Swaps Trading Deadline Approaches

Terry Flanagan

Regulatory complexities for pension plan asset managers will take on new urgency on September 9, 2013, when new swap-trading requirements take effect.

“Derivative reforms are well underway and significantly expanded mandatory clearing, collateral and reporting standards come into force on September 9 for pension plan asset managers,” said Kurt Woetzel, chief executive officer, BNY Mellon’s Global Collateral Services business. “Asset managers need to assess the implications of new reporting requirements, prepare for clearing specified interest-rate swaps and credit-default swaps, understand new modes of trade execution, and review their preparations with trading, clearing and custody partners.”

Kurt Woetzel, BNY Mellon

Kurt Woetzel, BNY Mellon

According to a report jointly issued by BNY Mellon and Davis Polk, asset managers must prepare for clearing and other regulatory requirements include classifying financial instruments traded. New Dodd-Frank derivatives regulatory requirements apply only to “swaps,” “security-based swaps” and “mixed swaps.”

Pension funds must determine the extent to which the regulations apply to the entity whose assets they trade as well as to the counterparties with whom they trade, and consider the implications of reporting requirements as well as the public transparency of swap transaction data.

For U.S. pension plans and separately managed accounts, mandatory swap clearing for certain interest-rate swaps and credit default swaps is required by September 9. As the markets respond to OTC swap market regulatory reforms in the United States, Europe and Asia, asset managers and other market participants must take stock of how the developments affect them and assess their readiness for the new regimes.

The CFTC work plan for derivatives is largely complete, with the finalization of the cross-border guidance and the publication earlier in the summer of SEF rules and related rulemaking. “We will continue to work through the implementation challenges our members face, including the third wave of mandatory clearing in early September, but the drumbeat of deadlines is fading on the U.S. front,” said Robert Pickel of the International Swaps and Derivatives Association, in a blog posting.

Europe is considering its approach to mandatory clearing and Isda’s various product steering committees are reviewing a discussion paper by the European Securities and Markets Authority.

The European approach to the G20 commitment on execution will be hashed out over the course of the fall through the consideration of the Markets in Financial Instruments Regulation in the trialogue process.

“We will be actively engaging with policy makers to identify areas with particular market sensitivity,” said Pickel. “Globally, we are expecting approval by the G20 of the proposals on margin for uncleared derivatives.”

Isda has significant concerns with the proposed initial margin requirements. “It seems clear that initial margin in some form and quantum will be required, so we are also working on the development of a standard initial margin model to facilitate the introduction of any initial margin that might be required,” said Pickel. “Whatever the G20 decides will need to be implemented at national levels, so this issue is going to be on the front burner for months to come.”

Dodd-Frank Act requires market participants to clear standardized interest-rate and credit-default swaps through clearinghouses. Clearinghouses require initial margin (independent amounts) and variation margin (mark-to-market amounts).

According to BNY Mellon and Davis Polk, pension plan asset managers must confirm that a pension plan has adhered to Isda protocols, prepare for mandatory exchange trading of mandatory cleared swaps, and review preparations with trading, clearing and custody partners and advisors in advance of the September 9 deadline.

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