May 6, 2019

ISDA CEO Criticizes Regulatory Burden of Initial Margin "Phase Five" Implementation

Nihal Patel Commentary by Nihal Patel

ISDA CEO Scott O'Malia encouraged regulators and policymakers to reduce certain "burdensome" requirements that will be enacted on the forthcoming implementation of initial margin ("IM") "Phase Five."

Mr. O'Malia stated that "Phase Five" will, among other things, harm firms by introducing requirements that will (i) have "no bearing on mitigating systemic risk" and (ii) be "redundant and costly." To address this, Mr. O'Malia urged regulators and policymakers to:

  • provide relief for counterparty relationships that are less than the $50 million IM exchange threshold, as previously recommended by CFTC Chair J. Christopher Giancarlo;

  • exclude physically settled foreign exchange ("FX") swaps and forwards from the €8 billion compliance threshold calculation;

  • remove IM model governance requirements for non-dealer entities that use the ISDA Standard Initial Margin Model; and

  • grant relief to all legacy swap transactions that may fall under the requirements due to contractual changes caused by either Brexit or benchmark reform.


Mr. O'Malia's statement largely echoes previous recommendations made by ISDA, save for pushing for an increase in the notional threshold for determining whether an entity is in scope for margin requirements. (Based on CFTC Chair Giancarlo's letter from last week, it seems that U.S. regulators may not be willing to take action on this point.)

As to the remaining recommendations made by Mr. O'Malia in this most recent post, there are no major asks. The inclusion of physically settled FX products in notional calculations never made a great deal of sense, given that (at least in the United States) those products are not actually in scope for the actual margin collection and posting requirements. The model governance requirements also make sense, and are largely needed given that U.S. law imposes requirements directly only on dealers and not on their counterparties. Finally, the relief for legacy transactions relating to benchmark reforms is sensible, and, in fact, is just one of many steps that regulators should take to clear the path for benchmark reform to take place in an efficient manner.

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