After several delays, early deadlines for BCBS/IOSCO’s non-cleared margin requirements have now passed, but there is still a lot of work to be done as the industry prepares for the next phases.
Variation margin (VM) and initial margin (IM) exchange is now a reality for Phase 1 broker dealers. After a somewhat chaotic rollout in September 2016 and February 2017, smaller dealers and buy-side firms should learn from the experiences of the Phase 1 dealers—namely, don’t underestimate how long it will take to get all the necessary documentation in order.
Updating or amending regulatory Credit Support Annexes (CSAs) to comply with VM requirements was a relatively easy task for the Phase 1 dealers, compared with the more complex challenges around IM and custodian documentation, according to Shaun Murray, managing director, head of strategic collateral management at Standard Chartered Bank who spoke in a recent DerivSource webinar, Non-Cleared Margin Requirements—Preparing for What’s Next.
“Negotiating documents with custodians to ring-fence IM were far more challenging than people expected. The IM document was only ready to go six weeks before go live, so everything was crammed into that end of summer break” Murray said. Differing onboarding processes at the various custodians added to the challenges dealers faced to get ready in time, he adds.
“Negotiating documents with custodians to ring-fence IM were far more challenging than people expected. The IM document was only ready to go six weeks before go live, so everything was crammed into that end of summer break,” Murray said.
A poll of live webinar attendees confirmed that the biggest challenge for firms in preparing for non-cleared margin requirements has been getting the required documentation in order, with more than half (56%) of the poll participants saying that this had been their biggest challenge so far. Making changes to operations to support the scale required was the biggest challenge for 32% of poll respondents, while 23% of poll participants cited a lack of internal resources or budget as their greatest challenge, and 11% said that preparing to post more collateral and more frequently was their biggest pain point.
EU, US diverge on March 1 VM deadline enforcement
VM requirements for all other financial and non-financial counterparties were phased in on March 1 this year and again there was a rush to the finish, with many firms starting their preparations too late. In a poll of live webinar attendees, 16% of poll respondents said their firms were not ready in time for the March 1 deadline, compared with 49% that were ready. The remaining 35% were not affected by this particular deadline.
As the March 1 deadline neared, it became clear that many counterparties would not have the relevant documentation in place in time. Industry bodies requested a further delay—the original implementation deadline was December 2015—but received differing responses from global regulators. Despite industry concerns over a lack of preparedness among smaller financial firms, the European Securities and Markets Authority (ESMA) announced that VM requirements would go into effect on March 1 2017 as planned for Phase 2 EU entities.
EU regulators expect all firms to have the relevant CSA documentation in place and all trades post March 1, 2017 to be properly collateralised. ESMA announced that enforcement would be based on the size of exposure and on a case-by-case basis. Some firms are looking to see if they can continue trading under their old CSAs, while they continue negotiations on a new one, says Florian Gaisendrees, manager, capital markets practice at risk and financial consultancy d-fine. “If there is no CSA in place, then trading past March 1 2017 is not a good idea,” he said.
Taking a different approach, the U.S. Federal Reserve eased requirements somewhat, saying “Priority should be given to compliance efforts by covered swap entities based on the size of and risk inherent in the credit and market risk exposures presented by each counterparty,” and “With respect to other counterparties, Federal Reserve examiners should focus on a covered swap entity’s good faith efforts to comply with the variation margin requirements of the final rule as soon as possible, and in no case later than September 1, 2017.”
And on February 13, 2017, the Commodities and Futures Trading Commission (CFTC) released a “Time-limited No-action letter”, requiring counterparties under its jurisdiction to meet all VM requirements by September 1, 2017. While the deadline technically remains March 1, no enforcement action will be taken before the new September deadline.
So where do we stand in terms of margin and other upcoming deadlines?
|September 1, 2016||VM deadline for Phase 1 dealers in the EU, US, Japan, Canada, Switzerland, Singapore|
|December 15, 2016||Phase 1 FINRA Rule 4210 went into effect establishing margin requirements for covered agency transactions in the US|
|February 4, 2017||Phase 1 IM deadline for CPs with more than EUR 3 trillion aggregate average notional of non-centrally cleared derivatives.|
|March 1, 2017||“The Margin Big Bang”
Phase 2 VM deadline for all remaining financial counterparties, or non-financial counterparties trading non-cleared derivatives in the EU, US, Japan, Canada, Switzerland and Singapore.
|(Soft VM deadline for Phase 2 counterparties under the Federal Reserve, CFTC.)|
|September 1, 2017||VM enforcement deadline for Phase 2 firms under CFTC, Federal Reserve.
Phase 2 IM deadline for CPs with more than EUR 2.25 trillion aggregate month-end notional amount of non-cleared derivatives in March, April and May 2017.
|November 1, 2017||Revised technical standards on EMIR reporting become applicable. (The updated EMIR Q&A promotes common supervisory approaches and practices in the application of EMIR.)|
|December 1, 2017||Phase 2 FINRA Rule 4210 goes into effect.|
|January 3, 2018||MiFID II implementation deadline.|
|September 1, 2018||Phase 3 IM deadline for CPs with more than EUR 1.5 trillion aggregate month-end notional amount of non-cleared derivatives in March, April and May 2018.|
|September 1, 2019||Phase 4 IM deadline for CPs with more than EUR 0.75 trillion aggregate month-end notional amount of non-cleared derivatives in March, April and May 2019.|
|September 1, 2020||Phase 5 IM rules apply to all in-scope entities with more than EUR 8 billion aggregate month-end notional amount of non-cleared derivatives in March, April and May 2020.|
Sources for timeline: