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US delays enforcement of new derivatives rules

US markets regulators have delayed enforcement of new derivatives rules due to come into effect in two weeks’ time because few of the hundreds of pension funds, insurers and asset managers affected would be ready in time.

There were fears that the widespread lack of readiness to comply could have caused market disruption if they were enforced as planned on March 1. The rules require some derivatives contracts to include the provision of collateral to cover daily price fluctuations.

The new rules, covering such “variation margin” requirements, are part of the Dodd-Frank Act, which has drawn scrutiny in recent weeks as President Donald Trump homes in on relaxing financial regulation introduced in response to the 2008 financial crisis.

Late on Monday, the Commodity Futures Trading Commission issued a “no-action” letter, meaning it will not seek to punish derivatives users that breach new rules that cover the contracts, which are typically bespoke agreements between counterparties that are traded bilaterally between banks and their customers. 

From March 1, global rules mandate that those entering into contracts would need to supply variation margin collateral. But the CFTC’s decision means it will not enforce them until September 1. 

The US’s decision puts fresh onus on Japan and Europe, which intend to go ahead as planned with enforcing the rules on March 1, to follow with a similar delay. The three regions account for the bulk of the world’s swaps trading. The EU will not formally delay the introduction of the rules as it would take several months to finalise the necessary legislation.

“The facts on the ground cannot be ignored that as much as 90 per cent of those end users are not ready to meet the new requirements despite their best efforts to do so,” said Christopher Giancarlo, acting chairman of the CFTC.

The action did not change the March 1 implementation date, he added. “It just foams the runway to ensure a safe landing,” he said.

While the CFTC is the main regulator for the US derivatives industry, it is not the only agency with oversight, leading to calls for a similar response from its peers.

“We hope that other agencies and jurisdictions can take similar action so that there are co-ordinated, clear rules of the road,” said David Hirschmann, president and chief executive of the US Chamber of Commerce Center for Capital Markets Competitiveness. “A failure to provide similar relief will only increase risk in our financial system by cutting off access to the derivatives markets as a result of noncompliance.”

Many derivatives users already post some form of variation margin, but there have still been widespread complaints that there has not been enough time to come into compliance with the specificity of the rules, including drafting new trading documentation. That would have left them locked out of the market, which they use to hedge their liabilities. 

Last week Isda, the main derivatives trade association, said just 4 per cent of the 159,000 legal contracts — known as credit support annexes (CSAs) — on which the industry relies for their bespoke deals, had been updated.

“While over time the change is manageable, in the short term it poses an operational nightmare,” said Kevin McPartland, head of market structure research at Greenwich Associates. The fear has been that without some concession, many market participants using bespoke derivatives to protect against fluctuations in market prices would no longer be able to do so. 

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