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U.S., European regulators relax on enforcing margin rules for some

U.S. and European regulators on Thursday eased requirements for some uncleared over-the-counter derivatives to comply with a March 1 deadline to use mark-to-market margin.

Two U.S. regulators, the Federal Reserve and the Office of the Comptroller of the Currency, issued guidance that would allow counterparties without what the agencies called “significant credit and market risk” to gradually comply with the variation margin requirement by Sept. 1.

However, those counterparties that do present such risk will still be required to meet the March 1 deadline, according to statements from the Fed and OCC.

Three other U.S. regulators — Farm Credit Administration, Federal Deposit Insurance Corp. and Federal Housing Finance Agency — also administer the margin rule for entities they oversee, but in a statement from the FDIC, the three agencies said they would follow the Fed and OCC in their guidance.

In the European Union, the European Securities and Markets Authority said national regulators may exercise flexibility for smaller entities in Europe that might struggle to comply with the new margin. Unlike U.S. regulators, ESMA did not set a specific date for extending the March 1 deadline but said it and national regulators expect “the difficulties will be solved in the coming few months.”

ESMA said in its statement that European supervisory authorities “have been made aware of operational challenges in meeting the deadline of (March 1) for exchanging variation margins.” It said material presented to these authorities shows the new rules mainly pose a challenge for smaller counterparties; for them, national regulators are expected “to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation.

“This approach entails that (these regulators) can take into account the size of the exposure to the counterparty plus its default risk, and that participants must document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained,” the ESMA statement added.

The move by the agencies follows the Feb. 13 announcement by the Commodity Futures Trading Commission that it would delay its overall enforcement of the variation margin requirement for six months until Sept. 1. The CFTC order applied only to non-bank entities, mainly energy companies.

Market participants, particularly at smaller firms, were concerned that they could not meet the March 1 deadline because they could not renegotiate all their credit support annexes — individual collateral agreements reached with counterparties — by that date.

The Federal Reserve and OCC did not specify any threshold for market or credit risk.

The Fed in its guidance said the agencies recognize the “scope and scale” of changes necessary to make all its CSAs compliant. “During initial examinations for compliance with the variation margin requirements that will phase in under the final rule on March 1, Federal Reserve examiners should evaluate a covered swap entity's management systems and program for compliance,” the Fed statement said.

Market participants are expected to have governance processes in place to assess and manage credit exposure to uncleared swap counterparties, as well as any other market risk, the Fed said.

Guidance from the Fed and OCC are available on their websites. The ESMA statement is available on its website.