ISDA's Initial Margin Analysis for Uncleared Swaps

ISDA published an analysis of initial margin (IM) requirements for non-centrally cleared OTC derivatives under current regulatory proposals. The analysis highlights three significant industry concerns. First, the level of IM required under the BCBS-IOSCO proposal is very significant, ranging from $1.7 trillion to $10.2 trillion depending on whether internal models or standardized schedules are used. Second, the increased amount of IM that would be required in stressed conditions will result in greatly increased demand for new funds at the worst possible time for market participants. This pro-cyclicality, which could increase IM requirements by a factor of three, could have major adverse systemic consequences. Third, the use of thresholds will actually amplify the pro-cyclicality of the IM requirement during market stresses and add to systemic risk concerns.

The analysis is based upon data submitted by member firms to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) joint Working Group on Margining Requirements (WGMR), as part of the WGMR’s Quantitative Impact Study (QIS).

In yesterday's newsletter, we included related comment letters from each of SIFMA and MFA.

Click here to view Margin Analysis.See also: Press Release.Comment Letters: Letter to U.S. Prudential Regulators Regarding Margin for Uncleared; re: Margin and Capital Requirements for Covered Swap Entities.