IOSCO, CFTC urge global accord for bilateral swaps risk mitigation
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
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
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
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.