The International Swaps and Derivatives Association (ISDA), Futures Industry Association (FIA) and Securities Industry and Financial Markets Association (SIFMA) released a discussion paper to:
(i) provide an overview of cross-margining programs developed by clearing organizations and their importance in the context of implementing recent market reforms with respect to US Treasury securities clearing;
(ii) describe cross-product netting arrangements with customers as a means to effectively reduce risk and their relation to cross-margining programs;
(iii) describe the treatment of cross-product netting arrangements under the current US regulatory capital framework; and
(iv) propose potential targeted changes to US regulatory capital rules to more appropriately reflect the economics of, and facilitate firms’ use of, cross-product netting arrangements with customers, particularly with respect to transactions based on US Treasury securities.
“It will be critical for the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to consider revisions to the US regulatory capital framework that recognize the risk-reducing effects of cross-margining programs,” ISDA wrote.
Among the recommendations is to extend the standardized approach for counterparty credit risk (SA-CCR) to include repos.
“This potential approach broadly involves treating repos on US Treasury securities as forward settling interest rate derivatives and determining the exposure at default of a portfolio of repos and derivatives contracts subject to a cross-product margining agreement under SA-CCR. This approach would use a pre-existing methodology in the US regulatory capital framework to recognize the risk-mitigation benefits of cross-product netting,” according to the report.