The implementation of variation margin requirements (VM) will not have as much of a severe impact on the industry as some think, according to Societe Generale.
VM rules are set to come into force globally on 1 March 2017, for non-cleared derivatives transactions.
Under VM rules all counterparties – regardless of size or jurisdiction – trading non-cleared OTC derivatives of over $8 billion notionally will have to comply.
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.
Speaking during a Societe Generale roundtable, Jamie Gavin, head of OTC clearing for EMEA and APAC at Societe Generale Prime Services, allayed fears of the VM impact.
“VM will probably not have as much impact as most people already swap VM on a daily basis anyway, and the next phase of IM in February we think will drive some more market economics,” said Gavin. “So what we saw in September was more a challenge to the established fixed income and prime brokerage businesses.
“Because the first stage of IM made the fixed income and prime brokerage trade more expensive there is a strong push to get those trades, especially the street leg, into clearing and we think that will continue to happen once IM and VM rules are fully live.”
IM rules came into force on 1 September 2016 for the US, Canada and Japan, with rules for the first phase of EU banks coming into force in 2017.
Bill Stenning, head of clearing, regulatory and strategic affairs at Societe Generale also spoke of the ultimate goal of IM requirements.
“The goal of regulation in this space was always, over time, to end up with non-cleared derivatives being more expensive than cleared and that’s what the IM rules have started to do,” said Stenning.
“These rules are being phased-in so we see a gradual further pickup of this.”