Derivatives markets participants are expecting to receive the green light from regulators to develop an industry initiative designed to head off potential pricing confusion as new rules come into force.
ISDA says it has finalised a standard model to calculate the margin needed to back trades that would not be processed by clearing houses. With the proposal, ISDA is hoping to smooth the introduction of rules that stipulate more derivatives trades be backed by margin, as insurance against a counterparty default. The proposal was drawn up by its members and was sent to the Basel Committee’s Working Group on Margining Requirements and the national regulators of the US, Europe, Japan – the three jurisdictions that cover the majority of OTC trades.
Scott O’Malia, new chief executive at ISDA, expected to receive the go-ahead to further develop it. “We’re working with regulators to get it approved. We expect them to approve the model. It takes away the ‘magic’, the black box around modelling. But it was only a couple of weeks ago we sent the letter.” Its move is an effort to offset what ISDA sees as a heavy burden on the market brought about by the new rules. Using other calculations, it estimated that backing non-centrally cleared trades could tie up as much as $10tn in collateral. However, the WGMR allowed the association to explore a standardised industry model.
The model, known as a standardised initial margin model (SIMM), is intended for use by any market participant. It is based on a standardised capital calculation as laid out by the Basel Committee. ISDA also repeated its calls to delay the rules beyond the December 2015 timetable. The WGMR only wrote its final rules a year ago, and national regulators are still working through their own responses. Furthermore, each jurisdiction’s rules contain differences, such as exemptions, which will need to be harmonised. As a result, ISDA has called for a phase-in to the rules and implementation by April 2017.
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