Variation Margin Gets a Breather


Users of uncleared swaps dodged a regulatory bullet regarding posting variation margins, as the U.S. Commodities Futures Trading Commission has granted a six-month reprieve from the March 1 deadline.

The CFTC’s Division of Swap Dealer and Intermediary Oversight has issued a time-limited no-action letter that does not recommend enforcement actions against swap dealers that fail to comply with the variation margin requirements that go into effect on March 1 until September 1.

According to the DSIO’s no-action letter, the letter affects those swap dealers that have not yet finished their credit support documentation with their counterparties, continue to make a best effort to comply with the original deadline, and continue to collect variation margins if they already have such an agreement already in place.

Although the regulator is committed to the initial March 1 deadline, Acting CFTC Chairman Christopher Giancarlo sees the no-action letter foaming the runway “to ensure a safe landing.”

Christopher Giancarlo, CFTC

“Nevertheless, the facts on the ground cannot be ignored that as much as ninety percent of those end-users are not ready to meet the new requirements despite their best efforts to do so,” he added.

The CFTC’s six-month grace period mirrors the actions taken by the market regulators of Australia, Hong Kong, and Singapore, which each announced in December 2016.

Giancarlo telegraphed the extension just before being named Acting CFTC Chairman in late January.

“These phased-in approaches seek to avoid market disruption come March 1st,” he said speaking before the Sefcon VII conference on January 19. “I believe these approaches are well-considered. As Acting Chairman, I also intend to look at solutions to ease the March 1st transition in a responsible manner.”

The International Swaps and Derivatives Association has welcomed the extension, which will provide additional time to update an estimated 160,000 credit support annex agreements, according to the industry body.

“Despite a determined industry effort, CSA negotiations have proved to be hugely complex and tie consuming,” said ISDA CEO and former CFTC Commissioner Scott O’Malia in a posting on the organization’s website. “Last week, we disclosed our latest industry survey data, which showed only 4.43% of CSAs had been amended.”

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