ISDA, SIFMA, the American Bankers Association, the Global Foreign Exchange Division of the Global Financial Markets Association, and the Institute of International Bankers (collectively, the "associations") offered recommendations to regulators to mitigate potential negative impacts as initial margin requirements for uncleared derivatives are expanded to capture buy-side market participants.
Based on a recent survey performed by ISDA, it is expected that the expansion of initial margin ("IM") requirements scheduled to take place in September 2020 (referred to as "Phase 5") will result in approximately 1,100 new in-scope counterparties and 9,500 new counterparty relationships being subject to regulatory IM. The survey further found that between 26-45 percent of counterparties and 69-78 percent of relationships brought in scope in Phase 5 are unlikely to require exchange of IM at all (though the trading relationships will be subject to the rules as a whole), as they will not exceed the current EUR/USD 50 million IM exchange threshold (or similar thresholds in other jurisdictions).
Among other things, the associations recommended the following modifications in light of the survey results:
raising the gross notional threshold for determining when an entity is in scope for Phase 5 to EUR/USD 100 billion (from EUR/USD 8 billion);
removing physically settled foreign exchange products from the scope of products that count toward the gross notional thresholds;
exempting non-dealer counterparties from certain of the governance requirements applicable to IM models;
exempting non-dealer counterparties from model approval requirements; and
providing a sub-threshold for purposes of IM exchange, under which in-scope counterparties would not be required to establish documentation for IM compliance.
The associations' letter was directed to the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, with copies provided to a number of different national regulators across the globe.