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COMMENTARY: Margining delays and CSAs
Preparations for the start of bilateral margining in the non-cleared swap market were thrown into disarray last week, when the European Commission told reporters the EU's leg of the regime would not take effect on September 1, as planned.
If the US goes ahead with its own rules – issued separately by the Commodity Futures Trading Commission and the country's prudential regulators – it would create a transatlantic lag of nine months or more, leaving US banks at a competitive disadvantage in the meantime, according to industry figures who testified to the House Committee on Agriculture this week.
News of the postponement broke on June 9 but, as of June 16, there was still no official announcement from the EC on how it planned to implement the framework, leaving the industry relying on the press.
Risk.net was able to shed some light on the matter, revealing that the EU's postponement would affect not just the initial batch of big dealers that were due to start posting and collecting initial margin from September, but also the tens of thousands of market participants that would have been subject to variation margining from March next year. It's understood both deadlines will take effect in May or June, 2017.
One of the big questions now is whether US regulators will reluctantly follow suit. CFTC chairman Timothy Massad has already said the agency plans to stick to its timetable. Prudential regulators have so far declined to comment.
The framework as a whole continues to be criticised by Asian bankers, who deplore the insistence on ‘impossible' next-day settlement standards.
But every cloud has a silver lining, and the arrival of the margining regime has served to revive plans for standardisation of the credit support annexes (CSAs) that govern collateral posting in the swaps market. CSAs already need to be reopened to make them compliant with the new rules, and dealers are hoping many of the existing contracts will be replaced with a less flexible document, helping to reduce the optionality and valuation disputes that currently plague the market. In parallel, swaps clearing house LCH is holding private talks with some dealers about a service that would achieve similar ends.
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"The real drag on lending is the legacy non-performing loans – that is the problem. Supervisors need to put pressure on the banks to deal decisively with this issue. At the same time, you need a policy-maker to eliminate the obstacles to this process which come from public policies themselves." EBA chair Andrea Enria
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