ISDA response to FSB DAT report on clearing incentives

10 September 2018

ISDA appreciates that the FSB is evaluating not only the regulatory reforms individually, but also – importantly – how they intersect. ISDA also welcomes an analytical framework that supports post-crisis regulatory objectives while rationalising the regulatory framework where appropriate.

ISDA members support clearing, which is an effective means to reduce counterparty risk and increase the resilience of the financial system. The clearing market infrastructure operates well, and the global approach to clearing has achieved significant reductions across many facets of systemic risk. Clearing brings a number of inherent benefits, including:

• multilateral netting;
• reduction in credit risk;
• operational efficiency; and
• a robust default management process.

Many firms clear voluntarily due to these inherent benefits.

Further incentives to clear are created through the regulatory framework. Regulations such as the non-cleared derivatives margin rules and certain capital requirements apply across a broad range of products and counterparties, regardless of whether such products are suitable for clearing, or whether such counterparties pose systemic risk. As a result, these regulatory incentives may not always be appropriate. ISDA appreciates that the Derivatives Assessment Team’s (DAT) report seeks to identify where this may be the case.

ISDA‘s key recommendations fall into the following broad subject areas:

• Recalibration of the capital framework;
• Flexibility in the clearing mandate;
• Need to increase clearing capacity; and
• Fostering harmonization where sensible.

ISDA also advocates for making non-cleared margin requirements more risk appropriate. These proposals will be the subject of a separate paper.

Full response

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