Update: Since the publication of this blog, IOSCO, the ESA the Federal Reserve and FCA have published various statements on the upcoming March 1st deadline for the exchange of variation margin - a sign taken by some as recognition of the operational (and documentation) overhaul required to meet this requirement and fact that some industry participants are struggling.
"While reaffirming its commitment to implementation of the margin requirements by 1 March 2017, the Board believes that relevant IOSCO members, to the extent permitted by their relevant legal and supervisory frameworks, also should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements. " See full statement
See other statements below:
The CFTC grants extension for March 1 variation margin deadline which is a relief to the buy side as concerns where mounting that the market was simply not ready
Although progress is being made, figures from the International Swaps and Derivatives Association (ISDA) show that only a fraction or 4.43% of the thousands of asset managers (CSAs) affected have completed the requisite legal paperwork to meet the fast approaching new variation margin regime.
Other associations have also reported their members are struggling with the early February deadline imposed to operationalise CSAs. For example, the Securities Industry and Financial Markets Association (SIFMA) and Investment Advisor Association (IAA), which share members, found that at least 2,800 agreements need to be completed to safeguard existing trading relationships. Of those roughly 1,800 are multi-client “umbrella” agreements that often are used to cover anywhere from 10 to 100 clients each. They range from U.S. registered funds to Ucits, public and private pension funds, hedge funds, private equity funds, and other institutional clients.
Given the sheer scale of the work involved, it is not surprising that many institutions, particularly those on the smaller end of the spectrum, are lagging behind with their preparations. The legal and operational challenges of amending, replacing or executing roughly 160,000 CSAs are a complex and time consuming task, according to ISDA.
The work also does not end once the changes have been made. Documents then needed to be loaded into reference data systems and activated for trading. Although several operational hands are on the pump, so far ISDA shows that just 12.29% of those CSAs have gone through the uploading process.
Trade groups have admitted that they underestimated the challenge which explains why they are going to bat for their members. In the past week, ISDA, SIFMA and IIA have joined forces with the Global Financial Markets Association, American Bankers Association, Association for Financial Markets in Europe and American Council of Life Insurers to entreat 22 banking and markets regulators worldwide to swiftly agree a six-month “transitional period” to the new rules that come into effect on March 1.
In their joint letter, the associations warn that a large swathe of market participants could be locked out of the market because so few of their counterparts are ready. Their main fears are that if regulators keep to a hard deadline, market fragmentation and disruption will ensue, significantly impacting an asset manager’s ability to hedge, manage investment risks, implement investment strategies, and achieve best execution on behalf of their clients.
While the trade groups are mulling over the different possibilities, one scenario being put on the table is having the requirements come into force as planned but market participants would be able to continue trading while they finish their documentation updates. This in fact would follow Australia lead where the Australian Prudential Regulation Authority recommended last December that the regulators could ask for trades conducted during that transition to be back loaded to the effective date, therefore keeping the pressure on the market to amend their documents.
Although Japan and Europe are forging ahead with the launch date, the pressure could mount as Australia, Hong Kong and Singapore have delayed implementation to 1 September while the US Commodity and Futures Exchange Commission (CFTC) has recently announced a six month reprieve for derivative users who are not ready. In a no action letter, the US watchdog said it” remains committed to the March 1 date, agreed with its fellow U.S. and overseas regulators, for posting of variation margin on swaps transactions between swaps dealers and their financial end-user customers. Nevertheless, the facts on the ground cannot be ignored that as much as 90 percent of those end-users are not ready to meet the new requirements.”
Although trading today occurs at record speeds, patience may be a virtue in this case.