In a Research Note, ISDA highlighted the degree to which current regulations rely on the concept of a "notional amount" to set compliance thresholds in major areas of derivatives regulation. The Note - which follows a recent report by CFTC economists introducing the concept of "Entity-Netted Notionals" - is intended to contribute to policy discussions regarding "the merits of a risk-based regulatory framework."
ISDA researchers asserted that widely used notional amount metrics may be reasonable indicators of transaction size or volume, but are not good measures of risk. They surveyed regulations in five areas (mandatory clearing, margin, trading requirements, trade reporting and capital) in a number of jurisdictions to highlight the degree to which regulators have relied on notional amount outstanding metrics to establish triggers and thresholds for applying derivatives rules since the G-20 reforms. In each of the regulatory areas, ISDA found that metrics for transaction activity and risk that are based on notional amounts, rather than more tailored concepts, are used extensively.
Commentary / Jeff Robins
The report does not attempt an in-depth analysis of the appropriateness of notional amount triggers for the different requirements included in the survey or propose alternative metrics. As such, it is intended primarily to heighten awareness of the different places where notional amount concepts are used to set markers for further regulatory discussions.
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