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Wednesday, 25 April 2018

EU delays rules on uncleared swaps margin

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European rules requiring over-the-counter derivatives that are not centrally cleared to be backed by collateral have been delayed to allow more time to approve final technical standards.

The European Commission on Thursday informed parliament and the council that it is reviewing draft regulatory standards submitted by the European Supervisory Authorities and the standards will now be submitted after the three-month deadline.

“Our objective is to deliver the standard before the end of the year and for firms covered by the first wave of the rules to be required to comply before the middle of next year,” said a Commission spokesperson.

The delay has been welcomed by market participants as the industry struggles to comply with draft rules that have many issues and ambiguities still to be ironed out before the planned September 1 implementation.

“We believe it’s positive that European regulators spend the necessary time to ensure the rules are appropriate, and we will continue to work with authorities and the industry to comply with the relevant deadlines,” said ISDA chief executive Scott O’Malia.

Many participants were surprised by the delay that scuppers plans for simultaneous implementation of BCBS-IOSCO standards for non-cleared margin across regions. The Commission’s decision could put European implementation almost a year behind similar rules in the US and Japan.

“European lawmakers seemed adamant on the timeline, so it’s a surprise to see them officially back down,” said Emma Dwyer, partner at Allen & Overy. “The reality is that the deadline was very difficult for most market participants as the scale of work involved is still huge and the industry still has a lot to do to achieve compliance.”

Global dealers have just over two months to negotiate collateralisation agreements before September implementation for US and Japanese rules while draft European rules are subject to change. A&O’s Dwyer believes that the splintered timeline could also pose a problem for infrastructure providers that are attempting a mass implementation of multiple rule sets without the final EU rules in place.

“I’m sure the delay is welcomed on a basic level, but without the same delay on a global basis, market participants will be left grappling with how to implement rules in a piecemeal manner,” said Dwyer. “Frankly it’s a mess unless the US and everyone else delays too.”

Final US margin rules were approved by the CFTC in December and market participants say there is little appetite for the regulator to change the timeline after the original implementation date of December 2015 has already been delayed by nine months. However, the threat of further swaps market fragmentation as a result of the mismatch could raise calls for the US to follow suit.

“The question now is whether there will be some sort of relief under the US rules. I suspect US entities would feel hard done by if they had to collect initial margin at a time when their EU counterparts didn’t,” said Deepak Sitani, partner at Linklaters.

Under the original timetable, which still stands for US and Japanese rules, the largest derivatives dealers will be required to post initial margin from September. Others will be brought into scope in yearly waves, with the final derivatives users with exposures of less than €750bn subject to initial margin from September 2020. Variation margin, which must be exchanged daily to reflect changes in valuation of swaps contracts, will be required to be posted by all participants from March 2017.

“The small number of firms covered by the first wave of the requirements will, in many cases, also be covered by rules in other jurisdictions and therefore should continue to prepare for implementation,” said the Commission spokesperson.

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