US and European authorities eased enforcement of new derivatives rules on Thursday less than a week before the standards come into effect, allowing small financial institutions more time to prepare for the wide-ranging reforms.
In a series of statements hours apart, supervisory watchdogs bowed to growing concerns of a potential dislocation in the swaps market and hundreds of unprepared pension funds, asset managers and credit institutions likely to be locked out of making new trades.
The US Federal Reserve, Office of the Comptroller of the Currency, and Iosco, the umbrella group for global regulators, joined European supervisory authorities in issuing guidelines to monitor the new standards, which are due to come into effect on March 1. Watchdogs said they would focus on efforts at compliance from institutions who have the biggest and riskiest credit and market exposures.
The moves maintain a fragile coalition among global watchdogs over the planned worldwide implementation of broader derivatives reform measures. Dubbed the derivatives ‘big bang’, the new rules cover bespoke over-the-counter swaps that are used to hedge risk in derivatives portfolios.
These type of specialised transactions will cost more under the new rules as users will be required to provide greater amounts of margin to cover the risk associated with them. Margin is used to match fluctuations in asset prices and the reforms are part of an overhaul by Basel banking regulators of the $544tn global swaps market.
The rules require new legal documents and without them, could have prevented many institutions from opening new positions. According to the International Swaps and Derivatives Association just 15 per cent of the 159,000 legal contracts, known as credit support annexes, had been updated.
“I think that this is a sensible approach,” said Edmund Parker, global head of derivatives at the Mayer Brown law firm in London. “This means that the big counterparties are caught on March 1 with other large players, but smaller ones, who perhaps have had to wait at the back of the queue for new documentation, are not shut out of the market.”
The European Banking Authority, European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority indicated their displeasure at the late change.
“The timeline for implementation has been known in the EU since 2015, and it is unfortunate that the financial industry has not managed to prepare for the implementation,” they said in a joint statement. An extra nine-month delay was agreed “with the clear expectation that the financial industry would be ready”, they added.
Iosco urged its members to “consider taking appropriate measures available to them to ensure fair and orderly markets” during the introduction of the rules.
The late intervention follows a similar decision by the US Commodity Futures Trading Commission, which last week delayed enforcement in its jurisdiction to September 1. Some authorities in Asia, such as Singapore, are also allowing delays in implementation.
Thursday’s statements show “there is a broader consensus to implement the margin requirements in a flexible and workable way to market participants”, said Christopher Giancarlo, acting CFTC chairman.
For lower risk entities, the Fed guided that overseers should focus on “good faith efforts to comply” as soon as possible, and all should comply no later than September 1.
European watchdogs said their latitude was not a delay to the introduction of the March 1 rules.
The EU is hamstrung as a formal delay would require a legislative change, which would take months. Regulators in the region also do not have the power to make European-wide rulings akin to “no action” letters that the CFTC is able to issue.
Isda said it welcomed the authorities’ move. “As the supervisory authorities point out, many firms already post margin so taking a case-by-case approach wouldn’t lead to an increase in systemic risk,” said Scott O’Malia, Isda’s chief executive.