Legislators from the EU, the US and several other jurisdictions have adopted regulations for mandatory risk management procedures to be applied by counterparties to non-centrally cleared OTC derivative contracts. In an open letter to the regulators of those jurisdictions dated 7 February, the International Swaps and Derivatives Association (ISDA) and a number of other market associations have requested 'regulatory forbearance' in respect of the 1 March 2017 compliance date for the exchange of variation margin under those regulations.
On 4 January 2017 the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 (the Regulation) entered into force, providing regulatory standards for the timely, accurate and appropriately segregated exchange of initial margin and variation margin collateral which counterparties to non-centrally cleared OTC derivative contracts are required to collect or post under the Regulation. Similar regulations have entered into force in other jurisdictions, including the US, Canada and Japan.
Under the Regulation, the requirements for calculation of variation margin and exchange of variation margin collateral apply from 4 January 2017 to all counterparty pairs which include at least one counterparty that has, or belongs to a group that has, an aggregate average notional amount of non-centrally cleared derivatives above EUR 3,000 billion. Since 1 March 2017, these requirements apply to other counterparty pairs as well. In many other jurisdictions, 1 March 2017 is also the date on which the variation margin requirements enter into force for the vast majority of counterparty pairs.
ISDA, in cooperation with a number of other associations representing market participants, has conducted a survey among market participants about variation margin readiness. According to ISDA, the data from the survey shows that the documentation and operational challenges that are necessary to comply with the variation margin requirements by 1 March 2017 are high, despite concerted and continuing efforts by market participants. Among other things, headway made with the execution of variation margin credit support annexes as required to comply with the regulations is currently limited.
In their letter, ISDA and the other associations warn that even if substantial progress is made in the next few weeks, a significant number of trading relationships will be interrupted and that a cessation in derivatives trading by and between significant portions of market participants would result in market fragmentation, market disruption, higher prices and the potential for a lack of access to hedging. Therefore, they have requested that the relevant authorities (including the Netherlands Authority for the Financial Markets) of all jurisdictions with a 1 March 2017 effective date for their variation margin regulations provide a 6 months transitional period during which market participants can continue to execute new derivatives transactions while they complete the necessary steps towards regulatory compliance for the relevant transactions.
On 23 February 2017 the European Supervisory Authorities (ESAs) published a paper which indicates that neither the ESAs nor the competent authorities (CAs) have the formal power to disapply directly applicable EU legislation, but that they expect the CAs in their day-to-day enforcement of applicable legislation to make a case-by-case assessment on the degree of compliance and progress particularly with regard to smaller counterparties. Regulators of other jurisdictions have published similar statements.
On 30 March 2017 the Dutch Central Bank published a newsletter which indicates that the Dutch Central Bank will not directly enforce the 1 March compliance date against market participants subject to its supervision.
A copy of the letter from ISDA can be downloaded here:
A copy of the ESAs paper can be downloaded here:
The news letter from the Dutch Central Bank is published here: