The associations emphasized that alignment with international rules, particularly those in the U.S., is crucial to avoid market fragmentation. They pointed out that in the U.S., equity options are not in the scope of non-cleared margin rules and are treated as securities, a status that would require legislative action to change.
Financial industry associations including the Investment Association, ISDA, AIMA, and the American Council of Life Insurers have collectively responded to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) on their consultation regarding margin requirements for non-cleared derivatives.
The joint response comes as a critical voice in the ongoing dialogues on regulatory frameworks in financial markets.
ISDA defends permanent exemption for equity options
The associations welcomed the regulators’ proposal to extend the temporary exemption from UK margining requirements under BTS 2016/2251 for single-stock equity and index options until January 4, 2026. The extension would afford the PRA and FCA time to gather evidence for establishing a permanent regulatory regime. The associations believe that a permanent exemption for equity options from margin requirements is justified.
The groups also commended the decision to rely on existing supervisory frameworks for initial margin (IM) models instead of introducing a formal pre-approval requirement. They warned that a pre-approval requirement at this stage could create uncertainties and disrupt market participants that are already using models like the ISDA Standard Initial Margin Model (ISDA SIMM) under existing supervisory oversight.
Equity options are not in the scope of non-cleared margin rules in the US
The associations emphasized that alignment with international rules, particularly those in the U.S., is crucial to avoid market fragmentation. They pointed out that in the U.S., equity options are not in the scope of non-cleared margin rules and are treated as securities, a status that would require legislative action to change.
The response highlighted that equity options play a significant role in the real economy, facilitating activities such as M&A transactions, share buy-backs, and portfolio diversification. They argued that imposing margin requirements on such derivatives would adversely affect smaller market participants and make UK dealers less competitive.
The associations expressed concern that the scope of regulatory standards on initial margin models is overly broad and does not differentiate based on the size or systemic importance of firms. They called for a more proportionate approach that would not discourage smaller institutions from using industry models.
