How Donald Trump’s presidency will impact global trade, the US tax system, healthcare and numerous other issues remains uncertain as he begins his first day as president. One likelihood, however, is that corporates and other derivative users will have more time to complete the documentation necessary to continue trading uncleared swaps.
Swap market participants now face a March 1, 2017 deadline to prepare for posting variation margin on their uncleared swaps. J. Christopher Giancarlo, a commissioner at the Commodity Futures Trading Commission (CFTC) and its acting chairman as of January 20, 2017, noted in a speech two days earlier at the SEFCIB VII conference that market participants face challenges meeting that deadline. Giancarlo replaces outgoing CFTC Chairman Timothy Massad.
All swap market participants will have to complete a representation letter that serves to indicate whether they are classified in a manner that would trigger margin rules. Nonfinancial corporates will not be subject to those rules, but they nevertheless must file the letter to confirm their status as an exempt non-financial end user. Information to be included in the letters includes: general biographical information; entity classifications/status in the US, and the same for the EU; other sections to be completed according by jurisdiction, as requested by bank counterparties.
“If they do not, they will be abruptly forced to stop hedging their portfolios at at a time of enormous changes in financial rates and global asset values,” Mr. Giancarlo said. “As acting chairman, I also intend to look at solutions to ease the March 1 transition in a responsible manner. Look for the CFTC to have more to say about this in the weeks to come.”
Financial corporates will have to enter into credit support annexes (CSAs) that are compliant with the new margin rules, through either a revised version of their existing CSAs or new CSAs. Nonfinancial corporates have long used CSAs, not because regulations required them but as part of an agreement between two parties.
“To the extent that the non-financial end user is party to a CSA that [it] has negotiated apart from regulatory requirements, that CSA will not need to be modified,” said Kate Helmberger, director, derivative and regulatory contract advisory at Kennett Square, PA-headquartered Chatham Financial.
Ms. Helmberger added that the letter can be completed using the ISDA regulatory margin self-disclosure letter, which can be accessed on the analytics site IHS Markit website or in paper form; in addition some banks have created their own representation documents.
Mr. Giancarlo, often critical of the swap regulations put in place by the CFTC since the financial crisis, noted several other areas he anticipates addressing. For one, he sees the regulator’s swap trading framework as “disproportionately modeled on the US futures market and biased against both human discretion and technological innovation” and has resulted in “fragmented” global swap markets. He intends to push for reforms that allow market participants to choose the manner of trade execution best suited to their swap trading and liquidity needs, better aligning regulatory oversight with inherent swap market dynamics. Mr. Giancarlo also intends to improve swap data reporting and harmonization of swap rules in different jurisdictions.