ISDA stresses need for margin rules

Shanny Basar

Scott O’Malia, chief executive of derivatives trade association  ISDA, said the margin requirements for uncleared trades are the most important change for 30 years as the industry waits for the rules which become effective in just a year.

From September 2016 financial firms will have to exchange margin on over-the-counter derivatives for the first time but global regulators have yet to approve the final rules.

O’Malia said at the ISDA Annual Europe Conference in London yesterday that the new margin rules are the most important change for the industry since master agreements were put in place 30 years ago.

“Most firms will have to post initial margin on uncleared derivatives for the first time, arrange custodial relationships and change their documentation despite the final rules not being published,” he added.

ISDA has developed a standard SIM model to calculate margins in order to avoid disputes, is working on a global dispute resolution regime and stressed the need to automate the exchange of margin collateral.

Eric Litvack, chairman of ISDA and head of regulatory strategy at Société Générale Global Banking and Investor Solutions, said at the conference that the documentation challenges for uncleared margins will be immense and cannot begin until the regulators issue the final rules. He said: “The extension has already been eaten up while we are waiting for the final rules which need to be written into contracts.”

Regulators have already extended the implementation date by nine months to September next year to give the industry more time to prepare.

O’Malia said ISDA had recently commented to the US Commodity Futures Trading Commission that the industry needs a minimum of 12 months from the publication of the final rules.

“We are waiting to understand the differences between collateral regimes and segregation,” he added. “The regulators have been willing to offer extra time thus far and they may offer a phased-in approach.”

O’Malia said the organisation did not know when the final rules will be published although a CFTC commissioner mentioned December at a recent ISDA conference in New York.

In Europe the industry is also waiting for the final technical standards for MiFID II which will come into force for financial markets in the region from January 2017.

Steven Maijoor, chair of the European Securities and Markets Authority, said in the keynote address at the conference that the regulator is “determined” to deliver the standards this month.

Maijoor added that Europe is close to starting the implementation of the clearing obligation for OTC derivatives for certain interest rate swaps denominated in EUR, GBP, USD and JPY. “The regulatory technical standards are now under scrutiny by the Council and European Parliament, as is required before they can enter into force, which could be around the year-end,” he said.

The rules proposing a clearing obligation for some European index credit default swaps are also close to being finalised and Esma hopes to submit them soon to the European Commission. The regulator is also considering rules proposing a clearing obligation for some interest rate swaps denominated in certain other  currencies.

“We are thus confident that with the upcoming clearing obligation for interest rate swaps and credit default swaps, a significant reduction of systemic risk in Europe should be attainable, whilst facilitating further, and to the extent possible, consistency in the clearing mandates at an international level,” said Maijoor.

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