EBF published its key points and comments. Mandatory two-way Initial Margin (IM) posting should be reconsidered in view of the serious negative effects that this would have.
Mandatory two-way Initial Margin (IM) posting should be reconsidered in view of the serious negative effects that this would have. A better and equally effective approach would involve exemptions, the exchange of Variation Margin (VM), regulatory capital requirements, larger thresholds and only one-way IM where one of the counterparties is not prudentially supervised. In addition we assume that the posting of IM results in an equivalent reduction in capital in order to avoid double counting counterparty risks and exacerbating a liquidity drain. This should be made more explicit in the proposal.
EBF supports a full exemption from margin requirements for physically-settled FX forwards and swaps. The FX markets should not be subject to significant margin requirements that might interfere with a market that is already transparent, liquid, and has a well-functioning settlement process.
Re-hypothecation should be allowed for both VM and IM. Without the possibility of rehypothecation, liquidity will be strongly impacted and raise transaction costs and potentially funding levels for end users. Legal differences need to be recognised and fully understood:
Requirements or exemptions must not presuppose a specific legal system but be open enough in order to prevent competitive disadvantages.
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To prevent an uneven playing field, the phase-in should not be staged solely on the trade volume of institutions but should be more risk-sensitive and also factor in other necessary prerequisites (legal framework for protection of netting and collateral arrangements, approval of models).
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EBF suggests that IM is introduced only after a thorough review of the cumulative impact of Basel 3 rules and mandatory clearing on global market liquidity, including an assessment to make sure that risks are not over-collateralised. In this way, 2020 seems a far more prudent and realistic timeframe than 2015, especially given the operational challenges with the implementation of the IM requirement. Consideration should be given to phasing-in for VM.
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The QIS greatly underestimates the amount of capital required in a stressed market situation. Consequently EBF believes that a new QIS should be carried out to design appropriate thresholds and calibrate the overall proposals.
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