EU Collateral Rules Lag U.S. in $493 Trillion Swap Market

  • European Commission intends rules to take effect mid-2017
  • Commission says banks should still comply with foreign rules

The European Union will push back the completion of collateral rules for the multi-trillion-dollar swap market to the end of the year, breaking with U.S. authorities who have set a September deadline for the biggest banks to comply.

The European Commission, the EU’s executive arm, won’t be able to meet the deadline adopted by the U.S. -- and laid out as a goal by global regulators -- for standards that seek to ensure banks have sufficient collateral to backstop transactions done directly with other traders, according to Vanessa Mock, a spokeswoman for the Brussels-based commission. The September deadline applies to trades conducted by the largest banks.

“The small number of firms covered by the first wave of the requirements will in many cases also be covered by rules in other jurisdictions and therefore should continue to prepare for implementation,” Mock said in an e-mailed reply to questions. “Our objective is to deliver the standard before the end of the year, and for firms covered by the first wave of the rules to be required to comply before the middle of next year.”

Mock said the commission supports the standards laid out by global regulators “and intends to bring them into force as soon as possible.” The commission, which received final draft technical standards from three EU regulators in March, said it is still reviewing the rules.

Initial Margin

The EU regulators proposed that the requirements enter into force on Sept. 1 this year, and that “market participants that have an aggregate month-end average notional amount of non-centrally cleared derivatives exceeding 3 trillion euros will be subject to the requirements from the outset.”

The move underscores how U.S. and European regulators have moved at different speeds to adopt comparable regulations for global financial markets. The over-the-counter derivatives market, estimated at $493 trillion by the Bank for International Settlements, is dominated by the biggest banks, such as Citigroup Inc. and JPMorgan Chase & Co., which are active around the world.

“We just heard about this this morning,” U.S. Commodity Futures Trading Commission Chairman Timothy Massad said to reporters Thursday after a speech at a Sandler O’Neill & Partners LP exchange conference in New York. “I wouldn’t expect us to delay.”

Japan and Hong Kong are ready for the Sept. 1 date, Massad said. "Everybody’s been moving toward Sept. 1. It’s still a good date," he said. Massad said the CFTC will confer with European regulators about their decision to delay.

Fully Effective

The standards may require EU buyers and sellers of swaps to set aside 200 billion euros ($226 billion) to 420 billion euros in total once they are fully effective in 2020, according to the EU regulators. U.S. bank regulators led by the Federal Reserve estimated last year that the rules could require firms in the U.S. to have $315 billion in initial margin.

The International Swaps and Derivatives Association had said the timeline presented a challenge for the industry to comply by September.

“We believe it’s positive that European regulators spend the necessary time to ensure the rules are appropriate, and we will continue to work with authorities and the industry to comply with the relevant deadlines,” Scott O’Malia, ISDA’s chief executive officer, said on Thursday.

Emma Dwyer, a partner at Allen & Overy in London, said a delay in Europe raises questions about how firms will comply with regulations taking effect elsewhere and without final EU standards.

“I’m sure the delay is welcomed on a basic level, but without the same delay on a global basis market participants will be left grappling with how to implement rules in a piecemeal manner,” Dwyer said in an e-mail. “Frankly it’s a mess unless the US and everyone else delays too.”

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