On April 12, ISDA and the Institute of International Finance (IIF) responded to the Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) consultation on transparency and responsiveness of initial margin in centrally cleared markets. The associations support enhancing transparency on cleared margin for all market participants, as it will benefit intermediary and end-user preparedness for margin calls and increase the resilience of the system overall.
Enhanced transparency should start with central counterparties (CCPs) making fundamental disclosures about their margin models, including greater transparency of margin model documentation, access for both clearing members (CM) and clients to CCP margin simulators and tools which can be used to assess how margins may change and backward-looking disclosures that can be used to assess model performance over time. In this regard, both associations highlight their support in the response to recommendations one through eight.
Regarding recommendation nine, ISDA and IIF are supportive of clients having necessary transparency on CM margin requirements. Whilst CMs reserve the right, in the contractual relationship with their clients, to charge additional client margin, in practice for most of the activity, the CCP margin is passed to clients without alterations. CMs already provide transparency when they require clients to post margin incremental to CCP minimums in the minority of cases, and clients can negotiate ex-ante the circumstances including notice period under which they might be called for additional client margin by their CM. Members of the associations do not believe that the information suggested under recommendation nine is proportionate to the need, given that most clients are on CCP minimums. As is recognized in the consultative report, enhanced transparency should not curtail the ability of CCPs or CMs to take risk management actions to respond to dynamic or idiosyncratic stress scenarios within the clearing ecosystem.
Regarding recommendation 10, both associations are generally supportive of the principle that CCPs should have visibility into the risk profile of their clearing participants. Any standardized transparency framework required by CCPs of CMs should be limited only to the information required for CCP risk management and should not raise legal, confidentiality, or competition concerns. The current information required under recommendation 10 does not meet these criteria.
One area where the consultative report should go further is on initial margin model responsiveness. Further work should be done on the fundamentals of CCP margin models, for example appropriateness of margin periods of risk and the calibration of anti-procyclicality tools, to ensure that margins do not fall too low during low volatility periods.
This response covers the positions of our members on the buy-side and sell-side. The paper does not reflect the views of many CCPs, and many of the CCPs are in disagreement with the views.
