April 15, 2013

ISDA, IIF, AFME and SIFMA Blast Proposed Margin Rules

A letter from the above four trade associations spells out the consequences on imposing Initial Margin requirements on un-clearable OTC products. The letter was sent to the Chairman of the BIS Stefan Ingves, Mark Carney at BoC, William Dudley at the New York Fed, Greg Medcraft at IOSCO and Paul Tucker Chairman of the CPSS. Some quotes below:

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. We therefore believe it is important to write to you separately from the responses we provided to the BCBS-IOSCO on the Second Consultative Document. We respectfully ask that you consider withdrawing or suspending any IM requirements until their consequences have been fully analyzed and clarified.


  • As we have noted previously, 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.

I like this point quite a lot:

The second issue has to do with the belief that IM is a necessary and effective measure which will incentivize market participants to clear their OTC transactions. We believe that you cannot incentivize the clearing of something if it is non-clearable.

The PDF can be downloaded directly, Margin Requirements for Non-Cleared Derivatives-4, or via the ISDA website below, look for the April 12th news item. via ISDA – International Swaps and Derivatives Association, Inc..

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