BCBS-IOSCO Offer Clarifications to Derivatives Margin Requirements

Commentary by Nihal Patel

The Basel Committee on Banking Supervision and IOSCO ("BCBS-IOSCO") issued a statement on the implementation of derivatives margin requirements related to (i) benchmark reforms and (ii) initial margin thresholds.

In the statement, BCBS-IOSCO indicates that amendments to "legacy" derivatives contracts "solely for the purpose of addressing interest rate benchmark reforms" do not bring trades into scope for relevant margin requirements. However, BCBS-IOSCO cautions that positions may be different under relevant implementing laws.

In the statement, BCBS-IOSCO also addresses the 2019-2020 phased implementation of initial margin requirements. In particular, they take the view that the BCBS-IOSCO margin framework (last updated in March 2015) does not impose "documentation, custodial or operational requirements" where the amount of margin to be posted remains below the €50 million threshold, but expects firms to "act diligently" when exposures approach the threshold, in order to ensure that arrangements are in place if posting were to be required.

Commentary

The BCBS-IOSCO statement is clearly a response to a flood of industry concerns. The content is encouraging, but there are a number of questions left to be addressed.

On initial margin, the statement is most notable for what it does not address. In particular, it does not offer any indication as to whether BCBS-IOSCO is considering a change to the billion trigger for determining whether an entity is in scope for initial margin requirements. (A number of industry trade groups recommended raising the threshold to 00 billion.) The statement also does not consider other proposals, such as exclusions for physically settled foreign exchange products and amendments to model approval requirements for non-dealers.

As to what the statement does say about initial margin, it makes complete sense - so much so that it may not be relevant in some jurisdictions, where rules already do not impose a requirement to have documentation (and other matters) in place before the posting threshold is crossed. (Unfortunately, the United States may not be such a jurisdiction. See CFTC Rule 23.158(a) and _.10(a) of the prudential regulators' rules.)

As to benchmark changes, BCBS-IOSCO's expressed view is reasonable and consistent with one of the recommendations made last June by the Alternative Reference Rates Committee. If regulators are encouraging market participants to amend contracts to stop using LIBOR and other benchmarks, it does not make sense to impose a kind of penalty (i.e., new margin requirements) as a result of making those government-encouraged changes. Other (non-margin) regulatory issues presented by amendments relating to benchmark changes go beyond the scope of this BCBS-IOSCO project, and, as highlighted by the Alternative Reference Rates Committee recommendations, will require regulators to address concerns as to clearing, trading, reporting and other requirements.

Even with the positives from this statement, it must be remembered that the BCBS-IOSCO statement lacks the force of law. Any changes to relevant regulations will need to take place jurisdiction-by-jurisdiction and potentially through time-consuming procedural requirements. That is why it is somewhat disappointing that the statement does not go further at this time. Market participants are already in the process of developing solutions for addressing the mass rollout of the initial margin requirements in 2020.

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