ISDA urges PRA flexibility on Basel 3.1 as Treasury clearing looms

Speaking in his opening remarks at the ISDA Derivatives Trading and Treasury Forum in London on Wednesday, ISDA chief executive Scott O’Malia said uncertainty over the timing of US Basel III implementation means the PRA should remain open to adjusting its deadline for the Fundamental Review of the Trading Book internal models approach (FRTB-IMA).

“While it has kept its January 2028 deadline for the implementation of the internal models approach, we don’t yet know when the US will go live,” O’Malia said in his opening remarks at ISDA's Derivatives Trading and Treasury Forum. “As a result, we’re recommending flexibility in the timing of implementation to align with other major jurisdictions and avoid fragmentation.”

The PRA has retained a January 1 2028 implementation date for the approach, a year after most UK Basel 3.1 rules take effect. The regulator said the delay reflects the importance of international coordination for internal models used by major cross-border trading firms.

ISDA earlier this month welcomed proposed PRA changes intended to make the framework less punitive for banks using internal models but said further revisions and flexibility over implementation are needed.

The call comes amid concern over differences in the implementation of Basel III across major jurisdictions. An Acuiti report earlier this month found fixed income firms viewed recent US capital reforms as more accommodative than the UK and EU approaches, with 61% of respondents expecting the US proposals to increase dealer capacity, while 31% expected the UK's Basel 3.1 implementation to reduce capacity.

O’Malia said the association has long argued that robust internal models provide greater risk sensitivity and allow banks to allocate capital more efficiently, adding that the PRA's latest proposals provide improved incentives for firms to invest in modelling.

ISDA warns over Treasury clearing capital

ISDA is also pushing US regulators to change the capital treatment of cross-product netting as the market prepares for mandatory central clearing of eligible Treasury cash transactions from the end of 2026 and repo transactions from June 2027.

The Securities and Exchange Commission's current compliance dates are December 31 2026 for eligible cash transactions and June 30 2027 for eligible repo transactions.

O’Malia said the latest US Basel III proposal allows cross-product netting under the standardised approach for counterparty credit risk (SA-CCR) for certain repo and derivatives transactions, including trades between clearing members and clients.

However, ISDA argues the proposed methodology is too blunt and could impose capital requirements that fail to recognise the economic risk of hedged portfolios.

The issue is becoming more important as firms prepare to use cross-margining arrangements to reduce margin requirements across Treasury cash, repo and futures positions following the expansion of central clearing. ISDA said last week that the Treasury clearing overhaul is already reshaping collateral allocation, funding conditions and hedging costs, with cross-margining expected to provide efficiencies by recognising offsets across related positions

“In anticipation of this huge structural change, market participants are looking to use cross-margining programs like the one offered by CME Group and the Fixed Income Clearing Corporation to reduce margin requirements across portfolios of Treasury cash, repo and futures transactions,” O’Malia said. “Enabling margin payments to more accurately reflect portfolio risk is a critical step in the efficient implementation of Treasury clearing by helping to reduce liquidity strain and improve market efficiency.”

ISDA warned that without equivalent recognition of those offsets under bank capital rules, reducing margin through cross-margining could result in banks having to hold more capital.

“Without similar recognition of risk offsets in the capital framework, the efficiencies created through cross-margining can perversely result in banks having to hold more capital, restricting balance sheet capacity and impeding their ability to provide clearing services,” O’Malia said.

ISDA has previously called for changes to cross-margining rules ahead of the Treasury clearing mandates, arguing that capital requirements should recognise offsets between repo and derivatives portfolios.

Tokenised collateral targets 24/7 trading

O’Malia also highlighted tokenised collateral as a potential way to support continuous margin movement as derivatives markets move towards longer trading hours.

He said current collateral infrastructure can be slow and operationally complex, resulting in firms posting excess collateral. A study by Nasdaq and ValueExchange, in which ISDA participated, estimated that as much as $50 billion (£37.7 billion) of collateral is either posted in excess or not remunerated.

Tokenised assets could enable near-instant settlement, improve intraday liquidity management and increase collateral mobility, according to O’Malia, potentially expanding the range of assets available for margin.

“Market participants and clearing houses need to be able to move collateral on a continuous basis, without the bottlenecks and inefficiencies that exist today,” he said. “The prospect of tokenised collateral could provide a near-term way to achieve continuous margin movement, supporting the transition to 24/7 trading.”

ISDA develops AI reporting agents

ISDA is also integrating artificial intelligence into its Digital Regulatory Reporting service, which uses the Common Domain Model to convert industry interpretations of reporting requirements into machine-executable code.

The association is developing a “tracer agent” designed to provide an audit trail showing when and why reporting decisions were made and link outcomes back to the relevant rule and industry interpretation.

A second “translator agent” is being developed to interpret new or amended reporting requirements and assist in converting them into code, with the aim of reducing the resources needed to implement regulatory changes.