The International Swaps and Derivatives Association (ISDA) has called on global regulators to push back the date for the implementation of margin rules relating to uncleared OTC derivatives.
In a letter to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), the derivatives trade body has warned that market participants will not be able to meet the current implementation date of December 2015. ISDA also requested that the introduction of variation margin (VM) rules be phased in over time.
The request comes in response to the BCBS and IOSCO final policy framework released last September. Intended to guide national regulators in implementing G-20-inspired requirements to collateralise uncleared OTC derivative trades, the framework proposes initial and variation margin at levels intended to incentivise use of centrally cleared derivatives while imposing strict conditions on the re-hypothecation of initial margin collateral.
Anticipating rules from US regulators based on the BCBS-IOSCO framework and similar to those already proposed by European and Japanese regulators in recent months, ISDA has written to the global regulatory bodies to convey a sense of uncertainty felt throughout the market regarding the implementation process.
Highlighting a number of implementation issues facing market participants attempting to comply with the oncoming regulatory demands, ISDA has proposed a two-year implementation period to allow market participants to respond to perceived likely delays finalising rules.
“The proposed effective date of December 2015 is simply too early,” ISDA’s chairman, Stephen O’Connor, wrote. “Implementation efforts will continue to be constrained until the rules have been finalised, which does not appear likely to occur until early to mid-2015. We request a period of two years after the rules are clarified and finalized in all of Europe, Japan and the US.”
O’Connor’s letter emphasises in particular the potential risk that the “FX Haircut” and concentration limits included in the European Supervisory Authorities’ (ESAs) proposals would impose upon market participants. The scope of the ESAs’ proposals is said to render them too problematic for market participants to effectively commence pursuing their proper implementation.
ISDA’s request for a VM phase-in is out of concern for a potential ‘big bang’ approach to implementation. Such an approach, it argues, would require all market participants to be fully compliant on a single date, which ISDA considers “unnecessary and potentially systemically dangerous”.
It is further argued that such an approach has the potential to force smaller market participants out of the market, and as such necessitates the establishment of a mechanism to ensure non-systemic market participants are able to remain competitive.
ISDA’s statement additionally requests that regulators avoid an implementation date that might coincide with “code freeze” or year-end book-closing periods.