February 4, 2022

To: European Banking Authority

The International Swaps and Derivatives Association, Inc. (ISDA), SIFMA’s Asset Management Group (SIFMA AMG) and the European Savings and Retail Banking Group (ESBG) (together, the “Associations”) appreciate the opportunity to respond to the Draft Regulatory Technical Standards on Initial Margin Model Validation (“IMMV RTS” or “Consultation”). We acknowledge that extensive consideration has gone into the proposal which is intended to specify supervisory procedures for competent authorities with respect to their oversight of the use of a quantitative initial margin (IM) model like the ISDA SIMM® (“SIMM”) by EU regulated entities to meet their obligation to calculate IM in accordance with the requirements in Articles 14 and 16 of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (“EMIR RTS”).
However, we believe there are key areas of the IMMV RTS that require substantive revision to avoid completely or severely limiting the ability for EU regulated firms to use an IM model. In some cases, the IMMV RTS requirements contradict or are more stringent than the EMIR RTS, the BCBS-IOSCO Margin requirements for non-centrally cleared derivatives1 (the “BCBS-IOSCO Framework”) or the areas for evaluation raised in the BCBS, CPMI, IOSCO Review of margining practices2 consultation (“BCBS Consultation”) which recognized the relative stability of SIMM during market volatility in early 2020. The IMMV RTS does not merely provide guidance for the assessment of model performance and implementation, but also dictates how the model should be designed, creating jurisdictional inconsistencies in the requirements for an IM model which have global impact, especially considering the broad and well-established use of the SIMM.

Many aspects of the IMMV RTS have been based on methods developed in the context of market risk models, and do not consider the industry and firm-level governance methods for SIMM which have been in practice for more than five years. Although counterparty credit IM has some similarities with marketrisk regulatory capital – indeed SIMM was adapted from the FRTB SBA – there are important differences. First, there are two parties to each portfolio, and they have to agree with each other on how much margin to exchange. This is fundamentally different from market risk (where the calculating firm is subject to its own calculation) and creates a clear requirement for the parties to agree IM at the individual portfolio level. Instead, the IMMV RTS suggests a framework by which model shortfalls are monitored and remediated at the entity level. Second, the number of relevant portfolios is much greater with initial margin (one portfolio per netting set) rather than market risk (one portfolio per entity). Because of this, reporting thresholds need to be set appropriately to avoid drowning out real signals with insignificant clutter. Many of the backtesting thresholds proposed in the IMMV RTS would produce large numbers of false positive reports, distracting from the primary policy objective of reducing systemic risk.

We are particularly concerned with the provisions in the Consultation that require analysis or remediation at the entity level, across all netting sets. There are legal, economic and practical reasons why we believe these entity-level requirements are unworkable, and we request they be replaced with portfolio-level

1 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf
2 https://www.bis.org/bcbs/publ/d526.pdf