The delay has been welcomed so that firms can prepare but this presents additional challenges, experts have warned
The delay to new rules that require banks to set aside collateral against a possible swap default is a positive step but the postponement could raise operational issues, experts have said.
The European Market Infrastructure Regulation (Emir) collateral requirements were set to take effect inSeptember for non-centrally cleared transactions but the European Commission saidlast week that it is still reviewing the draft standards and that they will benow submitted after this deadline.
“A delayed implementation is certainly welcome,” DeepakSitlani, derivatives partner at law firm Linklaters, told FOW. “The industryhas been working hard to implement based on draft rules that included mistakesand ambiguities. Hopefully now there will be an opportunity to fix those andfor the market to build systems and develop documentation based on a finalisedset of rules rather than a draft."
Neill Vanlint, managing director of Europe, Middle East, Africa and Asia at datamanagement firm GoldenSource, said: “Market participants will no doubt welcomelaw-makers dedicating additional time to ensure that something as important ascollateral rules for swaps are watertight.
“However, this is just one of many rules that increases costand operational risk across the market. Take central counterparties (CCPs), who are entering unchartedwaters as the manual workflows they have previously relied on simply aren’tcutting the mustard in this regulatory dominated world,” he added.
Jonathan Adams, head of collateral at trading consultancyDelta Capita, said: “The Emir regulations for bilateral over-the-counter derivatives required both parties to exchange initial margin (IM). There is inherent risk in delaying its implementation, however furtherconsensus is required as to the calculation of IM and the protocol surroundinghow each party will hold the IM in a segregated fashion.”
The looming European clearing mandate has been causingconcern for market participants, with on-boarding raised as a potential stumbling block.
In March Jeffrey Tessler, Deutsche Boerse’s head of clients,products and core markets, warned that Emir is set to cause "significant new challenges" for clients and called for market participants to ramp upprep work.
Looking ahead, a number of ambiguities remain around therules, such as limiting institutions who can hold cash margin to EU entities,and details around the process for firms’ applying for intraday exemptions,with market participants waiting for clarity on these – and other – issues toensure that they are adequately preparing.
Linklaters’ Sitlani added: “The question now is whetherthere will be some sort of relief under the US rules. I suspect US entitieswould feel hard done by if they had to collect initial margin at a time whentheir EU counterparts didn’t.”
Valint from GoldenSource said: “The challenge is that,as new regulations come into force, CCPs cannot on-board new business quicklyenough to keep up with investor demand. One of the stumbling blocks they willneed to overcome is sorting out the data infrastructure underpinning theclearing business.”
Vanessa Mock from the European Commission told FOW that the regulatory technical standards on margin requirements for non-centrally cleared derivatives will now be submitted after the three-month deadline in September.
“As the original timeline would not have allowed for the standards to be finalised by September, the date of application for the requirements applying to the small number of firms covered by the first wave of the rules will be modified and a new date set. Our objective is to deliver the standard before the end of the year and for firms covered by the first wave of the rules to be required to comply before the middle of next year,” said Mock
“The European Commission is strongly supportive of BCBS-Iosco standards on non-cleared margin and intends to bring them into force as soon as possible. The small number of firms covered by the first wave of the requirements will in many cases also be covered by rules in other jurisdictions and therefore should continue to prepare for implementation,” she added.
As reported by FOW last week, nascent margin firm NetOTC put its OTC derivatives margin service on hold indefinitely and confirmed plans to wind down staff to “practically zero” due to the lack of provision for the risk-reducing system in new margin rules.
