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April 5, 2017

Counting Down to the ‘New’ VM Deadline | Regulation Asia

1st of September highly likely to be the final cut-off for meeting OTC derivatives margin requirements. Samuel Riding, Editor, Regulation Asia

1st of September highly likely to be the final cut-off for meeting OTC derivatives margin requirements.

Samuel Riding, Editor, Regulation Asia

This article first appeared here and is reproduced with permission.

International standards for VM (variation margin) and IM (initial margin) have been a source of consternation, and no little confusion, for final institutions and non-financial participants in OTC (over-the-counter) derivatives markets ever since they were first ‘finalised’ by the Basel Committee on Banking Supervision and IOSCO (the International Organization of Securities Commissions) in 2013.

Individual jurisdictions were slow in coming up with their own variations on the guidelines. In Asia, MAS (the Monetary Authority of Singapore) only released its guidelines on VM on 6 December last year, and HKMA (the Hong Kong Monetary Authority) only publicised its ‘near final’ regulations pertaining to the issue at around the same time. Both provided for a six-month “transition period” from the original 1 March deadline for VM.

Then, as the 1 March deadline for VM neared, the US CFTC (Commodities and Futures Trading Commission) issued a ‘no action’ letter in which it offered market participants “a grace period to come into compliance”, and Japan’s market regulator told banks they could also waive VM requirements in transactions with jurisdictions that have not yet introduced margin rules.

Effectively, the deadline for VM has been pushed to 1 September, and will now clash with the introduction of IM requirements for a wider group of counterparties (following its coming into effect for the largest global entities in September last year).

How it came to this

For one panellist at Regulation Asia’s 2nd Annual OTC Derivatives Summit 2017 in Singapore, this “scattered approach” by regulators not just in Asia, but around the world – in part due to a lack of cross-jurisdictional communication – has created “a dangerous cocktail of circumstances”.

This state of affairs has left institutions operating under a “very opaque, gentlemen's agreement where the banks can be seen to be doing the right thing and they get a green card,” yet “at some point, the noose will be tightened,” added Greg Ballesty, senior risk management SME at SmartStream.

But the fact that only about 10 percent of the market is now “ready to trade” is not only down to regulators, another panellist pointed out. Institutions were also slow to react to the upcoming requirements, particularly with regard to repapering their legal agreements including CSAs (credit support annexes).

“We started having discussions [about repapering legal agreements] in January/February 2015, and nobody wanted to have that discussion.” he pointed out, adding that
those same clients only began giving the issue serious consideration at the start of 2017, in part due to what he described as “regulatory fatigue”.

Where we go from here

The noose is very likely to begin tightening on 1 September, and institutions should not bet on any further extension to that deadline, even if they won’t be able to meet it, according to Jonathan Quie, Singapore-based counsel at law firm Simmons & Simmons.

One ‘best efforts’ strategy for financial institutions has been to prioritise only the biggest four or five clients or counterparties, he added, which at some institutions represent 80 percent of business.

For others, Ballesty noted, counterparties are likely to be grouped into those firms’ front offices believe are most important from a business perspective, and it will then come down to how responsive a counterparty is. 

For clients that fall outside these parameters, Steven Griffiths, director of Absolute Derivatives, raised the issue of how many times an institution should grant its own forbearance before insisting on VM arrangements being in place. “It will depend on internal compliance and risk appetite, and the importance of clients,” a fellow panellist replied. “As long as you can prove, I think, that you're in discussions and the plan is robust and complete, you're in good shape.”

Indeed, for institutions who are making their “best efforts” to comply, it will eventually prove a competitive advantage, Ballesty concluded.
“Business will become concentrated among a panel of brokers who have put in the hard yards [in complying with the regulation], and will see the reward with greater execution.”


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