[ D E R I V AT I V E S
R E V I E W
The ‘no-action’ relief from the
CFTC will mean it will not punish
pension funds, asset managers and
insurance companies for failing
to post and exchange variation
margin (VM) for bilaterally traded
derivatives until 1 September.
“The facts on the ground cannot
be ignored that as much as 90% of
those end-users are not ready to
meet the new requirements despite
their best efforts to do so,” said
Giancarlo.
The elephant in the room
Important differences have
emerged between regulators on
other issues, too. The internation-
ally agreed framework included an
exemption for physically settled
foreign exchange swaps and
forwards, which was replicated
in most national versions of the
rules, but European regulators
still require variation margin to be
exchanged for FX trades.
Given most FX swaps and for-
wards have been traded on an un-
collateralised basis in the past, many
European users have had to set up
the infrastructure and documenta-
tion to post margin for the first time
or face being shut out of the market.
While FX forwards won’t need to
be margined until the start of 2018
under European rules, FX swaps
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came into scope on 1 March.
“FX is the big elephant in the
room because of the difference in
scope between the US and Europe.
We have a number of clients that
only trade FX forwards and we
have had to completely overhaul
our ISDA and CSA documentation
to include those clients so that they
can retain access to those prod-
ucts,” says Hadingham.
The timing of collateral posting
has been a further point of conten-
tion, as settlement requirements
differ from jurisdiction to jurisdic-
tion. US prudential regulators, for
example, require variation margin
to be settled the day after the
trade has been executed, whereas
Japanese rules merely state that
collateral must be exchanged as
soon as possible after the trade.
The differences on both the
FX exemption and the timing of
margin exchange may appear to be
niche details, but they put market
participants in a difficult position
when trading with counterparties
in other jurisdictions.
“When it comes to cross-border
trades, the devil is in the detail and
firms are having to consider the
rules very carefully and then adopt
the most stringent provisions.
European firms trading with US
counterparties would need to settle
variation margin on a same-day
basis, which is a very steep change
from normal market practice,” says
David Beatrix, product specialist
for collateral and valuation services
at BNP Paribas Securities Services.
Beyond compliance concerns,
the regulated posting of collateral
also brings operational challenges,
as firms may find they need to up-
grade their internal infrastructure
to handle the more regular margin
calls that they must now process.
Removing manual processes
and making collateral manage-
ment more efficient is likely to be
a priority, but as margin posting
becomes much more widespread,
there may also be an increase in
disagreements over the amount of
collateral to be exchanged on indi-
vidual trades. Industry solutions to
avoid disputes and improve dispute
resolution have been considered in
the past, but such efforts may now
need to be revived.
“Collateral can be incredibly
effective as a risk mitigation tech-
nique, but only if it is accurate. The
market is anticipating increased
scrutiny of margin disputes, and
there will clearly be a need to con-
sider more efficient dispute resolu-
tion processes going forward,” says
David White, triResolve product
marketing executive at TriOptima.
“FX is the big elephant in the room because of the
difference in scope between the US and Europe.”
BARRY HADINGHAM, HEAD OF DERIVATIVES AND
COUNTERPARTY RISK, AVIVA INVESTORS
62
TheTrade
Spring 2017