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Firstly, ISDA believes the FSB is right to acknowledge the readiness of market infrastructure across the FSB’s member countries to provide clearing services, collect and disseminate trade data and provide organised trading platforms.
ISDA and its members are focusing on industry readiness for forthcoming regulatory changes, which will be unprecedented in scale and scope. In order to help its members navigate the implementation of the new regulatory framework, and in a manner that avoids market disruption, ISDA has established a series of Regulatory Implementation Committees, each covering a key aspect of the new regulatory framework, as follows:
The creation of the new Regulatory Implementation Committees will support a shift in focus from what the rules should say to how they should be implemented. They also provide a new forum through which industry can engage with the regulatory community on questions of interpretation and compliance. These committees have been established within ISDA's Industry Governance Committee, which has been a focal point of interaction with global regulators for several years.
Secondly, ISDA agrees with the Financial Stability Board’s assessment that regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure.
Thirdly, ISDA would encourage the FSB to look further at the overall impact of regulatory reform, as ISDA remains of the view that too little has been done to understand properly the implications of the various rules that will be finalised in the near future. These rules and regulations include: Dodd Frank Act rulemakings, EMIR, Basel III, the establishment of liquidity buffers, and margin requirements for non-centrally-cleared derivatives, to name but a few.
ISDA strongly opposes the requirement for a universal two-way exchange of Initial Margin (IM) between financial firms and systemically important non-financial firms ("Covered Entities") in the way that is proposed in the Study. The margin rules as proposed are likely to impose significant operational difficulties on market participants and, most importantly, lead to a significant liquidity drain on the OTC derivatives market and potentially the whole economy. The proposed IM requirements are particularly worrisome, as they are highly pro-cyclical, and could potentially destabilise the financial system during periods of extreme market stress. ISDA estimates that the proposed IM rules are likely to require trillions of dollars of additional collateral which, in periods of market stress, could further increase by a factor of 3 or more.
Such demands on liquidity could cause enormous pressure on market liquidity with the potential for significant dislocation in the financial sector and thus the general economy, which makes the imposition of mandatory IM inconsistent with the letter and the spirit of the G20 leaders' recommendation.
In light of this, and the fact that central clearing will in any case deliver significant risk mitigation benefits, ISDA believes that the optimal way forward would be a regime that included a transitional variation margin model, supported by an observation period to determine whether further measures (including increased reliance on initial margin) would in fact be appropriate. In full (including this transitional variation margin model), the key features of the regime would be as follows: