Banks Win 9-Month Swap Margin Rules Delay From Basel Group

Banks won a delay in the introduction of minimum global rules on the collateral needed to back trades in the $691 trillion market for swaps and other over-the-counter derivatives.

International regulators said the date for beginning to phase in the measures would be September 2016 compared with previous plans for a December 2015 start. The rules were approved in 2013 to ensure lenders have sufficient safeguards in place when a trading partner defaults.

“The full phase-in schedule has been adjusted to reflect this nine-month delay,” the Basel Committee on Banking Supervision and the International Organization of Securities Commissions, said in a joint statement. Regulators “will continue to monitor progress in implementation to ensure consistent implementation across products, jurisdictions and market participants.”

The Basel and Iosco rules will require both parties to a trade to post initial and variation margin.

The measures set technical standards for the amount and quality of collateral that is needed to back trades, as well as rules on recycling collateral in multiple trades.

Under the original plan from 2013, the measures would have been phased in over a four-year period, beginning in December this year with the “largest, most active and most systemically important derivatives market participants.”

Banks had called for a delay, warning that a lack of certainly over precisely how nations would implement the rules meant they couldn’t complete their own technical work on schedule.

Margin Arrangements

While still challenging, the “revised implementation date should give firms additional time to develop, implement and test new systems,” Scott O’Malia, chief executive officer of the International Swaps and Derivatives Association, said in an e-mailed statement today.

“The new rules will require firms to make significant changes to their infrastructure, technology, processes and documentation,” he said.

Nations are seeking to toughen and align rules for over-the-counter derivatives, which became a target for oversight after the 2008 collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.

The Basel and Iosco rules will apply to deals of more than 50 million euros ($53 million).

Bulk of Measures

Foreign exchange swaps and forwards contracts that are physically settled will be exempt from the bulk of the measures.

The posting of collateral is when a party to a trade hands over assets to their counterparty as a guarantee that they will not be left empty handed should the trader default on their obligations.

Initial margin is collateral posted at the beginning of a trade. Variation margin may be exchanged daily to offset risk from incremental price movements.

The timetable for introducing the Basel and Iosco rules varies depending on the size of the firm’s OTC derivatives trading activities.

Under the previous plan, the earliest possible date for having to fully apply the rules on initial margin was Nov. 30

2016. This changes to Aug. 31 2017 under the revised timetable.

The timing for introducing the rules on variation margin has changed also.

Whereas the old plan had a single start date for these measures of Dec. 1, this now shifts to Sept. 1, 2016 or March 1, 2017 depending on the size of the firm’s trading activities.

The Basel committee brings together regulators from 30 nations to co-ordinate banking standards. Its members include the U.S. Federal Reserve, the Bank of England and the European Central Bank.

Iosco brings together markets watchdogs from more than 100 countries.

Before it's here, it's on the Bloomberg Terminal.