Industry Response To The European Banking Authority, European Securities Markets’ Association And European Insurance And Occupational Pensions Authority Joint Discussion Paper On Risk Mitigation Techniques For Trades Not Cleared By A Central Counterparty

A.    Introduction

The International Swaps and Derivatives Association (“ISDA”) together with members of the Financial Services Industry (“The Industry”) welcome the opportunity to comment on the above Joint Discussion Paper (“the Paper”). The Industry is supportive of the Paper’s aims and objectives and understands the desire expressed by the G20 nations to require Over the Counter (“OTC”) derivatives to be cleared where appropriate and for uncleared trades to be subject to robust operational processes and capital requirements.

In particular we agree with the concepts of Minimum Transfer Amounts (see question 14) and the requirement, where appropriate, to mark collateral to market daily. We believe that a very significant proportion of uncleared OTC trades will be covered by these requirements. In setting out the matters below where we feel that further discussion is needed, this should be seen in the context of a broad agreement as to aims and objectives and a willingness to work together with regulators to ensure that the proposals are sensitive to industry practice, risk sensitive and workable. Further we fully support the proposals in paragraph 15 of the paper to disapply the collateral requirements to Non Financial Counterparties which are not above the (clearing)threshold.

The Industry believes that in crafting legislation to reduce systemic risk, regulators must strive to strike the right balance between efficient risk management, financial stability while seeking to maintain financial innovation and prudent risk-taking supported by sound business practice and encouraging economic expansion. We are very concerned as to the potential for economic dislocation that a mandatory Initial Margin regime could trigger. We therefore urge policy makers both in the European Union and globally to undertake a robust (i.e. quantitative) cost benefit analysis to ensure that any expected reduction in risk is not outweighed by direct and indirect costsstemming from the unprecedented systemic liquidity demands.

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