February 1, 2018 / 6:15 PM / 3 months ago

Derivatives trade group ISDA may challenge new capital rules

NEW YORK (Reuters) - An industry group representing the privately traded derivatives markets may challenge new rules requiring that more capital be used to back the trades, arguing that the requirements place them at a disadvantage to trading futures contracts.

Capital rules adopted by the Commodity Futures Trading Commission and U.S. bank regulators in 2015, which are being phased in over a five-year period, require that capital equivalent to five days the historical value-at-risk (HVaR) of a derivative such as an interest rate swap be posted to back trades that are centrally cleared, with uncleared swaps requiring 10 days’ worth of HVaR.

Centrally clearing is when a clearinghouse stands in the middle of a trade and guarantees the trades.

Interest rate futures, by contrast, which are traded on the CME Group Inc’s (CME.O) exchange, require capital of around two days the value-at-risk of the trades.

Regulators require higher margins for uncleared trades as they are seen as posing higher risks to the financial system.

Central clearing and higher margins are part of reforms meant to reduce the risks of privately traded derivatives after a chain of large exposures between global banks was seen as destabilizing the financial system during the financial crisis of 2007-2009.

Scott O’Malia, the chief executive officer of the International Swaps and Derivatives Association (ISDA), said at an industry conference on Thursday that the new margin requirements for swaps may not make sense if the risk profile of the trade is the same as in futures.

ISDA plans to evaluate the economics of the trades and may then pursue “fact-based advocacy,” on the topic, O’Malia said.

    Reporting by Karen Brettell; Editing by Matthew Lewis

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