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(Created page with "===BIS final paper on margin for uncleared derivatives=== In March 2015, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published its final report, including a policy framework on uncleared derivatives margin. ===Cheeky summary=== BIS’s basic idea was to ''reduce systemic risk'' in the OTC derivatives markets by requiring market participants t...")
 
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===BIS final paper on margin for uncleared derivatives===
===BIS final paper on margin for uncleared derivatives===
In March 2015, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published its final report, including a policy framework on [[Uncleared derivatives margin - EMIR Provision|uncleared derivatives]] margin.
In March 2015, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published its final report, including a policy framework on [[Uncleared derivatives margin - EMIR Provision|uncleared derivatives]] margin.
===Cheeky summary===
===Cheeky summary===
BIS’s basic idea was to ''reduce systemic risk'' in the [[OTC derivatives]] markets by requiring market participants to exchange [[initial margin]] and [[variation margin]], at the same time promoting clearing of standardised derivatives and aligning the market participants’ incentives  — in other words, by ''disincentivising'' OTC derivatives.
BIS’s basic idea was to ''reduce systemic risk'' in the [[OTC derivatives]] markets by requiring market participants to exchange [[initial margin]] and [[variation margin]], at the same time promoting clearing of standardised derivatives and aligning the market participants’ incentives  — in other words, by ''disincentivising'' OTC derivatives.
Resting propositions:
# Centrally cleared standardised derivatives — exchange-traded futures and options — are transparent, liquid and ''good''; private, bespoke, non-intermediated contracts are opaque, incomprehensible and ''bad''.
# Large, interconnected institutions are intrinsically dangerous. [[Horcrux]] alert: [[Lehman Brothers]]. Cognitive dissonance alert: There is no larger, more interconnected financial institution than a central clearinghouse.
#There is a form-over-substance assumption here: that what matters is the format of a financial instrument and not its economic effect. There is nothing intrinsically dangerous about the ISDA format, nor an over-the-counter transaction: customers lend to banks (in the form of deposits) and banks lend to customers (in the form of loans) over the counter all the time. No one is suggesting margining those transactions. 


'''Scope''': The document imposes margin requirements on all financial firms and systemically important non-financial entities that trade [[over-the-counter |over-the-counter]] swaps, setting out criteria that might exclude counterparties that pose low systemic risk, such as sovereigns, central banks and supranationals — you have to screw your eyes up for a while to figure out how sovereigns and central banks don’t pose systemic risks, but still — low-risk transactions such as intragroup transactions.
'''Scope''': The document imposes margin requirements on all financial firms and systemically important non-financial entities that trade [[over-the-counter |over-the-counter]] swaps, setting out criteria that might exclude counterparties that pose low systemic risk, such as sovereigns, central banks and supranationals — you have to screw your eyes up for a while to figure out how sovereigns and central banks don’t pose systemic risks, but still — low-risk transactions such as intragroup transactions.
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'''Eligible collateral''': The document sets out eligibility criteria for initial and variation margin and specifies applicable haircuts under different levels of market stress.  
'''Eligible collateral''': The document sets out eligibility criteria for initial and variation margin and specifies applicable haircuts under different levels of market stress.  


'''Segregation and rehypothecation''': The document establishes rules for segregating initial margin from the collecting party’s insolvency and restricting [[reuse]] of initial margin.
'''Segregation and rehypothecation''': The document establishes rules for segregating [[initial margin]] from the collecting party’s insolvency and restricting [[reuse]] of [[initial margin]].


'''Interaction with other standards and regimes''': The document discusses the interaction of margin requirements with capital requirements for counterparty credit risk, the [[liquidity coverage ratio]] and the net stable funding ratio, bank recovery and resolution frameworks, and the cross-border application and implementation of the margin requirements.
'''Interaction with other standards and regimes''': The document discusses the interaction of margin requirements with capital requirements for counterparty credit risk, the [[liquidity coverage ratio]] and the net stable funding ratio, bank recovery and resolution frameworks, and the cross-border application and implementation of the margin requirements.
===Commentary===
The paper has the following resting propositions:
# Centrally cleared standardised derivatives — exchange-traded futures and options — are transparent, liquid and ''good''; private, bespoke, non-intermediated contracts are opaque, incomprehensible and ''bad''.
# Large, interconnected institutions are intrinsically dangerous. [[Horcrux]] alert: [[Lehman Brothers]]. Cognitive dissonance alert: There is no larger, more interconnected financial institution than a central clearinghouse.
#There is a form-over-substance assumption here: that what matters is the format of a financial instrument and not its economic effect. There is nothing intrinsically dangerous about the ISDA format, nor an over-the-counter transaction: customers lend to banks (in the form of deposits) and banks lend to customers (in the form of loans) over the counter all the time. No one is suggesting margining those transactions.
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