The International Swaps and Derivatives Association (ISDA) recently sent a letter to international securities and banking regulators requesting that the effective date of swap-margin regulations now in the works is pushed back. If regulators instead decide to proceed as currently planned, US corporations may face new swap margin requirements as soon as December 1, 2015.
That prospect appears unlikely, given US regulators are likely to issue soon a revised proposal, after incorporating comments to the original proposal issued in April 2011. Addressed to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), the ISDA letter notes those regulators’ proposal along with proposals by European and Japanese regulators, and the US proposal likely to be issued “in a few months.”
Should those regulators’ final rules all proceed with the December 2015 effective date, as recommended by the Working Group on Margin Requirements (WGMR) and published in IOSCO and BCBS’s final policy framework a year ago, swap-industry participants will be hard-pressed to implement the necessary changes in time.
“The proposed date of December 2015 is simply too early,” the letter stated, noting final rules probably won’t arrive until early to mid-2015, leaving insufficient time for market participants to adjust their policies and operations.
However, the single effective date is important to avoid regulatory arbitrage, said Lanny Schwartz, a partner at Davis, Polk & Wardwell. He added such arbitrage could incent market participants to shift trading to the most attractive jurisdictions currently and incur a range of costs to do that. “It’s in everybody’s interest for this to be coordinated,” Mr. Schwartz said.
ISDA focuses on the issue of preparedness, and requests two years after all the rules are finalized for market participants to comply. Regulators may be wary, however, about extending the effective date too far, given how long it’s taken so far.
Some regulatory jurisdictions could presumably issue final rules in time to give constituents sufficient time to comply by the end of next year, even if it’s a rush. The European Securities and Market Authority and European Banking Authority, for example, published a proposal in April for which the comment deadline was July 14. “If miraculously a final rule were to be issued in mid-September, there may be enough time for the market to adapt to it in the next 15 months,” Mr. Schwartz said.
US margin rules should share the effective date of those overseas, and a final version could be issued soon. Most believe, however, that the proposal, issued more than three years ago, must undergo enough changes to resemble the WGMR’s rule set that it will have to be reissued for public comment. ISDA’s letter suggests it, too, foresees a revised proposal arriving. Even if it arrives soon, however, the regulatory process makes a final rule before next fall is unlikely, and a December effective date logistically impossible for market participants.
The extended effective date requested by ISDA would be a boon for corporates, since that would almost certainly delay margin requirements that the US proposal would place on them. The US proposal requires banks to establish an exposure threshold for each corporate client, over which the client must post margin.
The prudential regulators have interpreted the Dodd-Frank Act as requiring corporate margin, although they’ve stated they would not oppose a legislative effort to exempt corporate from margin. Regulators outside the US either impose no margin requirements on nonfinancial companies using swaps to hedge risk, or the requirements apply only to the largest corporations.