For some time now, we’ve been warning that many derivatives users wouldn’t meet a March 1 deadline to amend their credit support annex agreements (CSA) in order to comply with new variation margin requirements. Yesterday’s announcement of a six-month transition by the Commodity Futures Trading Commission (CFTC) is therefore very welcome. It leaves the March 1 start date intact, but allows firms to continue trading while they finish the substantial work needed to amend their documents.
As our letter to regulators last week pointed out, sticking with March 1 without such transitional relief would have caused unnecessary market disruption. Most firms already post variation margin on their non-cleared derivatives trades, but face being shut out of derivatives markets unless they manage to amend their outstanding collateral documents. The scale of the task is huge – we estimate approximately 160,000 CSAs need to be updated. Despite a determined industry effort, CSA negotiations have proved to be hugely complex and time consuming. Last week, we disclosed our latest industry survey data, which showed only 4.43% of CSAs had been amended.
The CFTC has taken a practical approach to this issue. Its relief letter provides market participants with a six-month transition that enables firms to continue to access derivatives markets. During that six-month period, counterparties must show they are working hard to complete the necessary CSA amendments, and all swaps entered into from March 1 must be compliant by September 1, 2017.
This is similar to relief provided late last year by Australian regulators. Hong Kong and Singapore have also provided six-month transitions.
But while welcome, this relief needs to be complemented by similar action from other regulators. Unless a globally coordinated transition is agreed, there is a risk of market fragmentation, with counterparties shifting trading relationships to those entities or regions that have secured relief. Given the fact many counterparties have existing variation margin arrangements, this would cause significant disruption for no purpose.
We think all derivatives users should be able to access derivatives markets from March 1. As such, we urge global regulators to work together to provide consistency across jurisdictions.