October 2018

Clearing Incentives,
Systemic Risk andMargin Requirements for
Non-cleared Derivatives
Recent studies and research into clearing incentives and margining raise questions about whether
certain aspects of the margin requirements support their stated key policy goals. These questions
include:• Does the scope of the current margin framework for non-cleared derivatives appropriately
support the goal of systemic risk mitigation? Or does it impose costs on firms that pose little
or no systemic risk, and can it potentially have an adverse impact on their risk management
activities?
• Does margining of non-cleared derivatives (which is higher than margining for cleared
derivatives) incentivize central clearing? If and when it is not a major factor, then are the higher
margin costs for non-cleared derivatives versus cleared derivatives appropriate, especially insituations where the risks of both may be similar?
Based on this data and analysis, ISDA suggests:• IM should not be required for counterparties that pose little or no systemic risk. Toward this end,
the current threshold of €8 billion in notional outstanding could be raised to €100 billion (andrestricted to initial margin eligible trades) – a level that addresses systemic risk issues and avoids
adverse and unnecessary consequences for hundreds of firms that pose no such concerns.
• The role of margin as a clearing incentive should be re-calibrated, with consideration given for
the existing inherent benefits of clearing, such as multilateral netting.

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

INTRODUCTION
Recent research
into clearing
incentives andmargining has
raised questions
about whether
aspects ofthese rules
meet policy
objectives

Central clearing of standardized derivatives and margin requirements for non-cleared derivatives are
two of the basic tenets of global financial regulatory reform. They are also inter-related: the purposeof margin requirements is to both reduce systemic risk and promote or incentivize central clearing.
Recent studies and research into clearing incentives and margining raise questions about whether
certain aspects of the requirements do in fact support these key policy goals. These questions include:• Does the scope of the current margin framework for non-cleared derivatives appropriately support
the goal of systemic risk mitigation? Or does it impose costs on firms that pose little or no systemic
risk, and can it potentially have an adverse impact on their risk management activities?
• Does margining of non-cleared derivatives (which is higher than margining for cleared
derivatives) incentivize central clearing? If and when it is not a major factor, then are the higher
margin costs for non-cleared derivatives versus cleared derivatives appropriate, especially insituations where the risks of both may be similar?
This paper draws on research done internally by ISDA and recent studies by policy-makers toanalyze and answer these questions.
In terms of systemic risk reduction, a relatively small number of the counterparties (approximately
20%) subject to the initial margin (IM) requirements account for a large majority of the total IM
that will be required to be posted (approximately 85%) under the current rule set. Conversely,
80% of the firms currently in scope of the margin rules pose little or no systemic risk, but would
collectively be required to document thousands of agreements, and set up thousands of segregatedaccounts in order to exchange collateral. This could have needless adverse effects on economic andrisk hedging activity.
In terms of clearing incentives, while IM for non-cleared swaps may encourage clearing in certain
market segments, there is substantial evidence that other economic incentives have a significantly
greater impact. This includes regulatory capital requirements for cleared versus non-cleared swaps, aswell as the significant benefits that flow from the ability to net a large, diverse swaps portfolio with asingle central counterparty (CCP). Consequently, there are strong incentives to clear, and the higher
IM requirement for non-cleared versus cleared swaps may not be necessary to encourage clearing.
Based on this data and analysis, ISDA suggests:• IM should not be required for counterparties that pose little or no systemic risk. Toward this end,
the current threshold of €8 billion1 in notional outstanding could be raised to €100 billion (andrestricted to IM eligible trades) – a level that addresses systemic risk issues and avoids adverse andunnecessary consequences for hundreds of firms that pose no such concerns2.
• The role of margin as a clearing incentive should be re-calibrated, with consideration given for
the existing inherent benefits of clearing, such as multilateral netting.

All threshold levels are denominated in euros, as per the final margin requirements for non-centrally cleared derivatives paper by the Basel Committeeon Banking Supervision and International Organization of Securities Commissions. National regulators have used their home denominations when
implementing their rules

1

Further information and analysis related to changes proposed by ISDA to the margin rules are detailed in a recent letter to policy-makers

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

BACKGROUND ON MARGIN REQUIREMENTS
Margin rules
were explicitly
meant to meetthe policy
objectivesof reducing
systemic risk
and promoting
central clearing

In 2009 and in 2011, the leaders of the Group-of-20 nations articulated five commitments toreform over-the-counter (OTC) derivatives markets. One was that standardized derivatives shouldbe centrally cleared. Another was that non-cleared derivatives should be subject to minimum
standards for margin requirements.
The two commitments are understood to be interconnected. As a recent Financial Stability Board(FSB) paper notes: “A number of post-crisis reforms are, directly or indirectly, relevant to incentives
to centrally clear. These include mandatory clearing requirements, capital, liquidity and margin
requirements related to OTC derivatives activity…”3.
In fact, as policy-makers have stated in their final policy paper on margin requirements for noncleared derivatives, the margin rules have two main goals: reduction of systemic risk and promotionof central clearing. To achieve these objectives, policy-makers articulated a set of key principles uponwhich their final margin rules are based4.
One of these principles and rules (Principle and Requirement 2) relates to the scope of coverage
and applicability of the margin rules. It requires that all financial firms and systemically important
non-financial entities with more than €8 billion in derivatives notional exposure exchange variation
margin (VM) and IM on their trades5. The IM requirement is being phased in: the first twophases included firms with €3 trillion and €2.25 trillion in notional, respectively. The third phasebegan September 2018, and covers firms with €1.5 trillion in notional. The fourth phase takes
effect September 2019, and covers firms with €0.75 trillion in notional. The fifth and final phase(September 2020) covers firms with at least €8 billion in notional.
Principle and Requirement 3 relates to the level of IM that must be posted for non-cleared swaps.
It stipulates that IM for such transactions should be based on a 10-day margin period of risk
(MPOR), compared to a five-day MPOR for cleared swaps. The end result is that non-cleared
margin is designed to be higher than cleared margin (by approximately 40%) due to an historicalview of the legal close-out process for non-cleared swaps.
ISDA supports the efforts of policy-makers to enhance the strength, resiliency and transparencyof the global derivatives market by imposing margin requirements. In that context, universal VM
exchanges are useful. At the same time, however, it is becoming increasingly clear that certain
aspects of the margin rules can be recast to more effectively support the two main goals of systemicrisk reduction and promotion of central clearing, as discussed in the following pages.

FSB August 2018 paper, Incentives to centrally clear over-the-counter (OTC) derivatives
BCBS-IOSCO Working Group on Margin Requirements (WGMR) March 2015 paper, Margin requirements for non-centrally cleared derivatives. The
BSBS-IOSCO final policy on margin requirements for non-cleared derivatives were issued in September 2013 and revised in March 2015 to reflect anadjustment to the phase-in schedule. All references in this document to the final policy are to the March 2015 paper5
VM is exchanged to cover day-to-day changes in market value, and IM is exchanged to cover potential future exposure that could arise when acounterparty defaults
3
4

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

MARGIN AND SYSTEMIC RISK ISSUES FORNON-CLEARED DERIVATIVES
Under current
margin rules, alarge proportionof smallerfirms caught byphase five of
the IM rollout
will not actually
be required topost IMAs the Basel Committee on Banking Supervision (BCBS) and the International Organization of
Securities Commissions’ (IOSCO) Working Group on Margining Requirements (WGMR) stated:“Margin requirements for non-centrally cleared derivatives would be expected to reduce contagion
and spillover effects by ensuring that collateral is available to offset losses caused by the default of a
derivatives counterparty. Margin requirements can also have broader macroprudential benefits, byreducing the financial system’s vulnerability to potentially destabilizing procyclicality and limiting
the build-up of uncollateralized exposures within the financial system.”
The AIG situation in 2007-2008 amply demonstrates the importance of not allowing uncollateralized
exposures to build up in the system, particularly when coupled with ratings triggers, which require
and/or increase the amount of margin that one counterparty must post with another when its credit
rating deteriorates. AIG did not post full or, in some cases, any VM on its exposures to counterparties6.
When the company’s financial products subsidiary lost its AAA rating, it faced massive VM calls,
resulting in a liquidity crisis for AIG that ultimately led to its bailout by the federal government. The
AIG situation reinforced the importance of full VM posting for derivatives exposures.
The benefit of VM, then, is clearly one of the most important lessons learned from the financial
crisis. The requirement to exchange VM became effective on March 1, 2017 for all covered entities.
The impact of the regulations and counterparty requirements with regard to VM is clear: thetop 20 participants in the non-cleared derivatives market exchanged $1.5 trillion in VM forsuch trades at year-end 2017 7.

IM for Non-cleared Derivatives
The BCBS-IOSCO WGMR, however, believed additional protection against counterparty credit
risk was necessary, and decided to impose an IM requirement. In this way, the margin treatmentof non-cleared derivatives would be similar to that of cleared derivatives. For both, VM would
be exchanged to cover day-to-day changes in market value, and IM would be exchanged to coverpotential future exposure that could arise when a counterparty defaults. As noted above, IM for
non-cleared was set at a higher level than for cleared swaps.
The BCBS-IOSCO WGMR stipulated that the new rules should be phased in based on thederivatives notional exposure of covered entities8. The first phase went into effect in September
2016, and covered firms with €3 trillion or more in derivatives notional; there were 20 such firms.
A year later, the threshold reduced to €2.25 trillion, with six more firms coming into scope. The
threshold for September 2018 was €1.5 trillion (with an additional eight firms now in scope), andin 2019, it lowers to €0.75 trillion. In September 2020, the final phase will occur and the threshold
will drop significantly to €8 billion.

AIG In Hindsight, Federal Reserve Bank of Chicago, October 20142017 ISDA Margin Survey
8
BCBS-IOSCO Working Group on Margin Requirements (WGMR) March 2015 paper, Margin requirements for non-centrally cleared derivatives:“[A]ll covered entities (i.e. financial firms and systemically important non-financial entities) that engage in non-centrally cleared derivatives mustexchange initial and variation margin as appropriate to the counterparty risks posed by such transactions.” It then goes on to specify that “any covered
entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of theyear exceeds €8 billion will be subject to the requirements…”
6
7

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

Current IM Requirements for Non-cleared Derivatives
Recent market research by ISDA since the imposition of the margin rules shows their impact. As
Table 1 shows, IM collected by the 20 largest market participants (phase-one firms) for their noncleared derivatives totaled approximately $130.6 billion at year-end 2017, representing an increaseof 22% over the level reported in a previous survey as of the end of the first quarter of 2017. Of thisamount, $73.7 billion (described in Table 1 as Regulatory IM Received) came from the 20 phaseone firms and the six phase-two firms.

Table 1: IM Posted and Received by Top 20 (Phase-One) Derivatives
Counterparties ($b)
9

Q4 2017

Q1 2017

Q4 vs. Q1Regulatory IM Posted

75.2

47.2

59%

Regulatory IM Received

73.7

46.6

58%

Discretionary IM Posted

6.4

16.3

-61%

Discretionary IM Received

56.9

60.5

-6%

Total IM Posted

81.7

63.6

28%

Total IM Received

130.6

107.1

22%

Source: ISDA Margin Survey

Approximately $56.9 billion was collected by phase-one firms under existing collateral agreementsfrom counterparties not currently in scope (Discretionary IM Received). Phase-one firms posted
about $6.4 billion of discretionary IM for non-cleared derivatives. The difference in discretionary
IM collected and discretionary IM posted ($56.9 billion versus $6.4 billion) is probably due to thefact that phase-one firms are more likely to have one-way collateral agreements in place that only
require their non-phase-one and non-phase-two counterparties to post IM. Under the new margin
rule set, two-way exchange of margin is required.

Estimated Future IM Requirements for Non-cleared Derivatives
According to research conducted by ISDA, the total amount of IM that firms will be required topost once the margin rules are fully phased in is estimated between approximately $500 billion (ifthe ISDA Standard Initial Margin Model, or SIMM, is used) and $1.84 trillion (if the standard IM
grid is used).
In September 2020 – the last IM phase-in date for counterparties with notionals of €8 billion ormore – about 1,200 additional counterparties are expected to come into scope for the exchange of
IM. This represents over 95% of all the firms that will be subject in total to the IM rules (with only
about 50 to 60 firms being in scope under phases one to four).
In aggregate, these 1,200 counterparties coming into scope in phase five are expected to post $163
billion-$513 billion of IM (depending on the IM calculations model used). Sixteen percent of the
1,200 counterparties (all of which have derivatives notionals of €100 billion or more) account for
54% of the required IM.

The IM statistics in this paper exclude IM posted for inter-affiliate transactions. Inter-affiliate IM was estimated to be approximately $30 billion at yearend 20179

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

Conversely, 84% of the phase-five counterparties (those with €8 billion-€100 billion of derivatives
notional) account for 46% of the required phase-five IM. These roughly 1,000 counterparties
also account for 80% of the total population of firms that would be in scope of the IM rules andless than 15% of the total IM that would be required to be posted. As can be seen, many of these
1,000 or so firms have relatively little derivatives exposure. On average, it ranges (depending on themodel) between €10.5 million and €30 million per relationship for each counterparty10.
A recent paper from the UK Financial Conduct Authority11 adds additional context to thediscussion. The analysis demonstrates that a €100 billion threshold would capture 1.4% of the firms– and 95.4% of the derivatives activity – that are potentially subject to the IM requirements.
Other policy-makers have also weighed in on this issue. The US Commodity Futures Trading
Commission (CFTC), for example, has suggested expanding the scope of counterparties exempt from themargin requirements to include small financial institutions that do not present systemic risk challenges12.

Recalibrating the Margin Threshold to Focus on Systemic Risk
The findings of an August 2018 FSB study on clearing incentives “reinforce the importance ofunderstanding and carefully considering the effects of the scope and interaction of the reforms onmarket participants that are not considered systemically important.”13
ISDA believes that recalibrating the margin rules to exclude firms posing little or no systemic risk isamong the most important areas meriting such reconsideration.
As noted above, such low- or no-systemic risk counterparties would in aggregate be required to
document thousands of agreements, and set up thousands of segregated accounts in order toexchange collateral. In addition, some firms – such as pension funds – are not geared to provide
collateral, as their focus is on investing fund assets on behalf of their clients.
On the one hand, the additional hurdles and associated costs of exchanging and financing margin
would represent an unnecessary expense that could be channeled into more productive economic
activities. On the other hand, it might also incentivize firms to alter or curtail their risk hedging
practices, which in turn might increase risk for them.
Finally, the rationale supporting the current threshold for inclusion into the margin framework (€8billion in notional) is not clear from a systemic risk mitigation perspective.
ISDA research notes that notional amount outstanding is widely used as a metric or trigger for
regulation14. Some policy-makers have questioned its use in this regard15. The CFTC, for example,
has written that “another problem with the current MSE threshold [the €8 billion threshold] is that
it is an absolute amount. Entities with small absolute swaps positions are unlikely to pose systemic
risk, but so are entities with small swaps positions relative to the size of their businesses.”

The IM rules establish a threshold of €50 million of exposure above which the exchange of IM is required. These statistics refer to the amounts above
this threshold

10 

FCA paper, EMIR data and derivatives market policies, August 2018

11 
12

CFTC paper, Swaps Regulation Version 2.0, April 2018
FSB August 2018 paper, Incentives to centrally clear over-the-counter (OTC) derivatives

13 

ISDA Research Note, Uses of Notional Amount in Derivatives Regulation

14 

CFTC ENN paper

15 

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

Another issue related to the use of notionals can be seen via the example of two firms – one thatuses derivatives to hedge existing business or financial risk, and a second that is a directional
investor that takes on unhedged risk exposure for investment purposes. The notional amount of
their positions may be identical, but their risk exposures differ significantly.

Policy Suggestion
IM should not be required for counterparties that pose little or no systemic risk. Toward this end,
the current threshold of €8 billion in notional outstanding could be raised to €100 billion (andrestricted to IM eligible trades). This would address systemic risk issues and avoid adverse andunnecessary effects on economic and risk hedging activity for hundreds of firms that pose nosuch concerns16.

As per Footnote 2, additional information and analysis supporting ISDA’s proposed changes to the margin rules are contained in a letter to policymakers. These proposals include removing physically settled foreign exchange forwards and swaps from the notional calculation for phase five;exempting phase three-phase five counterparties from IM monitoring requirements; exempting non-dealers from any SIMM pre-approval under EU
and Japanese rules; and allowing non-dealers to rely on dealers for calculations on their behalf under EU and Japanese rules

16 

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

CLEARING INCENTIVES AND MARGINING OF NONCLEARED DERIVATIVES
There are more
importantdrivers
encouraging
firms to clear,other thanmargining
requirements

With regards to the role of margining in the promotion of central clearing, the BCBS-IOSCOWGMR wrote that:“In many jurisdictions, central clearing will be mandatory for most standardized derivatives. But
clearing imposes costs, in part because CCPs require margin to be posted. Margin requirements
on non-centrally cleared derivatives, by reflecting the generally higher risk associated with thesederivatives, will promote central clearing, making the G-20’s original 2009 reform programme
more effective. This could, in turn, contribute to the reduction of systemic risk.”
Clearly, one of the central goals of policy-makers in establishing the margin rules was toeconomically incentivize firms to clear17. Toward that end, the BCBS-IOSCO WGMR establisheda margin framework based in part on a 10-day MPOR, which is the time from the most recent
exchange of collateral until the position is closed out. The 10-day MPOR is twice that of the fiveday MPOR used in calculating IM for cleared swaps. This equates to roughly a 40% increase in
non-cleared margin versus cleared margin.
Recent data and analysis provide a means to assess the effectiveness of margining as an incentive
to clear. While there is some evidence that margining of non-cleared swaps may support the initial
evolution to clearing of a market segment that has no regulatory clearing mandate, there is also
substantial evidence that other economic incentives have a greater impact for ‘mature’ markets.

US IRD Clearing: Comparing Actual Cleared Volumes vs. Mandated Cleared
Volumes
Using data from publicly reported derivatives trades in the US from 2014-2017, ISDA analyzed thetotal amount of interest rate derivatives (IRD) traded per year, the percentage that was mandated to
be cleared and the percentage that was actually cleared. The results are shown in Table 2.

Table 2: US IRD Trading Volumes, % Cleared and % Mandated to be Cleared
2014

2015

2016

2017

Total IRD ($b)

Notional%

Notional%

Notional%

Notional%

Cleared111,10977

111,59878

139,67784

169,271

88

Mandated

105,15973

104,38773

127,699

77

164,72885

Non-cleared

32,68323

30,642

22

26,595

16

23,868

12

Grand Total

143,792

100%

142,240100%

166,272100%

193,139

100%

BCBS-IOSCO Working Group on Margin Requirements (WGMR) March 2015 paper, Margin requirements for non-centrally cleared derivatives: “A
third key element of the margin requirements is the minimum baseline amount of initial and variation margin that would need to be collected for a
non-centrally cleared derivatives and the methodologies by which that baseline amount would be calculated. The BCBS and IOSCO have evaluated thecalculation of these baseline margin amounts by reference to the two underlying benefits of the margin requirements described in Part A – systemicrisk reduction and promotion of central clearing...From the perspective of promoting central clearing, the BCBS and IOSCO have considered the costs
associated with complying with the baseline margin requirements; this line of analysis involves calibrating baseline margin amounts relative to the costsof executing the same or similar transactions on a centrally cleared basis. This paper establishes a general framework for calculating baseline variationand initial margin that is intended to realize both benefits of margin requirements”

17 

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Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

As Table 2 shows, the percentage of US IRD trading volumes (measured by notional amounts
outstanding) that was mandated to be cleared between 2014 and 2017 increased from 73% in 2014
and 2015 to 77% in 2016 and 85% in 2017.
During the same four-year time period, the percentage of US IRD trading that was actually cleared
increased from 77% in 2014 to 78% in 2015, 87% in 2016 and 88% in 2017.
In short, against a backdrop of increased trading volumes, the percentage of centrally cleared
derivatives has been steadily growing since the clearing mandates were imposed in 201318. Perhaps
even more importantly, market participants have consistently cleared more than they wererequired to clear: four percentage points more in 2014, five percentage points more in 2015, sevenpercentage points more in 2016, and three percentage points more in 2017. This is true both before
and after the margin rules went into effect, and it is true even after the US clearing mandate was
expanded (both of which occurred in late 2016). It is also true across IRD product categories –
fixed-floating swaps, basis swaps, forward rate agreements and overnight indexed swaps – for which
there was a clearing mandate19.

Multilateral Netting is a Strong Incentive to Clear
Multilateral netting is a strong incentive to clear that does not stem from regulation but is inherent
in the structure of central clearing itself. The fact that all transactions that are cleared at a particular
CCP are legally novated to it enables the clearing member to net all exposures to this CCP for the
purpose of calculating exposures. It also enables the CCP to net all transactions when calculating
IM and VM.
A recent ISDA research initiative shows the impact of multilateral netting. The study examined thenon-cleared portfolios of 19 firms that are currently subject to bilateral margin requirements. Withother factors remaining the same (for example, the IM model), the IM saving was estimated fromnetting these transactions between counterparties, using the ISDA SIMM model.
Based on this sample, the exercise demonstrates that, on average, firms would pay 62% less IM by
netting their non-cleared transactions within an asset class across their counterparties.

Other Clearing Incentives
The strength of netting as an incentive to clear is also evident in the August 2018 FSB study. On
a weighted basis, netting ranks as the third most important incentive among dealers. The top two
considerations are regulatory capital costs and counterparty risk management considerations. The
fourth is the opportunity to compress cleared portfolios. IM for non-cleared ranks fifth.

Compliance dates for US clearing requirements were phased by type of market participant entering into a swap. Category 1 entities began clearing on
March 11, 2013 for swaps they enter into on or after that date. Category 2 entities were required to clear swaps beginning on June 10, 2013 for swaps
entered into on or after that date, and Category 3 entities were required to clear swaps beginning on September 9, 2013 for swaps entered into on orafter that date19 
See ISDA Research Note, Actual Cleared Volumes vs. Mandated Cleared Volumes: Analyzing the US Derivatives Market
18 

9Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

Trading Volume of Non-clearing Mandated Products
As the IM rules were being finalized, it was noted that they “will also diminish the incentive totinker with contract language as a way to evade clearing requirements”20.
Based on recent analysis by ISDA21, trading volume in non-cleared products for which there isno clearing mandate – interest rate options, swaptions and cross-currency swaps – has remainedroughly the same over the past four years. In 2017, these products accounted for 10% of all rates
trading volume; in 2014, they were approximately 10.5%. There is no indication, either in thevolume of non-cleared products or in the increasing percentage of overall volume that is cleared,that counterparties are switching to non-cleared products to avoid the clearing requirements.
If anything, the statistics demonstrate the powerful economic pull that clearing has through its
ability to put more transactions through a single counterparty and optimize the benefits of netting.

Policy Suggestion
There is significant evidence of the strong incentives to clear that currently exist. Consequently,
the higher IM requirement for non-cleared versus cleared swaps may not be necessary to
encourage clearing. The role of margin as a clearing incentive should be re-calibrated, withconsideration given for the existing inherent benefits of clearing such as multilateral netting.

20

Interconnectedness and Systemic Risk: Lessons from the Financial Crisis and Policy Implications, Speech by Federal Reserve Board Chair Janet L.
Yellen to the American economic Association, January 201321

See ISDA Research Note, Actual Cleared Volumes vs. Mandated Cleared Volumes: Analyzing the US Derivatives Market
10Clearing Incentives, Systemic Risk and Margin Requirements for Non-cleared Derivatives

SUMMARY
Rising thephase-five
threshold to€100 billion
would exclude
smaller entities
that pose little
or no systemic
risk, without
significantly
reducing theamount of IM
exchanged

ISDA supports the efforts of policy-makers to enhance the strength, resiliency and transparencyof the global derivatives market by imposing margin requirements. In that context, universal VM
exchanges are useful.
At the same time, however, it is becoming increasingly clear that certain aspects of the current
rules related to IM do not effectively align with their stated goals of mitigating systemic risk andpromoting central clearing. Instead, they impose unnecessary costs and may impede economic andrisk management activity.
A relatively small number of the counterparties (approximately 20%) subject to the IM
requirements account for a large majority of the total IM that will be required to be posted(approximately 85%) under the current rules. Conversely, 80% of the firms that would be in scope
for the margin rules pose little or no systemic risk, but would collectively be required to negotiate
documentation and incur large operational costs in order to post non-systemically importantamounts of IM. IM should not be required for counterparties that pose little or no systemic risk.
Toward this end, the current threshold of €8 billion in notional outstanding could be raised to €100
billion – a level that addresses systemic risk issues and avoids adverse and unnecessary consequences
for hundreds of firms that pose no such concerns.
While IM for non-cleared swaps may marginally encourage clearing in certain market segments,
there is substantial evidence that other economic incentives have a significantly greater impact.
This includes lower regulatory capital requirements for cleared versus non-cleared swaps, as wellas the significant benefits that flow from the ability to net large, diverse swaps portfolios with asingle CCP. Consequently, there are strong incentives to clear, and the higher IM requirement for
non-cleared versus cleared swaps may impose unnecessary costs on market participants. The roleof margin as a clearing incentive should be re-calibrated, with consideration given for the existinginherent benefits of clearing, such as multilateral netting.

ABOUT ISDA
Since 1985, ISDA has worked
to make the global derivatives
markets safer and more efficient.
Today, ISDA has more than 900
member institutions from 70
countries. These members comprisea broad range of derivatives
market participants, including

corporations, investment managers,
government and supranational
entities, insurance companies,
energy and commodities firms,
and international and regionalbanks. In addition to market
participants, members also include
key components of the derivatives

market infrastructure, such as
exchanges, clearing houses andrepositories, as well as law firms,
accounting firms and other service
providers. Information about ISDA
and its activities is available on the
Association’s website: www.isda.org.
Follow us on Twitter @ISDA.
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