SIFMA, ISDA and FIA Propose Capital Rule Changes for QCCP Cross-Margining
In a joint discussion paper, SIFMA, the International Swaps and Derivatives Association ("ISDA"), and the Futures Industry Association ("FIA") asserted that current capital rules on qualifying central counterparty's ("QCCP's") default fund contributions—which base capital requirements on a qualifying central counterparty's "hypothetical capital requirement"—do not adequately "reflect the economics and risk offsets of QCCP cross-margining."
In a Pennsylvania + Wall blog post, SIFMA’s Head of Capital Policy, Dr. Guowei Zhang explained that "central counterparties use default funds, contributed by clearing members, to cover losses from member defaults, supporting market stability." He stated that as "cross-margining becomes more prevalent—particularly with forthcoming mandates like the SEC’s U.S. Treasury clearing requirement—this inadequacy will only become more pronounced and problematic." He argued that current capital rules "fail to properly recognize the substantial risk-reducing impact of cross-margining arrangements, resulting in capital requirements for banks that are unnecessarily stringent." He highlighted the Associations' two proposed solutions to better reflect actual risk:
- Single EAD Calculation with Allocation Factor. The "preferred approach" would have QCCPs calculate a single exposure-at-default ("EAD") per clearing member, combining non-cross-margined positions with cross-margined positions adjusted by an allocation factor agreed upon by participating QCCPs. This framework, he noted, offers simplicity while accurately capturing risk across both individual and shared exposures.
- EAD Calculations with Capital Cap. The "alternative approach" would require QCCPs to perform separate EAD calculations for non-cross-margined and cross-margined positions, then sum the results to determine the capital requirement. He stated that while this method is more conservative—effectively counting some exposures twice—it includes a cap that prevents capital charges from exceeding current rule levels when risk offsets are limited.
Dr. Zhang stated that the recommended changes would align capital requirements more closely with actual risk, reducing excessive capital burdens on banks while supporting broader adoption of cross-margining.