Harmonization and coordination are easy enough to identity as objectives, but harder to achieve. Regulators can take a lot of credit, then, for their efforts to develop a coordinated global margining framework for non-cleared derivatives. As part of that, each national regulator agreed to adopt the same implementation schedule, setting a start date of September 1 for the biggest banks.
That carefully orchestrated timetable is now splintering. Earlier this month, a European Commission (EC) spokesperson confirmed that European rules would not be finalized in time for the September launch. European authorities will instead aim to deliver final standards by the end of the year, pushing the start date in Europe to the middle of 2017. As it stands, no other jurisdiction has followed suit – in fact, press reports suggest other regulators are holding firm.
We believe it’s positive that European regulators spend the necessary time to ensure their rules are appropriate. But the split in timing poses some important questions. Under the globally agreed timetable, implementation would be phased, starting with the biggest banks exchanging initial and variation margin from September 1 – known as phase one. The next major deadline is March 1, 2017, when the variation margin ‘big bang’ becomes effective for all covered entities – not just banks, but other financial institutions, including the buy side.
It is understood that European phase-one banks will now not be required to comply with margining requirements until the middle of next year – unless they are trading with phase-one banks still subject to margin rules in other countries. Presumably, that means the March 2017 variation margin big bang deadline will also be pushed back in Europe. That will have a far wider, and far more profound impact on cross-border trading.
Clarity on this point is important from a readiness and operations standpoint – as is clarity on how other regulators will approach the March 2017 deadline.
The implications of a fractured timetable are complex enough for the big phase-one banks. On the face of it, the delay creates an unlevel playing field – but the precise impact will depend on the status of each entity and the identity of their counterparties.
The complexity will increase exponentially once variation margin rules come into effect in March, when more derivatives users will be subject to collateral posting requirements. It will also lead to greater fragmentation and disruption of cross-border trading. If other regulators retain the March 2017 deadline and Europe does not, then it might encourage European market participants to trade with European dealers where possible.
Given the impact from March 2017 on the broader market, not just the largest banks, it’s important this issue is considered carefully. There is an easy answer: realign the global implementation deadline. We would urge regulators to do that in the interests of ensuring the market can continue to function efficiently.