ISDA has responded to the Basel Committee’s July consultation on “Margin requirements for non-centrally-cleared derivatives”. It raises several concerns and recommendations:
- it opposes the requirement for initial margin, highlighting the procyclical effects and drain on liquidity it would cause. If it is introduced, ISDA says that the thresholds should be determined by the counterparties;
- there should be no obligation to segregate variation margin and its re-hypothecation should be permitted;
- portfolio-based margining should be permitted, also across cleared and non-cleared OTC derivatives and other products and between legal entities;
- the proposals would convert counterparty risk into credit risk, given that counterparties would have to borrow the initial margin they post, and the incentives to manage residual counterparty risk would be lost; and
- physically settled foreign exchange swaps and forwards should be exempted from margining.