With new collateral requirements on derivatives set to be finalized by international regulators this year, many banks and broker-dealers are uncertain whether they will be able to meet these rules.
According to a recent survey from the International Swaps and Derivatives Association (ISDA), a Wall Street trade group, around two-thirds of respondents said they were concerned, or somewhat concerned, about their ability to meet the requirements.
From December 2015, international regulators are expected to phase in new rules requiring firms that trade derivatives outside of clearing houses, otherwise known as central counterparties (CCPs), to place margin, such as cash or other types of collateral, to guarantee their trades.
However, ISDA warns rules for posting initial and variation margin would mean firms will have to make significant changes to their systems, processes and documentation, and many may not be able to do this before the December deadline.
“The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms appear unsure whether the rules apply to them,” says Scott O’Malia, CEO, ISDA.
“Once the margin rules are finalized, it is vital that market participants have sufficient time to allow for the legal, operational and technological enhancements necessary to effectively and safely implement these new requirements.”
Instead, ISDA is calling for a two year delay in implementing the rules to allow the industry to make the necessary documentation changes to allow them to exchange collateral on a global basis.
O’Malia also stresses the need for consistency with the rules, something that Patrick Pearson, head of financial market infrastructure for the European Commission, warned at an industry conference last month.
“What do you do if another country has lower margin requirements? It’s not a friendly, idealistic society. People need to make money in this world and in this market CCPs do compete on margin,” Pearson said.
“So we need to watch that space, and make sure we are in a place that we apply the same rules without anti-competitive issues attached.”
ISDA Respondents Worry Over New Margin Rules
With new collateral requirements on derivatives set to be finalized by international regulators this year, many banks and broker-dealers are uncertain whether they will be able to meet these rules.