The International Swaps and Derivatives Association has now published an analysis of the initial margin requirements for non-centrally cleared OTC derivatives under the current regulatory proposals. Most of the public does not really understand these over-the-counter derivatives and it remains perhaps the largest unknown global risk to the actual banking system and the shadow banking system.

The ISDA report shows that international rules governing margin requirements for OTC derivatives and that the resolution of issues related to the cross-border application of derivatives rules are two of the most important matters facing global regulators and the industry today.

Initial margin analysis was based upon data submitted by member firms to the Basel Committee on Banking Supervision and the International Organization of Securities Commissions joint Working Group on Margining Requirements, as part of the WGMR’s Quantitative Impact Study (QIS).1

The analysis highlights three significant industry concerns:

• First, the level of initial margin required under the BCBS-IOSCO proposal ranges from $1.7 trillion to $10.2 trillion depending on whether internal models or standardized schedules are used.
• Second, the increased amount of initial margin 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 initial margin requirements by a factor of three, could have major adverse systemic consequences.
• Third, the use of thresholds, which are designed to decrease initial margin requirements, will actually amplify the pro-cyclicality of the initial margin requirement during market stresses and add to systemic risk concerns.

As this is an international effort for the G20 countries, this is still a long work in progress. The full summary is here.

JON C. OGG

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