End Users Face Swap Margin Requirements
The issue of margin for non-cleared derivatives is a contentious one for swap-market participants.
Although hedge funds are generally subject to both initial and variation margin, non-financial end users are faced with the prospect of having to post margin for the first time.
Throughout the legislative process, both in the U.S. and in Europe, there have been active efforts by end users to be excluded from margin requirements.
“While the Dodd-Frank Act didn’t impose requirements on end-users, prudential regulators, ie., banking regulators, might require their regulated entities to obtain collateral from end-users,” Robert Pickel, former CEO of the International Swaps and Derivatives Association and a member of the advisory board of Droit Financial Technologies, told Markets Media. “There’s still a bit of a concern as to just how broadly applicable the requirements would be.”
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have established a December 2015 deadline for national regulators to come up with rules that conform to guidelines issued by BCBS/Iosco in September of last year for calculation of initial margin and variation margin.
In April 2014, European regulators published draft regulatory technical standards detailing the requirements for exchange of collateral. The standards are intended to be consistent with international standards published jointly by the Basel Committee and Iosco. Once finalized, the RTS are expected to apply from Dec. 1, 2015.
In the United States, the Commodity Futures Trading Commission has come out with proposed rules on margin for uncleared derivatives. The rules would require two-way margin (posting and collecting) for all trades between swap dealers and financial end users that have over $3 billion in gross notional exposure in uncleared swaps. IM requirements would be phased-in starting Dec 1, 2015 and ending Dec 1, 2019 from the largest participants to smaller ones.
Initial margin has traditionally only been required of certain types of non-dealer entities. “What these rules require now is that initial margin would be required pretty much across the board for anyone for whom these rules would be applicable,” said Pickel. “So you’ll find major dealers having to post initial margins to each other, when in the past they had not.”
The margin requirements are distinct from other areas of OTC regulations in that “as opposed to individual jurisdictions moving forward with their own regulatory requirements, there actually was a very active and productive process at the international level involving both Iosco and the Basel Committee that led to some clearly detailed proposals needed to be implemented at the national level,” said Pickel. “That process has been going on since a year ago, September, when the Iosco principles were published.”
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