Don't breathe a sigh of relief just yet.
Money managers and asset owners won't necessarily be getting a break from complying with a March 1 deadline to post mark-to-market margin on some over-the-counter derivatives.
While the Commodity Futures Trading Commission on Feb. 13 announced it would delay its enforcement of the variation margin requirement on uncleared OTC derivatives for six months until Sept. 1, that order applies to only a few market participants, mainly energy companies, sources said. Most market participants are subject to banking regulators in the U.S. and Europe, and those agencies remain on track for enforcing the rule on March 1.
“I've been getting a lot of emails and notices from clients asking about the CFTC action,” said Willa Cohen Bruckner, partner, financial services and products, at law firm Alston & Bird LLP, New York, whose firm represents money managers and hedge funds. “I've told them, "That's very nice, but it doesn't help you.'”
Molly Moore, counsel at law firm Ropes & Gray LLP, Washington, which represents money managers, endowments and foundations, said there might be some optimism among market participants that other regulators will follow the CFTC's lead, “but until we hear that they will, it's full steam ahead” on compliance.
Most market participants still will have to scramble to change thousands of credit support annexes — individual collateral agreements reached with counterparties — before March 1. And missing that deadline, sources said, could shut down their trading in swaps, futures or other derivatives until market participants are in compliance.
“If a pension fund or an asset manager can't get the paperwork finalized, they wouldn't be able to trade,” said Kevin McPartland, principal, market structure and technology, at Greenwich Associates, Stamford, Conn. “Their compliance offices wouldn't allow it. ... Billions of dollars in trades will be affected by this.”
For those who aren't ready by March 1, “we assume that their dealers won't trade until they're done,” Ms. Moore said. “That could have a major impact on the market. People use these instruments to hedge risk. Not having those could keep some (asset owners) from implementing their strategy.”
Ms. Moore said she's heard some dealers “are prioritizing their clients in favor of those who trade more and have more volume. The smaller client that might not trade as much might not be ready come March 1.”
The deadline has been set by the European Market Infrastructure Regulation, the CFTC and five U.S. banking regulators — the Federal Reserve, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the Farm Credit Administration. It's part of International Organization of Securities Commissions and Basel Committee regulations on overall margin requirements for these derivatives, for which variation margin is the first to be imposed. Requirements for initial margin, based on worst-case losses in a default, will be phased in through September 2020.
Acceptable collateral types under the regulations generally will be cash, but could also include gold or debt securities under certain conditions.
“The Europeans are under a lot of pressure to not let the March 1 date slip, and U.S. banking regulators are also under pressure not to back off,” Ms. Moore said. “Concern about market impact of the regulations might push those regulators to change, but certainly none (of the U.S. banking regulators or the EMIR) are making statements” like the CFTC.