin are not netted across the client’s separately managed accounts that exist across these asset managers. Managers of these separately managed accounts do not have knowledge of exposures for other separately managed accounts for the same client and therefore are unaware of whether the client’s exposure across all of the separately managed accounts of the customer are in excess of the €50 million IM exchange threshold. The March 5 clarification did not provide any guidance with respect to these relationships which impact a significant amount of entities coming into scope for Phase 5.