Non-cleared derivatives margin rules worry market

Banks and broker-dealers are uncertain whether they will be able to meet new collateral requirements for non-cleared derivatives, according to a survey from the International Swaps and Derivatives Association.

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Banks and broker-dealers are uncertain whether they will be able to meet new collateral requirements for non-cleared derivatives, according to a survey from the International Swaps and Derivatives Association (ISDA).

International regulators are set to finalise the rules this year, and according to ISDA’s results, around two-thirds of respondents said they were concerned, or somewhat concerned, about their ability to meet the requirements. 

From December 2015, international regulators are expected to phase in new rules requiring firms that trade derivatives outside of clearing houses, to place margin, such as cash or other types of collateral, to guarantee their trades. 

The changes are set to hit the largest derivatives from December 2015, with other buy-side firms subject to new margin rules from then until December 2019, depending on usage of the products.

ISDA has warned though, that rules for posting initial and variation margin would mean firms will have to make significant changes to their systems, processes and documentation, and many may not be able to do this before the December deadline.

“The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms appear unsure whether the rules apply to them,” says Scott O’Malia, CEO, ISDA. 

“Once the margin rules are finalised, it is vital that market participants have sufficient time to allow for the legal, operational and technological enhancements necessary to effectively and safely implement these new requirements.” 

Instead, ISDA is calling for a two-year delay in implementing the rules to allow the industry to make the necessary documentation changes to allow them to exchange collateral on a global basis. 

The survey also highlighted the importance of derivatives in respondent’s risk management strategy. According to the results, 81% believe derivatives are important or very important to their firm’s strategy, while 78% expect their use of derivatives to increase or stay the same over the first three months of 2015.

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