Global Swap-Collateral Rules at Risk of Further Delays, FSB Says

  • U.S., Japan and Canada set to apply margin rules on Sept. 1
  • Half of 24 jurisdictions may miss second deadline in March

Global regulators called for urgent action to enact new collateral rules for derivatives to prevent the $493 trillion market from fracturing.

The U.S., Japan and Canada are the only three countries that will meet an internationally agreed deadline of Sept. 1 for the rules to start phasing in, the Financial Stability Board said on Friday in a review of 24 countries’ oversight of over-the-counter derivatives. A second deadline in March for additional requirements will probably be met in about half of the countries, according to the FSB, whose members include the U.S. Federal Reserve, the Bank of England and the Hong Kong Monetary Authority.

“Jurisdictions should urgently take steps to implement these reforms,” the FSB said in the paper. “Differences in the coverage of regulatory requirements could prove challenging for market participants, particularly where firms or transactions are subject to multiple jurisdictions’ regulatory requirements.”

Global regulators estimate that the rules could eventually require more than 700 billion euros ($791 billion) in cash, government bonds and other forms of collateral to protect against the threat that the default of one trader spreads risk to others and potentially throughout the financial system. The standards were sought by regulators after the 2008 crisis to ensure firms have collateral backstopping trades they do directly with each other instead of being settled at third-party clearinghouses.

Swap-dealing divisions of banks including JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc., alongside consultants, lawyers and the International Swaps and Derivatives Association have been racing to meet the September deadline for initial margin. In Europe, regulators said they couldn’t meet the goal and intend for the rules to take effect early next year. Australia, Hong Kong and Singapore, among other jurisdictions, have confirmed they also won’t apply the rules next month.

At the beginning of March 2017, the rules were intended to require banks also to exchange variation margin when they trade with a wider range of clients.

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