Approximately US$1.41trn of collateral was posted for cleared and non-cleared CDS and interest rate swap trades by end-1Q17, according to ISDA's latest margin payments survey. The association's findings highlight significant changes to collateral practices in the derivatives markets over recent years.

The ISDA survey shows that initial margin (IM) posted by clearing participants to central counterparties (CCPs) for their cleared derivatives trades totalled US$173.4bn, while IM posted to the 20 largest dealers (phase-one firms) for their non-cleared derivatives transactions totalled US$107.1bn at the end of March 2017. These 20 dealers, in turn, delivered US$63.6bn of IM and US$685bn of variation margin (VM).

Total VM posted stood at US$1.13trn, split across US$260.8bn for cleared and US$870.4bn for non-cleared trades. By asset class, IM and VM posted by clearing participants to CCPs respectively totalled US$173.4bn and US$260.8bn for cleared interest rate swaps and credit default swaps.

IM for IRS trades has grown by about 58.7%, from US$88.9bn at end-3Q15 to US$141.1bn at end-1Q17. IM for CDS trades grew by 13.7% over the same period, from US$28.4bn to US$32.3bn.

IM posted by clearing members for their own positions totalled US$79.3bn, compared with US$94bn of client IM, of which US$90bn was calculated on a gross basis and the remainder on a net basis. The portion of client gross margin relative to house net margin has increased from 43% in 3Q15 to 52% in 1Q17, according to ISDA's analysis.

The figures include IM that is required to be exchanged under the new rules (regulatory IM) and IM that is exchanged as a result of bilateral negotiations (discretionary IM). Specifically, phase-one firms delivered an estimated US$47.2bn of regulatory IM and received US$46.6bn of regulatory IM for their non-cleared derivatives exposures during the period. They also delivered an estimated US$16.3bn of discretionary IM for these exposures and received US$60.5bn of discretionary IM.

The top-five phase-one firms by amount of collateral represented about 51% of regulatory IM, 68% of discretionary IM and 46% of VM delivered. Cash accounted for 70.9% of total collateral, government securities comprised 20.7% and other securities made up 8.3%.

Based on the survey results, phase-one market participants mostly use government securities for meeting regulatory IM requirements because the margin regulations stipulate IM has to be bankruptcy remote. For VM, cash is the primary form of collateral used.

The survey polled the 20 banks with the largest non-cleared derivatives exposures - the so-called 'phase-one' firms under the new margin rules. ISDA also used publicly available data on cleared derivatives from two US CCPs, three European CCPs and two Asian CCPs. As such, the US$1.41trn total excludes margin posted on non-cleared derivatives exchanged between non-top 20 firms.

To put this total in perspective, the notional outstanding of OTC derivatives transactions was US$483trn at end-2016, according to BIS figures. This included US$368.4trn in interest rate derivatives and US$10trn in credit derivatives.

Separately, ISDA has published recommendations - which build on the work of the Committee on Payments and Market Infrastructures (CPMI), IOSCO and the FSB - for a comprehensive recovery and resolution framework for CCPs. The association says its recommendations should serve to strengthen CCP oversight and calls on regulators to finalise and implement CCP recovery and resolution strategies.

The recommendations suggest that a resolution regime for CCPs should indicate a time at which resolution could commence, but should allow flexibility for recovery to continue beyond that time. Subject to safeguards, VM gains haircutting could be used to allocate losses at the end of a CCP's default waterfall, while partial tear-ups could be used to rebalance a CCP's book if an auction or similar voluntary mechanism fails to do so.

Further, CCP assessments on clearing members must be capped in aggregate across recovery and resolution, with clearing participants that suffer losses beyond a certain point receiving claims that position them senior to existing CCP equity holders. While ISDA believes that it is appropriate for clearing participants to bear a portion of some non-default losses, CCPs and their shareholders must bear the risk of non-default losses that are solely within their control. The association also indicates that access to central bank liquidity on standard market terms is necessary to support CCP recovery and resolution.

CS