REGULATION

US agencies provide respite with variation margin changes

Derivatives trading bodies are pushing for US agencies to ease rules on how client cash margin held by banks is calculated as part of their capital exposures.

By Joe Parsons joe.parsons@strategic-i.com August 15, 2017 10:55 AM GMT

A group of US regulatory agencies have made changes to how variation margin is treated for certain, centrally cleared derivatives, providing significant capital relief for banks.

Under a new guidance issued by the Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), variation margin will be considered as a settlement payment for exposures to certain derivatives contracts, as opposed to being treated as collateral.

The guidance follows from a number of amendments to the rulebooks of clearing houses for certain contracts being categorised as settled-to-market (STM).

Major clearing houses, including CME, have obtained legal opinions to support STM treatment of cleared derivatives.

The result of these changes has proved beneficial to Barclays, which saw a £87 billion decrease in the size of its derivatives assets in the second quarter year-on-year, “primarily due to interest rate derivatives reflecting the adoption of a CME rulebook change to daily settlement.”

Barclays also stated the drop in derivatives assets to £260 billion was also due to its continued run-down of its non-core derivatives back book. Jess Stanley, CEO of Barclays, said on the UK bank’s quarterly earnings call that it had “exited hundreds of thousands of derivatives trades.”

Derivatives trading bodies, including the Futures Industry Association (FIA), are pushing for US agencies to ease rules on how client cash margin held by banks is calculated as part of their capital exposures.

Last week in a letter to the US Treasury, the FIA urged US prudential regulators to amend rules so that cleared variation margin can be treated as the settlement of an exposure, rather than collateral.

The FIA noted that the changes could result in capital calculations for banks may be reduced by 1% of notional for interest rate swaps with greater than five years to maturity if the variation margin of the trades settles and reset daily.