Europe urged to finalise swaps margin rules

4 min read
Helen Bartholomew

European regulators have just two months to finalise collateral rules for uncleared swaps if they are to implement initial margin requirements ahead of the March 2017 “big bang” that will force the whole industry to begin exchanging variation margin on bilateral derivatives exposures.

Derivatives participants speaking today at ISDA’s Annual Europe Conference in London warned that European regulators face a narrow window for implementation of initial margin rules if they are to avoid regulatory congestion, as thousands of swaps counterparties rush to update documentation and overhaul operations in anticipation of a surge in margin call volumes.

“We expect to see the rules implemented from late December at the earliest to late April at the latest, but the real window is much narrower, “ said Eric Litvack, ISDA chairman and head of regulatory strategy at Societe Generale, speaking at the conference.

“Most banks have a code freeze in late December so you can’t roll anything out until mid-January, and if it’s too close to the variation margin “big bang”, you bring in too many complexities for participants.”

He believes that regulators should attempt to implement the new requirements between mid-January and mid-February to minimise the burden stemming from rules that many see as the biggest challenge the derivatives industry has faced in 20 years.

To meet a mid-January deadline, rules must be published in the European Union’s Official Journal in mid-December, requiring them to be finalised by the European Commission by late November for approval by the European Parliament and European Supervisory Authorities.

The final pillar of the G20 agreement, requiring collateralisation of OTC swaps that are not cleared through central counterparties, went live in the US, Japan and Canada on September 1.

Under the staggered timetable, the largest derivatives dealers in those jurisdictions are required to post initial and variation margin on their uncleared swaps exposures, while additional counterparties will be subject to initial margin requirements in annual waves out to 2020. All derivatives counterparties will be forced to exchange variation margin, reflecting daily price changes of their bilateral swaps exposures, from March 2017.

The European Commission confirmed in June that final rules would not be completed in time for September implementation, and later clarified its intention to push ahead with the original March deadline.

Equivalence elephant

Once final, the European requirements will kick-start a cross-border equivalence process as global regulators seek to determine whether overseas rules are close enough in scope to be substituted for local rules.

“The elephant in the room is still the cross-border aspect,” said Litvack. “Rules have gone live in three jurisdictions, but we’ve heard almost nothing in terms of cross-border recognition.”

Earlier this month, the CFTC deemed Japanese margin rules to be broadly equivalent to US rules, allowing substituted compliance in the majority of trades carried out by US persons on Japanese soil. Rules governing inter-affiliate trades were deemed not to be equivalent as Japan does not require IM or VM to be posted on swaps between consolidated affiliates.

“The significance of the CFTC approval [for Japanese rules] matters to Nomura, but the track record on cross-border recognition is just not there,” said Scott O’Malia, ISDA CEO, speaking to reporters at the conference.

“The CCP equivalence decision was very painful and took three years to reach a conclusion. The margin rules are closer, but they’re not perfect and we do need to develop a consistent framework.”

Despite some stark differences in settlement times across regions, margin rules have broad similarities as they stem from an international framework developed by IOSCO. That comes in stark contrast to swaps data reporting and rules governing trading of OTC swaps on regulated venues.

“If we don’t get cross-border recognition on margin, the chance of getting it anywhere else is very low,” said Litvack.

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