Industry bodies unite in plea for VM grace period

Variation margin rules come into effect on 1 March and several industry associations have called for a ‘transitional period’ to ensure compliance.
By Paul Walsh
A group of influential associations are calling for regulatory patience through a six-month grace period for variation margin (VM) rules set to come into force on 1 March.

The trade bodies have highlighted a number of documentation and operational challenges which currently exists.

They added that even if substantial progress is made in the next few weeks, a substantive portion of trading relationships will be interrupted.

Under VM rules all counterparties – regardless of size or jurisdiction – trading non-cleared OTC derivatives of over $8 billion notionally will have to comply with new collateral requirements.

Concerns have been raised over a big bang effect due to the amount of counterparty relationships resulting from VM being exponentially more than initial margin (IM) rules.

The associations are requesting a transitional period for all jurisdictions affected by the 1 March VM effective date to continue executing derivatives transactions while they complete the necessary steps for compliance.

“The associations understand that as much as six months may be needed by many market participants to complete the legal and operational processes to comply with VM regulations,” the trade bodies said in their letter to global regulators.

One of the major issues leading up to the deadline is the repapering of collateral agreements.

“Daily operational processes are about to change forever,” said Lee McCormack, head of strategy and product development at CloudMargin, at a briefing last week.

“The first challenge is to repaper new agreements at present there are a lot of legacy agreements which are non-compliant,” said McCormack.

The International Securities Derivatives Association (ISDA), along with the Global FX division of the Global Financial Markets Association (GFMA), the Investment Association (IA), Financial Services Roundtable (FSR), the ABA Securities Association (ABASA) and the American Council of Life Insurers (ACLI) have all contributed to the letter.

McCormack also highlighted that the same day exchange of margin is another issue as the deadline approaches.

“There is going to be around a 500% increase in the number of margin calls and some collateral management processes will creak and eventually break,” said McCormack.

One source told Global Custodian that despite recent calls for an extension they believe regulators are not keen to amend the date.

Last month however Societe Generale’s head of OTC clearing for EMEA and APAC Jamie Gavin downplayed the impact of the rules as “most people swap VM on a daily basis anyway.”