Banks, Insurers Push For Delay To Initial Margin Phase-In

Law360, London (March 26, 2020, 12:23 PM GMT) -- Global standard setters for banks, insurers and other financial services are asking regulators to delay rules requiring companies to  hold more cash against uncleared derivatives transactions to allow them to focus on ensuring access to markets disrupted by the coronavirus epidemic.  

Entities that hold more than €50 billion ($55 billion) of derivatives that are not put through clearinghouses must comply with initial margin rules from September; firms holding more than €8 billion have another 12 months. The measures are designed to ensure there is a margin "buffer" to protect against potential losses following a change in value of a derivative position.

“These efforts are being severely impacted by the global COVID-19 pandemic, and our members do not believe it is possible or practicable to meet documentation and operational requirements for the regulatory initial margin  compliance dates on Sept. 1, 2020 and Sept. 1, 2021,” the letter published by the International Swaps and Derivatives Association Wednesday said.

The message addressed to the Basel Committee on Banking Supervision - a global group of regulators - and a securities watchdog, the International Organization of Securities Commissions, said the deadlines would be impossible to meet because operational staff are being tied up and working from home, limiting access to documentation.

“Staff have been displaced and re-purposed given the increased market volatility,” warned the letter, signed by more than 10 trade associations including the Association for Financial Markets in Europe and Insurance Europe.

“These challenges are expected to worsen as markets continue to fluctuate, lockdowns broaden, and staff are compromised by illness or need to care for family members,” the trade bodies added. “Due to market volatility, firms are avoiding infrastructure updates and may be unable to complete, deploy or test infrastructure needed to support regulatory initial margin requirements.”

As the overall impact of COVID-19 may not be known for some time, ISDA suggest that decisions about a new timeline for the implementation of initial margin requirements should be delayed. They should be reconsidered “when relevant facts and circumstances are known.”

Initial margin requirements force participants in a non-centrally cleared derivatives contract to hold collateral when entering into a trade in order to cover credit risks. The G-20, an international forum for economic policy makers, proposed the requirement in the wake of the 2008 financial crisis to protect the over-the-counter derivatives market.

The G-20 pushed for the majority of OTC derivatives to be cleared through central counterparties, or CCPs. The group also proposed tighter rules for non-centrally cleared OTC derivatives to reduce risks to the market, calling on the Basel Committee and IOSCO to develop these.

The initial margin requirements set out by the two standard-setters will force parties to a derivatives trade that will not be going through a CCP to hold appropriate collateral that can be liquidated in a reasonable amount of time.

The margin requirements also force firms to post collateral when their side of the trade drops, known as variation margin.

--Additional reporting by Najiyya Budaly. Editing by Ed Harris.

For a reprint of this article, please contact reprints@law360.com.

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