MFA submitted a comment letter to the Working Group on Margining Requirements (WGMR) of the Basel Committee on Banking Supervision (Basel) and the Board of the International Organization of Securities Commissions (IOSCO) in response to the Basel-IOSCO Consultative Document on Margin Requirements for Non-Centrally-Cleared Derivatives. In the letter, MFA commended the commitment of the WGMR to establish a unified framework that will provide a global standard for margining non-cleared derivatives. MFA particularly supported the requirement to exchange variation margin on a bilateral basis, which reflects and reinforces the current market “best practice”. However, MFA urged the WGMR in the final recommendations to take into consideration the importance and continued viability of certain non-cleared derivatives as customized risk management tools. To address the overarching concerns, MFA set forth the following positions:
- Initial margin. MFA supports the bilateral exchange of initial margin, provided that the initial margin requirements appropriately reflect and address the risks to the financial system presented by the relevant non-cleared derivative transaction.
- Portfolio margining. MFA strongly supports the proposal to allow quantitative initial margin models to account for risk on a portfolio basis. For portfolio margining to achieve the intended risk offset benefits, initial margin models should account for risk offsets across suitably correlated cleared and non-cleared derivative and non-derivative products.
- Margin thresholds. MFA does not believe that thresholds are an appropriate tool for managing the liquidity impact of the proposed initial margin requirements. MFA is concerned that the introduction of thresholds would result in counterparties being treated unequally, with some counterparties being required to post no initial margin, or a significantly reduced amount after application of a high threshold.
- IM schedule. MFA welcomes the proposed option for market participants to choose between using an approved initial margin model or a standardized initial margin schedule.
- Ongoing review of requirements. MFA recommends that the WGMR plan for a regular review and, when appropriate, periodic adjustment, of the international standards for margin requirements in response to developments in the non-cleared derivatives markets.