Talk of delaying IM ‘big bang’ sparks backlash

EC official's recent comments may hamper compliance preparations, dealers say

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A European Commission official has drawn a backlash by suggesting that the final phase of the uncleared margin rules could be deferred.

Patrick Pearson, head of the EC’s financial market infrastructure and derivatives unit, said at a Risk.net conference in London on May 14 that the rules posed “huge problems” and urged the industry to “keep banging the drum” for a delay.

Banks and clearing houses are balking at the idea. “We don’t want this,” says a margin manager at a European bank. “It’s just dragging out the pain.”

Many in-scope firms are already behind schedule in preparing for the so-called ‘IM big bang’ in September 2020, and talk of a delay will only add to industry inertia, he says.

One clearing house executive tells Risk.net he “despaired” at the thought of a delay, adding that the industry has had plenty of time to prepare for the incoming requirements, which were unveiled more than a decade ago as part of the Group of 20’s post-crisis reforms. 

The chances of a delay are slim. To be effective, any changes to the final phase would need be to be globally co-ordinated, which even Pearson admitted could be hard to do in a short space of time. 

“All regulators regardless of jurisdiction would need to agree to it,” says James Slater, global head of securities finance, segregation and liquidity at BNY Mellon.

If one jurisdiction were to act unilaterally, it could create additional complications. For instance, during the first phase of implementation in 2016, European regulators extended the original September 1 go-live date. While this benefitted firms that operated exclusively in Europe, those trading with US or Japanese counterparties still had to comply.

A delay would be a tricky one because it would require global harmonisation
James Slater, BNY Mellon

“The concept of one region changing the timeframe doesn’t necessarily ensure a change to the compliance deadline for entities in that region. A delay would be a tricky one because it would require global harmonisation,” says Slater.

The uncleared margin rules require derivatives users to exchange collateral when the outstanding notional of bilateral trades exceeds certain thresholds. The requirements already apply to trades between large dealers, and the first buy-side firm – Brevan Howard – fell into scope during the third phase of compliance in September 2018.

According to BNY Mellon, around 50 firms were caught in the first three waves of compliance, and another 42 will be added in September this year when phase four extends the rules to firms with material uncleared derivatives exposures of $750 billion or more.

Lobbying curtailed

The fifth and final phase in September 2020 will see the compliance threshold plummet to just $8 billion. This will bring an additional 641 firms into scope, according to BNY Mellon. The roster includes corporates, pension funds, insurers, hedge funds, asset managers and regional banks. In order to comply, entities must set up new credit support agreements and negotiate eligible collateral schedules with each trading counterparty. They must also open segregated custody accounts for posting collateral.

Banks have largely curtailed their lobbying efforts, led by the International Swaps and Derivatives Association, which sought to raise the final compliance threshold to $100 billion and remove physically settled foreign exchange derivatives from the exposure calculation. Forex derivatives including swaps and forwards count towards the compliance threshold but do not incur regulatory initial margin charges.

Those arguments fell on deaf ears. In March, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions ruled out a threshold change. The regulatory bodies did provide some mild relief, however: lifting the documentation requirements of the rule for firms that exchange less than $50 million of initial margin with an individual counterparty. Some dealers believe this could release 60% to 70% of phase five firms from the operational burden.

That change, which does not require rule changes, could avert a cliff-edge scenario. The initial margin requirements only apply to new trades, so even the largest phase five firms may not exceed the $50 million threshold for documentation on day one. 

The industry is now seeking clarification on the scope of the documentation relief, which still needs to be endorsed by national regulators. Firms will need to monitor their collateral exposures to prove they are exempt from the documentation requirement, which could prove difficult. 

“There’s still a large burden on the industry to monitor. If you don’t have a regulatory margin CSA in place, your broker would need a subset of the CSA data to perform your calculation. Without the data, monitoring the threshold becomes complex. As a result, the industry will need clarification on how to implement this,” says BNY Mellon’s Slater.

The buy side has not stopped banging drum for a delay just yet. The Managed Funds Association this month called for the final phase to be delayed by a year. In a May 10 letter to the Commodity Futures Trading Commission, Laura Harper Powell, associate general counsel at the buy-side lobby group, called for the compliance threshold to be raised to $100 billion in 2020, with an additional phase in 2021 for firms whose bilateral swaps notional crossed $8 billion.

“A more gradual and orderly staging would ensure that there is market infrastructure in place to support the final stages of initial margin phase-in,” Harper Powell said in the letter.

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