ISDA and the MFA offered several recommendations to the Financial Stability Board ("FSB") Derivatives Assessment Team ("DAT") in response to a consultative report on incentives to centrally clear OTC derivatives. As previously covered, the FSB DAT report reexamined whether adequate incentives to clear centrally OTC derivatives are in place. The first assessment of incentives to centrally clear OTC derivatives by FSB DAT was published in 2014.

In response to the FSB DAT, ISDA recommended (i) a recalibration of the capital framework, (ii) increased flexibility in the clearing mandate, (iii) enhanced clearing capacity and (iv) harmonization wherever needed. ISDA affirmed that it has been studying incentives to clear OTC derivatives over the last several months in order to complement the FSB DAT analysis. In particular, ISDA's recommendations included the following:

  • recognition of initial margin in leverage ratio calculations;
  • a review of the global systemically important banks' framework to recognize that clearing reduces "complexity and interconnectedness";
  • exemption of the client leg of cleared transactions from credit valuation adjustment capital charges in the United States (as is done in Europe);
  • harmonization of clearing mandates across jurisdictions and exemptions therefrom for small firms; and
  • the standardization of central counterparty rulebooks, in particular as to default management and porting.

Separately, the MFA urged the standard-setting bodies and national regulators to alter the leverage ratio to recognize the exposure-reducing nature of client initial margin for cleared OTC derivatives. The MFA recommended three actions to policymakers: (i) enable an initial margin ("IM") to offset in the leverage ratio, (ii) switch from the current exposure method to an adjusted SA-CCR (i.e., standardized approach to counterparty credit risk) method, including offsets for client IM, and (iii) the withdrawal of a Federal Reserve Board proposal to amend certain reporting instructions for U.S. systemically important banks.

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