ISDA Recommends Reforms to Strengthen SFT Markets

The International Swaps and Derivatives Association ("ISDA") recommended several regulatory reforms to address frictions in securities financing transactions ("SFTs") that can constrain the availability of secured funding during periods of market stress.

In a whitepaper detailing its recommendations, ISDA explained that SFTs—including repurchase agreements, securities lending, buy/sell-backs, and margin lending—have become more resilient following post-2008 reforms. Notwithstanding these improvements, ISDA stated that current regulations can "unintentionally amplify volatility." ISDA noted that divergent capital frameworks, leverage constraints, accounting asymmetries, and fragmented data and reporting regimes limit balance-sheet flexibility and collateral mobility, causing demand for secured funding to rise during periods of market stress precisely when these constraints are most binding. ISDA further emphasized that, amid expanding government bond markets, growing non-bank participation, and increasing central clearing mandates, a "forward-looking prudential framework" is needed.

To address these concerns, ISDA recommended:

• Adjusting Capital Frameworks and Cross-Product Netting. ISDA recommended refining capital rules to better reflect the secured, short-dated nature of SFTs, including: (i) permitting an extended Standardized Approach for Counterparty Credit Risk to enable cross-product netting with derivatives; (ii) updating standardized credit risk rules to recognize short maturities and apply more risk-sensitive weights; (iii) excluding SFTs from the credit valuation adjustment framework; and (iv) recalibrating the G-SIB surcharge to reduce the disproportionate impact of weighted short-term wholesale funding on low-risk SFTs.
• Revising Leverage and Liquidity Constraints. ISDA recommended ensuring the leverage ratio functions as a backstop by exploring exemptions for government bonds and related repos and expanding netting recognition for economically matched SFT portfolios, while aligning liquidity rules by reducing required stable funding factors and recognizing the stability of centrally cleared repo. ISDA also emphasized the need for incentives to support voluntary central clearing and measures to address procyclicality in central counterparty margin requirements.
• Rescinding Minimum Haircut Floors. ISDA recommended rescinding Basel Committee on Banking Supervision ("BCBS") minimum haircut floor standards, noting they are a blunt tool that fails to reflect portfolio-level risk management, and instead favoring more risk-sensitive, portfolio-based margining approaches.
• Harmonizing Accounting Standards. ISDA recommended harmonizing US GAAP and International Financial Reporting Standards offsetting rules to better reflect "legally enforceable netting" arrangements, reduce "gross balance-sheet inflation," and avoid penalizing cross-product netting and client clearing models.
• Advancing Digital Collateral and Data Standards. ISDA recommended adopting standardized tools, such as the Common Domain Model and Digital Regulatory Reporting, to reduce fragmentation and duplicative reporting, while encouraging data collection exercises to assess reforms and improve the usability of Financial Stability Board repo vulnerability metrics. ISDA also urged updates to the BCBS crypto-asset framework to recognize certain digital assets as collateral and to reflect the reduced risk associated with near-instantaneous settlement.