Variation Margin Requirements Relief | White & Case LLP International Law Firm, Global Law Practice
Variation Margin Requirements Relief

Variation Margin Requirements Relief

According to the original timetable, the first implementation date in various G20 countries for uncleared over-the-counter ("OTC") derivative variation margin requirements was 1 September 2016 for the largest market participants and the second implementation date was scheduled to be 1 March 2017 for all other market participants. However, as 1 March 2017 approached, there was a recognition by regulators that some market participants would not likely be in a position to fully comply with the variation margin requirements by 1 March 2017. Among other things, market participants indicated that they were facing difficulty in completing the necessary credit support documentation and operational processes to settle variation margin in accordance with the applicable requirements, notwithstanding their efforts to do so.

In light of this, regulators in the US, the European Union, Japan, Hong Kong, Singapore and Australia, among others, have granted relief to market participants to provide them some flexibility in complying with the 1 March 2017 variation margin requirements with respect to certain counterparties. This relief is intended to prevent disruption to the uncleared OTC derivatives market, the occurrence of which would likely undermine the regulatory purpose of the variation margin requirements.

Jurisdiction

Regulator

Relief

Links

United States

 

 

 

Board of Governors of the Federal Reserve System

Department of the Treasury (the Office of the Comptroller of the Currency)

Each Swap Dealer that was required to comply with the variation margin requirements on 1 March 2017 with respect to its counterparties is expected to comply with such requirements:

  • on 1 March 2017 (as scheduled) with respect to its counterparties that present significant exposures as at such time; and
  • as soon as possible, and in no case later than 1 September 2017, with respect to its other counterparties, provided the Swap Dealer is using good faith efforts to comply with the variation margin requirements by such date.

The regulators, in exercising their supervisory discretion, will prioritise compliance efforts by Swap Dealers subject to their jurisdiction based on the size and risk inherent in the credit and market exposure presented by each counterparty.

White & Case Client Alert

SR 17-3

OCC Bulletin 2017-12

Press Release

 

Farm Credit Administration

Federal Deposit Insurance Corporation

Federal Housing Finance Agency

Not applicable, as there are no Swap Dealers regulated by such entities that would be affected.

Press Release

Commodity Futures Trading Commission

Each Swap Dealer that was required to comply with the variation margin requirements on 1 March 2017 with respect to its counterparties must comply prior to 1 September 2017, subject to the following requirements:

  • the Swap Dealer's current non-compliance with respect to a particular counterparty is solely because it has not, despite good faith efforts, completed necessary credit support documentation or, acting in good faith, requires additional time to implement operational processes to settle variation margin;
  • the Swap Dealer uses its best efforts to continue to implement compliance without delay;
  • the Swap Dealer must continue to post and collect variation margin in accordance with any existing arrangements.

Swap Dealers are expected to make continual, consistent, and quantifiable progress toward compliance with the variation margin requirements with all counterparties on a rolling basis during this period.

White & Case Client Alert

CFTC No-Action Letter 17-11

European Union

European Supervisory Authorities (ESAs)

The ESAs issued a statement noting that the implementation of variation margin requirements by 1 March 2017 "mainly [posed] a challenge for smaller counterparties" (i.e. smaller FCs on the buy-side of the market and NFC+s). Taking this into account, it noted that, although the ESAs still expect Competent Authorities (being the relevant regulator in each EU Member State) to generally apply their risk-based supervisory powers to enforce applicable legislation, in this context they may take into account:

  • the size of the exposure to the counterparty in question and its default risk;
  • the steps the parties have taken to document progress towards full compliance;
  • the availability of alternative arrangements to ensure that any non-compliance is contained (such as using existing credit support documentation that may not be compliant with the EU margin rules (e.g. in respect of timing, collateral stated to be eligible for posting, etc.)).

In short, the relief is limited in scope and the ESAs expect Competent Authorities to continue to apply their supervisory powers.

White & Case Client Alert

Statement from the ESAs

Japan

Japan Financial Services Agency

Variation margin requirements commenced on 1 March 2017. However, the Japan Financial Services Agency has stated that, if the counterparty is located outside Japan where variation margin requirements have not been effective and a Japanese financial institution has difficulty in entering into the necessary documentation required for the margin regulations, the Japan Financial Services Agency will consider, for the time being, that the appropriate management system required by the margin regulations has been established so long as the relevant Japanese financial institution has established appropriate measures to reduce the counterparty risks in line with the margin regulations and continuously strives to comply with the regulations, including without limitation, addressing of the remaining risks and managing the exposure.

JFSA

Hong Kong

Hong Kong Monetary Authority

Authorised Institutions incorporated in Hong Kong and overseas are required to comply with margin requirements when they enter into in-scope uncleared OTC derivatives with a covered entity.

Variation margin requirements apply to new transactions entered into on or after 1 March 2017. Initial margin requirements, on the other hand, apply in accordance with a phase-in schedule. Both requirements are now subject to an initial 6-month transition period (1 March 2017 to 31 August 2017).

HKMA – Supervisory Policy Manual

Singapore

Monetary Authority of Singapore (MAS)

MAS Covered Entities entering into in-scope uncleared OTC derivatives booked in Singapore are required to comply with the margin requirements.

Variation margin requirements apply to new transactions entered into on or after 1 March 2017. Initial margin requirements, on the other hand, apply in accordance with a phase-in schedule. Both requirements are now subject to an initial 6-month transition period (1 March 2017 to 31 August 2017).

MAS – Singapore Margin Guidelines

MAS Response – Policy Consultation on Margin Requirements (December 2016)

Australia

Australian Prudential Regulation Authority (APRA)

If an APRA covered entity enters into a new uncleared OTC derivative transaction, with the exception of a physically settled FX forward or swap, with a covered counterparty during the margining period 1 March 2017 to 31 August 2017, the APRA covered entity will be taken to comply with the variation margining requirements in CPS 226 if it uses its best endeavours to exchange variation margin with the covered counterparty during that period.

If the transaction remains open on 1 September 2017, the APRA covered entity must exchange variation margin for the transaction from 1 September 2017.

CPS 226

 

 

THE DELTA REPORT
Derivatives Newsletter
May 2017

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