Margin 'big bang' to catch tenfold more UK firms, FCA estimates

Risk Quantum analysis suggests around 50 firms will be captured by margin rules in total

The final phase of the initial margin requirements for non-cleared trades in 2020 will capture 5.9% of UK financial firms – an almost tenfold increase from 0.6% currently – analysis by the Financial Conduct Authority (FCA) shows. 

A back-of-the-envelope calculation by Risk Quantum suggests that roughly 50 firms in total will then be subject to the rules. 

Under post-crisis reforms, institutions have to post collateral against their bilateral trades, with the mandate being phased in over time. In Europe, the first cohort of firms – those with non-cleared derivative notionals of €3 trillion or more – were brought under the rules on February 4, 2017. The threshold is ratcheted lower every year until all firms with over €8 billion in notionals are under the rules on September 1, 2020 – the so-called 'big bang'.  

The FCA estimates the first threshold captured 0.5% of UK firms – a total of four, according to reporting. As the line moved to €2.25 trillion in September 2017, the proportion of firms grew ever so slightly to 0.6%, where the FCA expects it to remain straight through September 2020, when the threshold hits €8 billion, and 5.9% of the firms it regulates are under the rules. 

The FCA study found that the percentage of non-cleared derivatives activity subject to the rules is already at 90.7%, where it will still be hovering in 2019. By 2020, the percentage of bilateral trades captured will shoot up to 98.8%.

The slight change in the proportion of firms makes it clear that those doing most of the trading have already been corralled by the rules.  

What is it?

The FCA research is based on a sample of UK financial reporting counterparties’ outstanding over-the-counter derivative trades on April 10, 2018, with the data gathered under the European Market Infrastructure Regulation and other reporting regimes. The FCA did not disclose the size of this sample or the number of counterparties featured.

Why it matters

The 2020 initial margin 'big bang' is a source of dread for market participants. Even the mammoth institutions captured by the first and second phase-in struggled with the documentation and operational challenges involved in switching to a collateralised regime for non-cleared trades. A recent survey by the International Swaps and Derivatives Association showed that a majority of swaps participants believe the market is unready for the remaining phases. 

Those brought in-scope in the final phase will generally be smaller, less sophisticated institutions that may not trade derivatives as frequently – but will still be expected to comply with all the requirements that stymied their much larger peers. Difficulties getting to grips with the rules could cause trade backlogs, or even shut counterparties out of the market. The sheer number of swaps participants that will be caught in the 2020 dragnet will only compound these issues.

Small wonder, then, that market participants are asking regulators to raise the final threshold to at least €50 billion from $8 billion to reduce the workload and minimise disruption.    

Get in touch

How do our estimates stack up? Are we on the money, or are more UK firms likely to be captured? Let us know by emailing or tweeting @LouieWoodall or @RiskQuantum.

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