[ D E R I V AT I V E S
R E V I E W
|
V A R I AT I O N
M A R G I N S ]
“They [buy-side]
have had to put the
documentation and
infrastructure in place
very quickly or face
being shut off from
certain dealers.”
JOHN SOUTHGATE, HEAD OF
DERIVATIVES AND COLLATERAL
PRODUCT MANAGEMENT,
EMEA NORTHERN TRUST
do a limited amount of derivatives
business may have struggled to re-
negotiate their documents in time,”
says Kruse.
This documentation challenge
was compounded by the short
amount of time between finalisa-
tion of the rules and implementa-
tion. While the first version of the
international policy framework
was published in September 2013,
it was revised in March 2015 and
national and regional regulators
then had to transpose the stan-
dards into binding rules in their
own jurisdictions.
In Europe, for example, the three
pan-European supervisory author-
ities published draft regulatory
technical standards in March 2016,
but they were not approved by
the European Commission until
December 2016. This put European
participants a step behind their
peers in the US as they prepared to
post variation margin this year, as
the final approved rules had been
in-hand for only a few months.
“We have all known this was
coming for some time but there is
only a limited amount of work one
can do before the final rules are
published. This has been the big-
gest re-documentation exercise the
market has ever had to go through,
and the short timeframe has cer-
tainly made it extremely challeng-
ing,” says Barry Hadingham, head
of derivatives and counterparty
risk at Aviva Investors.
While regulators had always
agreed on the importance of inter-
national alignment and consistent
implementation of the rules,
differences have emerged that
made the margin framework even
tougher to implement. In Hong
Kong, Singapore and Australia,
regulators decided in December
to allow a six-month transition to
variation margin posting between 1
March and 1 September to ease the
pressure on firms, but other juris-
dictions declined to follow suit.
In a speech on 18 January, the
US Commodity Futures Trading
Commission’s (CFTC) Christopher
Giancarlo raised concerns that
smaller US pension funds may not
be able to get their documenta-
tion finalised in time and could be
forced to stop hedging, criticising
regulators for sticking to the 1
March deadline.
US regulators take action
“In the past few years, we have
witnessed how market disrup-
tion, fragmentation and reduced
liquidity occurs when cross-border
regulatory harmonisation is not
achieved. Making market reform
work for America means working
cooperatively with fellow foreign
regulators,” said Giancarlo.
Subsequently, just before going to
press, the US derivatives regulator
announced it would delay the en-
forcement of strict rules for asset
managers and pension funds by six
months.
The delay will help ease fears
among buy-side firms, many of
which were reportedly nowhere
near ready to comply with the vari-
ation margin rules set to come into
force globally on 1 March.
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