There remains end-user confusion and uncertainty on margin requirement rules set to kick in this year. That’s according to new survey released January 6 by the International Swaps and Derivatives Association (ISDA).
The new rules require most derivatives users to post initial and variation margin on non-cleared derivatives transactions and will be phased in beginning in December of this year. But despite clarifications and reexaminations late last year, over a third of survey respondents still indicate they don’t know whether they are subject to the rules. And of that cohort, nearly two thirds said they were concerned or somewhat concerned about their ability to meet the requirements. “The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms still appear unsure whether the rules apply to them,” said former Commodity Futures Trading Commission member and new ISDA head Scott O’Malia.
Regulators, including the Fed and CFTC, are offering end-users a phase-in approach that starts with the largest users at the end of this year and extending through to December 2019. Variation margin posting, the additional funds a broker may request from a client so that the initial margin keeps up with any losses, is slated to begin for all eligible counterparties in December 2015, requiring firms to make significant changes to systems, processes and documentation. Regulators from the US, Europe and Japan released proposed requirements in 2014, but final rules have not yet been published.
Despite confusion over the new requirements, the survey showed that derivatives are still a valued risk management tool for end user firms, with 81 percent of respondents calling them important, or very important, to their risk management strategies. During the first quarter of 2015, 78 percent expect their use of derivatives to either increase or stay the same. Most respondents said they use derivatives for risk management purposes, with 65 percent using derivatives for managing exposure to currencies, interest rates, exposure and credit. The second most popular use was for hedging exposures to international markets, with 52 percent citing this, while 38 percent used them for reducing financing costs.
As has been noted by treasurers and banks before, increasing costs of hedging was the top concern around derivatives, with 59 percent citing concern, while regulatory uncertainty and the scope of cross-border derivatives regulation also emerged as worries, with 38 percent and 36 percent concerned about these, respectively.
ISDA said the results come from 400 respondents who answered some or all of the survey questions. Of those, 24 percent work at non-financial corporates and 57 percent were employed by financial institutions (insurers, finance companies, asset managers and bank end users). Forty-one per cent of respondents work for firms that are headquartered in Europe, while 47 percent are headquartered in North America. The complete survey results can be accessed here.