Global Regulators Call for Consistent Margin Rules for Uncleared Swaps
Two global regulatory bodies have called on lawmakers to ensure that margin requirements for bilateral swap deals be harmonized across regions to reflect their higher risk.
The proposed guidelines, say legal experts, are in many ways similar to proposals issued by the U.S. Commodity Futures Trading Commission and banking regulators under the Dodd-Frank Wall Street Reform Act.
The Basel Committee on Banking Supervision (BSBC) and the International Organization of Securities Commissions (IOSCO) are seeking comments on seven key principles and requirements for swap contracts which are not eligible to be cleared through central clearinghouses. The seven principles for bilateral trades include requiring counterparties to exchange initial and variation margin; methods for calculating margin; collateral requirements and haircuts and regulatory consistency.
Bilateral or uncleared swap trades are those executed and processed between two counterparties. Regulations on both sides of the Atlantic call for most swap transactions to be cleared through central clearinghouses which serve as middlemen between counterparties and require collateral to be posted to back the trades. Industry consensus is that centrally cleared trades will require far more collateral than bilateral ones in part because both initial and variation -- or additional -- margin must be applied.
In response to the paper, the CFTC has extended its consultation on margin requirements for uncleared swaps to September 14 from July 11.
The two regulatory organizations want a broad range of eligible securities that can be held as margin against swap exposures to include liquid equities and corporate bonds, subject to the appropriate haircuts to address potential liability. Margin requirements for non-centrally cleared derivatives should further mitigate systemic risk in swap markets by reflecting the higher risk they carry, they say.
"Regulatory regimes should interact so as to result in sufficiently consistent and non-duplicative regulatory margin requirements for non-centrally cleared derivatives across jurisdictions," says the paper.
Both the BSCB/IOSCO paper and U.S. regulators call for the use of initial and variation margin and would not allow margin accounts to be netted between two counterparties. Both would also call for portfolio margining with the same counterparty, says the law firm of Davis Polk in a communiqué to clients on July 10.
However, the BCBS/IOSCO paper provides a broader definition than the U.S. regulations on the types of collateral which can be used. The global regulators also call for interaffiliate transactions to be subject to variation margin but leaves initial margin requirements to local regulators. The U.S. proposals are silent on the issue of margin requirements for interaffiliate swaps and therefore do not differentiate interaffiliate swaps from third-party transactions, according to Davis Polk.
Separately, the CFTC has just defined when trades are considered swaps under the Dodd-Frank Act -- a step that triggers more than a dozen rules under the financial regulation overhaul that could take effect as early as September. Among those rules are the registration of an estimated 125 swap dealers and so-called major swap participants; the reporting of data on interest rate and credit swaps to the public; the conduct between banks and swap buyers; internal standards for chief compliance officers and registration of swap data repositories.
Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com