As part of its efforts to understand the progress of and issued connected with derivatives market regulatory reforms, the Financial Stability Board (FSB) tasked its Derivatives Assessment Team (DAT) with analysing the impact of Group of 20 (G-20) regulations on incentives to clear[1]. Since then, the DAT has held workshops and calls with industry participants, issued surveys for different segments of industry and published a consultative report (the DAT report[2]).

In parallel, ISDA has embarked on an analysis on how G-20 regulations affect clearing in terms of central counterparty (CCP) proliferation, market access and incentives to clear. This study was complementary to the DAT project, and early drafts of some of the papers have been shared with the DAT.

We have produced papers on the following topics:

• Incentives and impediments to clear for clients;
• Architecture of clearing – number of CCPs in the clearing market;
• Clearing in small or closed jurisdictions;
• Quantitative impact study on multilateral netting;
• Clearing incentives, systemic risk and margining (this whitepaper will be published separately).

These papers have also been used to inform ISDA’s response to the DAT report[3]. Below is a brief summary of and links to each of these papers, including the key recommendations contained in each.

Incentives and Impediments to Clear for Clients
Many clients have started to clear voluntarily. Clients, however, require confidence in continuity of transactions. Some clients, especially in Europe, are not confident that porting is reliable. We compare models for access to CCPs for clients and recommend changes to improve porting, and to enhance clearing member capacity by reviewing capital requirements and other burdens on clearing members (for instance, CCP recovery and resolution).
The full paper is attached.

Architecture of Clearing
Globally integrated markets are most efficient in promoting growth in the real economy by providing the ability to borrow, invest and hedge in deep and liquid markets at the fairest possible prices. Arbitrary and mandated fragmentation of these markets, or the infrastructure that supports them, may lead to market distortions and inefficiencies that, in turn, can burden economies with additional costs. This paper analyzes the role clearing and the architecture of the global clearing market play in supporting globally integrated markets.
The full paper is attached.

Clearing in Small or Closed Jurisdictions
This paper explores clearing in jurisdictions with relatively smaller or closed derivatives markets. In particular, it finds that the foundations of a clean netting regime and development of a liquid derivatives market are fundamental for a CCP to be established successfully. In addition, it finds that local clearing mandates may not be required in these markets.
The full paper is attached.

Quantitative Impact Study on Multilateral Netting
Multilateral netting creates a particularly strong incentive to clear. To illustrate the effect of multilateral netting, ISDA has conducted a quantitative analysis illustrating the potential benefit of multilateral netting, demonstrating that, holding all other factors constant, the initial margin reduction by multilateral netting alone provides a strong incentive to clear transactions that are not currently cleared. Using non-cleared portfolios of 19 members, currently subject to bilateral margin requirements and representing the majority of non-cleared bilateral IM, we estimate savings by netting transactions between counterparties within four product sets determined by asset class. Using the ISDA SIMM model and holding other factors constant (for example, the initial margin model), the exercise demonstrated that, on average, firms would see a 62% reduction of risk as reflected in initial margin
The full paper is attached.

Incentives to Clear
This paper describes recent research and analysis related to the two policy drivers underpinning margin for non-cleared swaps: reduction of systemic risk and promotion of central clearing.
The paper will be published separately.

[1] http://www.fsb.org/2018/08/fsb-and-standard-setting-bodies-consult-on-effects-of-reforms-on-incentives-to-centrally-clear-over-the-counter-derivatives/

[2] http://www.fsb.org/wp-content/uploads/P070818.pdf

[3] https://www.isda.org/a/AdpEE/FSB-DAT-ISDA-Response-final.pdf