June 17, 2019

ISDA Analyzes Swap Margin Requirements and Market Fragmentation

Nihal Patel Commentary by Nihal Patel

ISDA identified differences in the jurisdictional implementations of margin requirements for non-cleared derivatives that may have caused market fragmentation. ISDA considered regulations in the following jurisdictions: the United States, the European Union, the United Kingdom, Japan, Singapore, Hong Kong, Australia, Switzerland and Canada.

In its paper, ISDA urged national regulators to prioritize harmonizing margin requirements to avoid further market fragmentation. According to ISDA, the major issues that regulators must address include:

  • inconsistent initial margin ("IM") collateral eligibility requirements;

  • different IM settlement timeframes;

  • varying IM treatment for inter-affiliate transactions;

  • differing IM model-testing requirements;

  • misaligned IM product scope requirements; and

  • duplicative margin documentation requirements.


Certain of the issues identified by ISDA would seem to be fairly easy for regulators to address quickly. For example, changing transfer timing requirements would involve minimal rule changes, would (at least in the United States) involve relatively minimal policy concerns, and would not have knock-on effects on other legal requirements.

Other changes - however sensible - raise issues that may require legal changes that seem unlikely to be resolved for various reasons. Inter-affiliate IM, for which an industry push is ongoing, is likely to be seen by regulators as raising systemic risk concerns. Aligning collateral eligibility might require a common classification system and, in the United States, would require questioning a broader policy of reducing reliance on rating agencies. Product scope may be the most tricky issue. In the United States, a politically driven and mostly illogical system for classifying derivatives reigns that, more or less, follows a jurisdictional divide put into U.S. law for futures in the early 1980s. It's hard to see that changing in short order (notwithstanding the urging of at least one Twitter user).

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