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Today, however, the global financial system and market participants face new challenges and risks. Proposed collateral requirements for non-centrally-cleared derivatives may be pro-cyclical and exacerbate, instead of alleviate financial market stress. Short selling and other restrictions threaten prudent risk management and investment in the European economy. Overcoming these challenges is important to ensuring robust, stable financial markets, as well as a strong, growing and productive economy.
ISDA, the OTC derivatives industry and global policymakers share a common goal: safer, more efficient markets. The significant progress made in key areas of financial regulatory reform – in terms of clearing and transparency – evidence this commitment.
The non-cleared OTC markets play a vital role in key sectors of the global economy, ranging from housing to corporate and sovereign funding to credit origination. The importance of these markets to a stable and efficient global economy cannot be overstated.
Current proposals would significantly impact market depth and liquidity in the OTC derivative markets and in so doing, could harm important sectors of the global economy. And while current margin proposals are motivated by a desire to establish systemic resiliency by reducing counterparty risk, their application is likely to increase economic risk (and thus compromise systemic resiliency) by discouraging (or even eliminating) the ability of market participants to hedge risks to their businesses. Finally, the pro-cyclical problems caused by the use of a dynamic approach to margin are a real concern.
ISDA strongly urges policymakers to conduct a new, thorough impact study before imposing margin requirements. The proposed requirements will have serious negative effects on the markets as a whole, in terms of liquidity drain, collateral demand and transaction costs. The toll of such effects may well outweigh any actual benefits realised.
ISDA is committed to working with regulators, policymakers and market participants around the world to overcome the challenges we currently face and secure robust, stable financial markets, as well as a strong, growing and productive global economy.