Variation margin, CCP investment problems and Russian courts

The week on, August 18–24 2017

VM CAPITAL SAVINGS get the nod from US

CCPS hit problems with EU investment rules

COURT DOUBTS “hamper netting in Russia”


COMMENTARY: Variation margin

A little good news for banks as the US deadline for variation margin approaches. By September 1, non-cleared swap trades in the US will either have to be covered by a new collateral agreement with the counterparty – known as a credit support annex (CSA) – or will have to be updated to comply with the new rules (a process known as repapering).

The original deadline was March 1, but, a week out, regulators bowed to the inevitable and granted a six-month extension, as only an estimated 15% of transactions had been brought into compliance. The industry has put the respite to good use – almost 90% of trades are now compliant, according to the International Swaps & Derivatives Association. But that remaining 10% is causing concern, with banks holding back from initiating new trades with counterparties that have not yet signed CSAs – and preparing to negotiate unwinds of any trades still non-compliant by this time next week.

Meanwhile, US banks could also be looking at significant capital savings now their regulators have approved the treatment of variation margin as settlement rather than collateral. The same change allowed Barclays, Credit Suisse and UBS to cut the sizes of their derivatives assets – and US banks could follow suit.

Variation margin has been causing late nights and lost sleep for some time now, so banks can be forgiven for feeling a sense of triumph – but they shouldn’t forget compliance with the rules is a tool, not an end in itself. The true test will come when the rules are in force and counterparties start coming under pressure – if variation margin works as designed, all the effort will be worthwhile.



Op risk risk-weighted assets for Credit Suisse’s Strategic Resolution Unit, which holds the group’s non-core assets and business lines, stood at Sfr19.7 billion ($20.5 billion) at the end of the second quarter, which represents nearly a third of the bank’s total op risk RWAs of Sfr66 billion.



“If you are in the business of using a bank’s balance sheet to execute your exotic trades, your days are numbered. However, if you are in the business of reducing risk from bank balance sheets, the future is bright” – Dennis Davitt, Harvest Volatility Management

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