Swaps industry gets last-minute relief from new U.S. margin rule

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By Lisa Lambert | WASHINGTON

WASHINGTON U.S. regulators joined their European
counterparts on Thursday and granted some last-minute relief on
a swaps rule, after the derivatives industry said it was
overwhelmed with record-keeping requirements by the rule coming
online next week aimed at driving down risk in the financial
system.

The country’s banking regulators – the Federal Reserve,
Office of Comptroller of the Currency and Federal Deposit
Insurance Corporation – said parties trading swaps without a
central clearinghouse must follow the rule for their biggest and
riskiest trades by the original March 1 deadline.

But they granted more flexibility for smaller trades, giving
the firms until September to comply with the rule on variation
margin, the cash and bonds traders put up to cover losses from
day-to-day swings. That will lighten some of the more burdensome
requirements for smaller firms.

Much of the global $544 trillion market is dominated by U.S.
banks. Swaps, a form of derivatives, mushroomed before the
financial crisis, when they were lightly regulated. Since the
2007-09 credit meltdown, most are routed through clearing
houses, but some are so complex they will not be cleared.

The rule, part of the Dodd-Frank Wall Street reform law, was
finalized in December 2015. Along with requiring adequate
collateral, it is also intended to set margin requirements high
enough to curb firms’ abilities to take on large risks.

“This flexibility is welcome and needed,” said Scott
O’Malia, CEO of the International Swaps and Derivatives
Association.

He added that despite the industry’s extensive efforts, it
had struggled with a requirement to amend all outstanding
collateral documents “in a relatively short period of time.”

Asset managers in January asked for more time, citing
record-keeping challenges, and earlier this month the top U.S.
derivatives regulator said it would hold off on strictly
enforcing the rule until September.

On Thursday, European banking authorities announced they too
were giving wiggle room for a similar rule coming online March
1.

Raf Pritchard, CEO of triResolve Margin, a service created
to help firms deal with the increased volume and complexity of
margin calls under the rule, said that over the years, each
region has customized its part of the market, which will make
automation and standardization around the globe difficult.

“There is an element here where everyone is being tracked
onto a common timetable,” he said. “There’s only so many firms
the entire industry can onboard at once. There may be
bottlenecks.”



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