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Since commissioning this report IOSCO and BCBS have made the decision to delay Phase 5 & 6 of Uncleared Margin Rules until 2021 and 2022 respectively. While buy side firms now have an extended time to prepare for the changes they will inevitably have to make, resources have been stretched more than ever as attention and resource have turned to business continuity.
But as the ‘new’, post pandemic world is slowly emerging how are buy side firms starting to prepare for the next couple of years?
Patricia Saenz de Maturana, Senior Policy Advisor from IOSCO joined us for our Global UMR meeting to explain the objectives of the regulation, to help provide clarity for 2021 and 2022. Here is what she had to say:
- The origins of uncleared margin rules (UMR) bring us back to the financial crisis. In September 2009 G20 leaders agreed to reform OTC derivatives markets to make them more resilient and transparent. G20 leaders agreed, among others, that:
- All standardised OTC derivative contracts should be cleared through central counterparties (central clearing) by the end of 2012 at the latest; and
- OTC derivatives should be reported to trade repositories, to increase transparency.
- In addition, in 2011, G20 leaders agreed that derivatives which are not centrally cleared should be subject to higher capital requirements and margin requirements (in the form of exchange of margins to ensure that collateral is available to offset losses).
- The Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO), taking into account comments from the industry, adopted the margin requirements framework in 2013. They also set up a monitoring group, the Working Group on Margin Requirements (WGMR).
- Central clearing would reduce systemic risk and make OTC derivatives markets safer. But this objective of OTC derivatives reforms can only be achieved if CCPs are also subject to appropriate risk management to withstand stress situations.
- Clearing through CCPs involves costs because counterparties have to post margin. Derivatives which are not centrally cleared entail higher risks than centrally cleared derivatives. They are subject to margin requirements to protect counterparties against the default of the other counterparty. Margin requirements are designed taking into account the higher risk of non-centrally cleared derivatives and in order to promote central clearing.
- Margin requirements, and in particular the need to provide liquid high quality collateral, may have some impact on liquidity. This impact on liquidity is not to be assessed in isolation but taking into account other regulatory frameworks which have been adopted since 2011.
- The objectives of the margin requirements framework cannot be achieved if the framework is not implemented on a consistent basis globally. This is due to the global nature of the derivatives markets and to the fact that very often each of the counterparties to a derivatives contract is subject to a different set of national rules. This makes compliance of the margin requirements very difficult and cumbersome. Moreover, consistent global implementation is necessary to prevent regulatory arbitrage or unlevel playing field (for example to avoid that certain jurisdictions set out lower margin and the subsequent transitioning of flow to these jurisdictions).
- IOSCO and BCBS have been monitoring the implementation of the margin requirements framework by local regulators through the WGMR. The WGMR is composed of national authorities in charge of the implementation of the margin requirements framework in their respective local jurisdictions.
- The WGMR focused at the beginning in monitoring which jurisdictions were implementing the framework and on which dates.
- In addition, the WGMR also focused on whether the national implementing rules had any relevant differences or inconsistencies which could make it cumbersome for derivatives counterparties to comply with the framework, regarding for example, the in-scope derivatives and covered entities.
- Another important focus of attention of the WGMR is whether authorities from different jurisdictions have adopted any equivalence decisions or substituted compliance determinations that would allow counterparties to choose one of the two sets of rules that would otherwise apply to a derivatives transaction.
- The WGMR holds regular calls and prepares monitoring implementation reports for the IOSCO Board and the CPMI parent committee, with some recommendations such as necessary clarifications or changes of the framework.
- Both IOSCO and the BCBS will continue monitoring the implementation of the margin requirements throughout the following phase-ins.