ISDA Urges US Regulators To Recognize Cross-Product Netting

Why Cross-Product Netting Matters

The International Swaps and Derivatives Association (ISDA) is calling for US regulators to update capital rules to recognize the risk-reducing benefits of cross-product netting. Currently, under the US Basel III endgame proposals, banks using the standardized approach for counterparty credit risk (SA-CCR) cannot account for netting across transaction types such as derivatives and repo-style agreements. This oversight, ISDA argues, creates a disconnect between actual risk and regulatory capital requirements.

Cross-product netting allows banks to settle obligations across multiple instruments with a counterparty on a net basis, significantly lowering credit risk. As banks and clients become increasingly focused on efficient funding to support liquidity, these arrangements are gaining traction. Yet without regulatory recognition, required capital levels remain higher than warranted by the actual risk profile of netted positions.

The imbalance puts pressure on bank balance sheets and could ultimately limit liquidity provision, particularly during times of stress. For the US Treasury market—where outstanding issuance is nearing $30 trillion—this constraint could prove especially hardyatic. The introduction of the SEC’s clearing mandate in 2025 will only increase the importance of efficient intermediation and client clearing services.

Takeaway

The Role Of Clearing And Cross-Margining

Central counterparties (CCPs) have been expanding cross-margining programs, which allow participants to offset exposures across clearing houses and . These initiatives are designed to reflect the true risk of a portfolio rather than treating trades in isolation. By enabling offsets, cross-margining lowers costs and improves liquidity, especially in volatile conditions.

However, ISDA warns that without corresponding changes to the regulatory capital framework, the benefits of cross-margining may be neutralized. Banks might be forced to demand full margin postings from clients or absorb increased capital charges themselves. Either outcome could create inefficiencies and reduce the incentive for market participants to take advantage of cross-margining programs.

The association stresses that the capital framework should mirror the legal and operational realities of modern trading practices. With legally enforceable master netting agreements already covering both derivatives and , regulators have the necessary documentation basis to acknowledge these offsets. Aligning capital treatment with market practice would prevent unnecessary capital strain and promote financial stability.

Takeaway

Why Regulatory Adjustments Are Needed Now

ISDA argues that revisions to SA-CCR should be prioritized as regulators refine the Basel III endgame. While internal model methods can recognize cross-product netting, these are not included in the US proposals, leaving banks reliant on a standardized framework that fails to capture actual risk reductions. Making SA-CCR more risk-sensitive would ensure capital requirements more accurately reflect the exposures banks face.

This issue is especially relevant as Treasury clearing mandates approach and cleared . Without adjustments, banks may struggle to expand their intermediation capacity, just as market demand for liquidity peaks. Aligning capital rules with netting practices would give banks more flexibility to provide client clearing services without tying up unnecessary capital.

ISDA frames the debate as one of market efficiency and resilience. Recognizing cross-product netting would reduce systemic strain, support deep and liquid markets, and enhance financial stability during stress. At the identical time, it would ensure that banks are not penalized for risk-management practices that demonstrably reduce counterparty exposure.

Takeaway

Broader Implications For Market Liquidity

The debate over cross-product netting highlights the tension between risk sensitivity and regulatory conservatism. While strict capital requirements guard against systemic shocks, they can also create inefficiencies when they fail to recognize proven risk-reduction mechanisms. For the US Treasury market and related derivatives, this could mean higher funding costs and reduced liquidity at a time when issuance volumes are at historic highs.

By revising capital rules, regulators could unlock more efficient balance sheet usage, enabling banks to intermediate larger volumes of trades without increasing systemic risk. Such reforms would also support the broader goals of financial regulation: fostering stable, transparent, and resilient markets. ISDA emphasizes that failing to act risks undermining the very liquidity and efficiency regulators are viewking to protect.

As the US finalizes its proposals, the question of cross-product netting will remain central. Whether regulators choose to recognize it may determine how effectively banks can meet client demand, support clearing mandates, and provide liquidity during the next period of market stress.

Takeaway