ISDA released the results of a survey of derivatives users; focusing on how prepared they were for margin on non-centrally cleared trades. Looks like there is still a lot of work to do.
Of the 400 respondents, almost half are active, with over 100 trades per year. People came from a variety of organizations.
The big issue is about initial and variation margin on non-cleared swaps. Slated to start at the end of 2015, this will bring some substantial changes for clients. Those market participants who did not have to post margin, but will have to start, will see the cost of trading go up. 59% of the respondents thought that increased costs of hedging was among their biggest concerns in using derivatives to manage risk. Theses clients can no longer rely on their dealer to, in effect, extending them credit to cover the exposure. It is ironic that the effort to make the banking system more robust simply ends up pushing the need to collateralize the exposures down to their clients.
36% of the respondents said they were subject to the new rules, while 33% said they were not sure. We would hope the 33% starts to figure this out soon. Of those (33%) who are impacted…
Margin for non-cleared derivatives is complicated with long phase-ins, exemptions, and confusion about how to model it. ISDA proposed a Standard Initial Margin Model (SIMM) to promote transparency and predictability. We wonder if everyone using the same model doesn’t have the potential to mask problems? It is probably better than the Tower of Babel alternative though.
We have written a couple posts on the new rules for non-cleared derivatives as well as written a paper, sponsored by Murex.
“US regulators propose margin rules on non-cleared derivatives. Did they give non-financial end users a pass or not?” September 9, 2014
“Finadium: Preparing for Risk-Based Margining of Non-Cleared Derivatives (free via Murex)”, June 24, 2014
“ISDA releases Standard Initial Margin Model (SIMM) for Non-Cleared Derivatives”, December 12, 2013
“Final Basel rules on margin for non-cleared derivatives, with clarification on rehypothecation”, September 3, 2013