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Regulatory Watch

Synching Swap Margin Rules

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June 17, 2016

Congress weighs whether to follow Europe’s lead on delaying derivative margin requirements.

Fri Reg and Accting - Law BooksCoincidentally scheduled just a few days after European policy makers’ decision to delay derivative margin requirements, Congress held a hearing to discuss whether that change should delay margin rules in the US, too. It also debated those rules’ impact on swap-market participants.

Europe’s delay applies specifically to non-cleared swaps, which represent about a quarter of the overall swap market. The European Union’s executive arm announced June 9 that it would be unable to complete the margin rules by the September 1, 2016 deadline set out by the G-20, and instead it plans to deliver the standard by year-end and require compliance by the middle of 2017.

The announcement came as a surprise to US regulators, who, along with regulators in Asia, have required large banks to begin complying with the new margin requirements for uncleared swaps by the September 1, 2016 deadline with the rest of the market complying by March of 2017.

“Aligning the start dates globally for margin requirements was the product of a pretty extraordinary coordination effort, so this is a pretty significant departure,” said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial. He added that the question of whether the US should delay its margin rules was met by a “resounding chorus from the panelists that the US should endeavor to keep those dates in lockstep with the Europeans, lest there be competitive imbalances.”

Mr. Zubrod was one of those panelists, which included representative from the CME Group, J.P. Morgan Chase, the Wholesale Markets Brokers’ Association, and the Managed Funds Association. The hearing follows earlier information-gathering sessions by the subcommittee to review the impact of derivative reform. The impact of capital and margin requirements was discussed in late April and the progress of swap data reporting goals was discussed February 25, 2016.

One issue that has yet to be reconciled is the cost of clearing for smaller market participants. Mr. Zubrod, whose testimony focused on this issue, said that now that the cost of clearing is better understood, it is clear that it’s prohibitive for smaller financial end-users like real estate and infrastructure funds, micro-finance funds and financial corporates, including payment processors and some leasing companies. US regulators, he said, provided a much narrower accommodation – one tailored to apply only to small banks – than those in other jurisdictions.

“This isn’t the largest issue facing clearing generally, but it’s the biggest one for end-users,” Mr. Zubrod said.

A bigger concern discussed at the hearing is stability of clearinghouses, in which the new swap market infrastructure has concentrated a lot of risk. Authorities internationally have been discussing how to make sure clearinghouses are not contributing to systemic risk and are insulated from major market events. One possibility being discussed is instituting globally harmonized stress testing of clearinghouses, to make sure they’re resilient, and if one fails its critical functions remain continuously available.

“It is therefore critical that policymakers and market participants ensure the risk management frameworks in place at CCPs are sufficiently robust to reflect this enhanced role, particularly as central clearing is no longer optional for many market participants seeking to manage risk,” said Marnie Rosenberg, global head of Clearinghouse Risk and Strategy at J.P. Morgan, at the hearing.

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