Derivatives industry challenges new trading rules

Six trade bodies representing the derivatives industry want to delay the implementation of new trading rules due to come into force in March.

"We are writing on behalf of our members to request regulatory forbearance", begun the letter. 

It was signed by The International Swaps and Derivatives Association, the Global Financial Markets Association, including its Global FX Division, The Investment Association, Financial Services Roundtable, The ABA Securities Association and The American Council of Life Insurers.

The new rules will require asset managers, small corporation pension funds and insurance companies to exchange margin for non-centrally cleared derivatives, and follow recommendations in a policy framework published by the Basel Committee on Banking Supervision and International Organisation of Securities Commissions.

There are two types of margins that are being recommended: variation margin, for ongoing mark-to be segregated and ring-fenced from the insolvency of the margin receiver.

Organisations have until the 1st of March to comply. But the letter suggested that few organisations would be compliant and would be locked out of the markets. The letter requested a six month transition period. 

It stated: "While the systemic risk implications of granting forbearance are low, it is clear to the Associations that the documentation and operational challenges that are necessary to comply with the VM regulations by March 1st are high, despite concerted and continuing effort by our members and other market participants."

It said that "the operationalisation of the corresponding data is currently so limited that even if substantial progress is made in the next few weeks, a substantive portion of trading relationships will be interrupted."

The letter went on to say "We believe that both market participants and the framers of the global implementation schedule underestimated how challenging this phase of the implementation would be."

It has been reported that some jurisdictions in Asia have already granted delays.

A survey found that just two percent of the legal contracts required to meet compliance had been updated as of January 27th.

The FT quoted Scott O'Malia, Chief Executive at ISDA, saying "The sheer operational challenge of negotiating with counterparties and amending all outstanding CSAs (Credit Support Annex) is stretching resources of dealers and their clients to the limit."