End Users Face Swap-Margin Deadline

Terry Flanagan

Derivatives users face formidable hurdles in meeting a December 2015 implementation deadline for margin rules for non-cleared swaps.

In September 2013, the Working Group on Margin Requirements, an initiative jointly run by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (Iosco), issued the final margin policy framework for non-cleared, bilateral derivatives.

The Basel Committee and Iosco have established a December 2015 deadline for national regulators to come up with rules that conform to the WGMR framework.

Individual regulatory authorities across jurisdictions have since started to develop their own margin rules consistent with the final framework.

“The proposals will require a huge number of changes to processes, systems, documentation, and collateral practices,” Scott O’Malia, CEO of the International Swaps and Derivatives Association, said during a webcast. “The problem is there’s not a lot of time to do it all, made harder by the fact that the final rules have not been published.”

ISDA initiated a WGMR Implementation Program to facilitate the implementation of the margin rules across jurisdictions.

The rules had their origin in the G20’s commitment to improve financial stability and reduce systemic risk. The G20 called upon the Basel Committee and Iosco to publish and develop consistent global standards for margin requirements. Individual national authorities then took up the baton publishing their own rules to transpose WGMR principles into their national regulatory frameworks. Europe went first, publishing its proposed rules in April, followed by Japan in July, U.S. prudential regulators in early September and the CFTC later that month.

The exact thresholds differ under the various national proposals, but under the WGMR framework, covered entities with noncleared derivatives notional outstanding above 3 trillion euro will be captured beginning Dec. 1, 2015. The application threshold is reduced each year for four years until it reaches 8 billion euro. Variation margin requirements, however, will be applied to all covered entities from day one.

Under the WGMR framework, firms can use their own internal models to calculate initial margin, as long as they meet certain criteria and obtain regulatory approval. These models have the potential to differ significantly, raising the possibility that counterparties will arrive at a different initial margin figure for the same trade. The result would be a surge in the number of disputes – and no obvious way currently in place to quickly resolve them.

“The national proposals present market participants with a choice of using either a standard table set by regulators, or an internal model to calculate initial margin in line with the WGMR framework,” said O’Malia. “The latter creates the risk that each firm will develop its own margin model, leading to a situation where no two counterparties are able to agree on a margin requirement for a trade.”

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