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ISDA is a big supporter of a globally consistent, risk-based regulatory framework. Unfortunately, it hasn’t always worked out like that. Initial margin (IM) requirements for inter-affiliate derivatives transactions are a case in point. The obligation only exists in the US at present, and even then not by all regulators in that jurisdiction.
This matters because inter-affiliate trades are used by firms to centralize their risk management activities. These internal risk management transactions do not create new counterparty exposures outside the corporate group – in fact, centralizing all the risk in a single risk function creates efficiencies and ultimately limits credit exposure to third parties.
Many global regulators recognize this, including the US Commodity Futures Trading Commission, which, under both a Democratic and Republican chair, has maintained exemptions for inter-affiliate trades in its IM rules. This bipartisan support also extends to Congress, where both Republicans and Democrats have written to US prudential regulators voicing their support for a rule change.
By obtaining an exemption for inter-affiliate trades, firms would essentially avoid having to post and collect duplicate IM amounts – once for the external facing trade and again for the internal risk transfer within the corporate group. That’s an extremely inefficient use of resources.
There’s no appetite to reverse the important changes that have taken place, like clearing, reporting, margin and capital requirements. But there is an opportunity to improve the rules and make them consistent across jurisdictions. This will make the framework more effective and more efficient.