Banks Win Swap-Collateral Reprieve as Regulators Rewrite Rules

Global financial regulators loosened collateral requirements for banks trading uncleared swaps and gave them until 2019 to fully comply with new rules designed to guard against a repeat of the 2008 credit crisis.

Banks including JPMorgan Chase & Co. and Deutsche Bank AG won the concessions in a revised proposal released yesterday by the Basel Committee on Banking Supervision and International Organization of Securities Commissions. The proposal would free up liquidity by exempting firms from having to transfer the first 50 million euros ($66 million) of collateral, they said.

“Several features of the near-final proposal are intended to manage the liquidity impact of the margin requirements,” IOSCO and the Basel panel said in a statement. The changes would reduce to 700 billion euros from 1.7 trillion euros the total initial margin required to back uncleared swaps in the global market, they said.

The Federal Reserve and Bank of England are among more than 30 agencies responsible for the rules, which would start to take effect in 2015 and be fully in place by 2019. The proposal is open to public comment until March 15.

Global regulators are seeking to align rules for the $639 trillion market for over-the-counter derivatives, which became a target for increased oversight after a credit crisis sparked by the 2008 collapse of Lehman Brothers Holdings Inc. and American International Group Inc. The potential for firms to exploit gaps in collateral rules for uncleared swaps between countries prompted regulators to strive for consensus.

Reducing Risk

Rules are being drafted to require that most swaps be guaranteed at clearinghouses positioned to reduce risk by accepting collateral from buyers and sellers. The regulatory proposal released yesterday would apply to interest rate, credit, equity and other swaps that aren’t settled at clearinghouses operated by companies including LCH.Clearnet Group Ltd., CME Group Inc. and Intercontinental Exchange Inc.

The measure sets common standards for the assets banks can count as collateral and for how banks should calculate writedowns that should apply to these securities.

Banks warn that inconsistencies in rule-making and overlapping requirements may increase costs and give foreign competitors an advantage. Lenders also say collateral rules that are too tough risk crippling markets by forcing traders to set aside the bulk of their high-quality assets.

Under the proposal, there would be a threshold below which firms wouldn’t need to collect initial margin, which is collected at the beginning of trades to offset potential future risks. The rule would exempt firms from having to collect the first 50 million euros of initial margin from each client.