IM delays, swaption problems and synthetic doubts

The week on, July 13–19, 2019

7 days montage 190719

Regulators plan to delay IM ‘big bang’ – market sources

Most see final phase of initial margin rules coming a year later, in September 2021

Swaptions face valuation hit on discounting switch

Move to new reference rates could hurt some swaptions holders, while others enjoy “windfall gain”

Synthetic securitisations and Europe’s capital sweetener

Regulator weighs high-quality label for synthetic deals, but without favourable capital treatment


COMMENTARY: Riding the wave of paper

This week on, we broke the news that the long-planned expansion of initial margin rules for non-cleared derivatives may not go ahead in September next year as intended. Instead, market participants say, regulators have decided to push it back a year – confirmation is expected any day now.

The problem isn’t new. A year ago, the industry was calling for a rethink, asking regulators to raise the threshold for compliance, cutting the number of firms affected by half. A staggered rise in the threshold for the fifth phase of the IM rules is said to be one of the options regulators are mulling.

In phase four, from September this year, the threshold for inclusion will drop to $750 billion in average aggregate notional, bringing in a few of the largest derivatives users among asset managers, who will join Brevan Howard, currently the only non-bank caught by the rules. But the fifth phase of expansion, the so-called ‘big bang’, would drop the threshold to just $8 billion, bringing in hundreds of smaller buy-side firms – 641, say some; many more, suspect others; ten times as many as the first four phases put together, reckons the UK FSA. Many are not remotely ready, market participants say.

So, would a delay – for all firms, by one year; or for some, by dropping the threshold to $50 billion in 2020 and then to $8 billion later on (essentially turning the 2020 big bang into two smaller bangs) – provide an easy solution? Unfortunately not. The initial margin rules aren’t the only thing on the agenda for 2021: there’s also the planned end of Libor as a benchmark rate, set for the end of the year, which also involves a huge payload of repapering (and revaluation, and a lot of yet-unanswered questions for European regulators). Many firms aren’t ready for that either – and there are fears that a delay or split implementation of the IM rules could, perversely, make things worse, by nourishing hopes the threshold may never be lowered to the $8 billion mark. This in turn would encourage misplaced optimism that the whole expensive and tiring problem will quietly go away. Regulators privately insist it will not.

No doubt some in the industry will blame regulators for trying to impose too many changes too quickly; no doubt some on the other side will blame the industry for dragging its heels.



Goldman Sachs put aside $66 million to cover legal costs in Q2, up 78% on the first quarter. Chief financial officer Stephen Scherr said the bank was adjusting its estimate of ‘reasonably possible losses’ to $2.5 billion from $2 billion. This is the bank’s estimate of its aggregate losses above accumulated reserves for legal costs.



“Presently, European insurers have little clarity on the possible timeframe for any essential changes to the Solvency II risk-free reference rates. We are concerned the absence of a timeline could act as an obstacle for insurers in their preparations for the transition through limiting the work they are able to do now to mitigate the risk in the future” – Tushar Mozaria, Barclays and Bank of England risk-free rates working group

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