A joint consultation paper from two global regulatory bodies has urged policy makers to ensure margin requirements for non-clearable swaps are harmonised across regions and reflect the higher risk profiles of bilateral trades.
The paper, released by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO), seeks comments on the key principles and requirements for OTC derivatives that are unsuitable for clearing under impending regulations.
The new rules – enacted under the European market infrastructure regulation in Europe and Dodd-Frank in the US – seek the standardisation of OTC derivatives so they can be traded on exchange-like platforms and cleared through central counterparties.
The BCBS/IOSCO paper is focused on those contracts that cannot be standardised and therefore have to remain bilateral. It lays down seven core principles for addressing bilateral types of trades. These include requiring counterparties that trade non-centrally cleared derivatives to exchange variation and initial margin, methods for calculating margin, collateral requirements and haircuts, and regulatory consistency.
“Regulatory regimes should interact so as to result in sufficiently consistent and non-duplicative regulatory margin requirements for non-centrally cleared derivatives across jurisdictions,” read the paper.
In terms of defining eligible collateral that can be held as margin against OTC derivatives exposures, the paper suggests a broad approach, where assets such as liquid equities and corporate bonds are permitted, subject to appropriate haircuts to address their potential volatility. The advantages of this approach, according to BCBS and IOSCO, are a reduction of the potential collateral shortfall and a better alignment with current clearing practices.
The paper also notes that margin requirements for non-centrally cleared derivatives should further mitigate systemic risk in OTC derivatives markets by reflecting the higher risk they carry.
Comments to the paper are due by 28 September, with BCBS and IOSCO also planning to conduct a quantitative impact assessment prior to the deadline to consider the impact of its proposals on the broader financial system.
In response to the issues raised in the BCBS/IOSCO paper, US watchdog the Commodity Futures Trading Commission has extended its own consultation on margin requirements for uncleared swaps. The CFTC paper was initially published in on 28 April and offered industry participants the chance to comment on proposed rules for the management of uncleared swaps. The deadline for comments on the CFTC paper is now 14 September, having initially been due on 11 July.