March 25, 2020
Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
Secretariat of the International Organization of Securities Commissions
C/ Oquendo 12
Re: Margin Requirements for Non-Centrally Cleared Swaps Margin – Impact of COVID-19 on Initial Margin Phase-In
To whom it may concern,
The International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA), the Global Financial Markets Association (GFMA), the Global Foreign Exchange Division (GFXD) of GFMA, the Investment Adviser Association (IAA), the Australian Financial Markets Association (AFMA), the Alternative Investment Management Association (AIMA), European Fund and Asset Management Association (EFAMA), the Investment Company Institute (ICI), the American Council of Life Insurers (ACLI), the Institute of International Bankers (IIB), Managed Funds Association (MFA), the Asia Securities Industry and Financial Markets Association (ASIFMA), the Association for Financial Markets in Europe (AFME), SIFMA Asset Management Group (SIFMA AMG), the International Capital Market Association (ICMA), the Institute of International Finance (IIF), Insurance Europe, the European Banking Federation (EBF), Commodity Markets Council Europe (CMCE) and the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC) (together, the Associations 1) appreciate the efforts of regulators towards developing and implementing margin requirements for non-centrally cleared derivatives. In accordance with the Basel Committee on Bank Supervision and International Organization of Securities Commissions (BCBS-IOSCO) Final Framework on Margin Requirements for Non-Centrally Cleared Derivatives (Final Framework)2 regulators have established standards for margin requirements for non-centrally cleared derivatives (commonly referred to as “UMR”), to be phased in over time. In response to industry concerns and data which demonstrated the scale and difficulty of implementation3, BCBS and IOSCO issued statements and a revised timeline4 for the phase-in to UMR requirements. Global regulators have taken, and continue to take, actions to confirm and codify these recommendations.
The Associations and our members are very appreciative of the steps taken by BCBS, IOSCO and global regulators to address the challenges of the final phases of UMR and market participants have been working diligently to meet these compliance dates. However, these efforts are being severely impacted by the global COVID-19 pandemic, and our members do not believe it is possible or practicable to meet documentation and operational requirements for the regulatory initial margin (IM) compliance dates on September 1, 2020 (Phase 5) and September 1, 2021 (Phase 6). We respectfully request that BCBS and IOSCO issue an immediate, public recommendation to global regulators to suspend the compliance dates for Phase 5 and 6, and that global regulators act swiftly to provide corresponding reassurance in their jurisdictions while they work to address necessary rule amendments or other means to effect this decision. As the overall impact of COVID-19 may not be known for some time, we suggest that decisions regarding a new timeline for the implementation of further phases of the IM requirements be delayed and reconsidered when relevant facts and circumstances are known. When markets are back to normal conditions and new Phase 5 and Phase 6 compliance dates are to be set, we kindly request that sufficient lead time be provided in order to complete implementation in a phased and reasonable period.
While our members have robust business continuity plans in place that are generally functioning well, given the overwhelmingly disruptive nature of the current epidemic, our members’ efforts to prepare for the final phases of regulatory IM have been severely impacted due to personnel, systems and other issues. Staff have been displaced and repurposed given the increased market volatility. Work from home is limiting access to legal and operational documentation and limiting abilities to communicate with counterparties. These challenges are expected to worsen as markets continue to fluctuate, lockdowns broaden, and staff are compromised by illness or need to care for family members. Due to market volatility, firms are avoiding infrastructure updates and may be unable to complete, deploy or test infrastructure needed to support regulatory IM requirements.
Although the next regulatory deadline is September 2020, there are critical near-term deadlines during Q2 – particularly in respect of custodial onboarding – which will be impacted and have a knock-on effect on the ability of Phase 5 firms to meet the September deadline. Additionally, while firms need to complete custodian documentation, the custodians are subject to the same strained working conditions as the firms coming into scope. We note that the ability of global custodians to facilitate client onboarding is already being impaired, extending further the lengthy process to establish compliant custodial accounts. Similar challenges are likely to affect the availability of vendors which provide services critical to IM implementation.
Our members are also concerned about the electronic execution of agreements. Electronic execution is a means of signing virtually rather than by way of a usual ‘wet ink’ signature which is scanned and exchanged. Electronically-executed agreements may not be enforceable in every counterparty jurisdiction (as a matter of local company law) and would need to be diligenced on a case-by-case basis. Therefore, given the industry is almost entirely working from home at present, getting documents physically signed and scanned could pose an obstacle to the timely execution of regulatory IM documents by all contracting parties.
In current circumstances, operational teams are working at full capacity to ensure proper business continuity. Run-the-institution activities have full priority over change-the-institution activities. On this basis, it will be very challenging for the industry to complete steps necessary to comply with UMR even prior to IM exchange, including average aggregate notional calculations and computation tools for margins. Without action by global regulators, it is almost certain that sections of the market would get shut out, increasing risk to investors.
During this volatile period, our members are deeply focused on the management of market and credit risk. We believe that efforts to minimize losses from the current crisis should take precedence over preparations to address the potential risk of future exposure from small market participants. Moreover, we emphasize that, if during this historically volatile time, firms divert internal resources away from managing their risk and portfolios and instead focus on implementation of UMR, investors may be adversely affected. In the meantime, the exchange of regulatory IM amongst the largest market participants will continue to mitigate systemically important derivatives market exposures5.
We acknowledge and appreciate that global regulators have already taken steps to rapidly and proactively address the unprecedented market volatility and engage with the industry on its impact to their continued operations and ability to provide critical access to the financial markets, including the derivatives markets, for investment and risk mitigation. Without timely and, to the greatest extent possible, globally consistent regulatory action in respect of UMR, there will be insurmountable hurdles to implementation for many market participants, limiting access to the derivatives market at a time when they are most greatly needed to hedge financial risk, including related market volatility.
We thank you in advance for your consideration of this important matter and are happy to provide further information or engage in dialogue which would be helpful to this purpose.
1 See Appendix for description of the Associations.
2 BCBS-IOSCO Final Framework on Margin Requirements for Non-Centrally Cleared Derivatives (July 2019), available at: https://www.bis.org/bcbs/publ/d475.pdf.
3 See joint trade association letter of September 12, 2018: https://www.isda.org/a/5evEE/Initial-Margin-Phase-In-Implementation-Joint-Trade-Association-Comments.pdf
4 Available at: https://www.bis.org/bcbs/publ/d475_summarytable.pdf
5 Initial margin requirements already cover 97% of the U.S. portion of the global market. (See statement of CFTC Chairman Heath P. Tarbert in Support of Extending Relief for Initial Margin Requirements for Uncleared Swaps, on March 18, 2020: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820.) We further note that data from a quantitative study conducted by ISDA in 2018 shows that up to 78% of counterparty relationships subject to IM in the final phases are unlikely to be required to exchange any IM two years into their regulatory obligations.