# Non-cleared IM, Priips and the plummeting pound

## The week on Risk.net, October 7–14, 2016

MARGIN rules may hit EU banks during December

PRIIPS delay unlikely even as pressure mounts

STERLING flash crash causes confusion over market's low.

COMMENTARY: At the margin

It was all about margin this week, with worrying deadlines looming for dealers and alternative investment funds (AIFs).

The European Union's move to fast-track the implementation of non-cleared margin rules could see dealers forced to begin posting initial margin by mid-December – risky during the annual 'code freeze', when banks roll out IT programs and systems for the new year. A 'go live' date between December 15 and January 15 could hinder banks' ability to deliver IT patches and, coupled with limited personnel presence, might mean the set-up of new custodial accounts over that period could prove tricky.

The timeframe was shaken up on October 11, after Roberto Gaultieri, chair of the Econ committee, announced the European Parliament would state its non-objection during the second of this month's two plenary sessions, which will take place between October 24 and 27 – rather than during a plenary session running from November 21 to 24, which would have seen the rules implemented in mid-January 2017 at the earliest.

In addition, in Europe, many alternative investment funds (AIFs) are unprepared for a March 2017 deadline requiring firms classified as financial counterparties to begin exchanging variation margin for new non-cleared swaps trades. Although many funds already exchange variation margin with dealers, the new rules are much stricter than current bilateral practices. Pension funds are also caught, and are generally less accustomed to daily margin posting.

There is a way for some AIFs to swerve the margin requirement. Private equity and real estate AIFs that use a special-purpose vehicle to "purchase, hold or administrate undertakings" are not classified as a financial counterparty, which means they're not subject to the margining requirements, but lawyers warn this could bring them into conflict with a February 2014 European Market Infrastructure Regulation regulatory technical standard.

In Asia, market participants have been told they must learn lessons from the implementation of non-cleared derivatives margin rules in Canada, Japan and the US on September 1, to avoid a disorderly last-minute dash for compliance. Derivatives experts made the warning at the Asia Risk Congress in Singapore on October 6. Asian jurisdictions have not yet finalised their own rules, but compulsory variation margin posting for all entities covered by the requirements is scheduled to begin globally in March 2017.

Meanwhile, international regulatory standard-setting bodies are creating "solutions in search of a problem", a senior US supervisor has claimed. The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (Iosco) have proposed clearing houses introduce prescriptive new quantitative metrics to detect possible pro-cyclical effects embedded within their initial margin models.

Speaking at a Commodity Futures Trading Commission (CFTC) roundtable discussion in Washington, DC, John Lawton, deputy director of the agency's division of clearing and risk, took issue with the guidance on the resilience and recovery of central counterparties, released on August 16. CFTC staff have looked at data for a period of more than six years in four large contracts in different asset classes, and found the largest variation margin demands ranged from five times to 16 times as large as the largest initial margin increases. Lawton says CPMI-Iosco should instead focus its attention on the pro-cyclical potential of whipsawing variation margin requirements in the midst of market dislocations.

STAT OF THE WEEK

Average daily volumes for non-mandated interest rate swaps cleared at CME and LCH have jumped 82% from $77 billion last year to$140 billion this September, data from CME Group shows. Non-mandated clearing now represents 10% of total interest rate swap clearing volumes, compared to around 6% in 2014 and 2015.

QUOTE OF THE WEEK

"It was absolutely carnage. There are very few proprietary trading desks and market-making institutions around now, so the platforms have a field day as they're driven by algorithmic systematic trading" – chief executive of a Geneva-based hedge fund, on sterling's flash crash

ALSO THIS WEEK

Enterprise risk management powers up at utilities
Revived focus on ERM, but expectations now more realistic on what it can achieve

Supervisors must police activities, not entities – Allianz's Buecheler
Regulatory chief welcomes debate moving beyond 'too-big-to-fail'

Interview: US Treasury CRO on credit risk, Tarp and cyber threats
Ken Phelan stresses importance of credit risk management in key Treasury role

Treating sovereign bonds as risk-free 'courageous' – Parente
UFR update needed for credibility; too early to change risk margin, Eiopa director tells conference

Why re-correlation matters in alternative premia investing
Understanding key risk can be difference between success and failure

Taking aim at efficient market theory
Winton founder David Harding slams 'weak' theoretical basis for alternative beta

#### 7 days in 60 seconds

###### CCPs, handling default, and cyber risk

The week on Risk.net, September 15–21, 2018