Former CFTC Commissioner calms fragmentation worries

The European Commission has adopted the initial margin rules, which is set to come into force in January 2017.
By Joe Parsons
The widely predicted fragmentation in the uncleared swaps market has not emerged, according to the former commissioner for the US derivatives watchdog, as Europe prepares to implement new collateral rules.

Speaking to The Trade on the sidelines of Sibos 2016 in Geneva, head of global public policy at DTCC and former commissioner at the CFTC Mark Wetjen, said the expected cross-border fragmentation and regulatory arbitrage in OTC derivatives trading, caused by a fracture implementation timeline, has not materialised.

“We have had a few discussions this week with market participants who also confirmed they haven’t yet been affected by this liquidity fragmentation,” says Wetjen.

“Margin rules in other jurisdictions, particularly in Europe, will be implemented in a relatively short amount of time, so by complying with the existing rules in the US firms can ensure they are ready to meet these same requirements when they go live in other jurisdictions a couple of months later.”

The European Commission came under fire when it decided to put on hold implementing the initial margin rules for uncleared swaps, despite regulators in the US, Canada and Japan going live with the rules in September.

On Tuesday the European Commission (EC) adopted the long-awaited initial margin rules for non-cleared OTC derivatives, and is targeting an implementation date of January 2017.

The EC endorsed the rules but decided to remove the concentration limits for pension funds, freeing up pension funds from the obligation to hold a collateral pool across different sovereign debt issuers.

The first wave of implementation will cover swap dealers and banks that hold uncleared swaps exposures of over € 2.25 trillion.