Margin on uncleared swaps: Global agreement in theory but not yet in practice

September 2013


While global reform efforts to reduce systemic risk in the derivatives market through central clearing are in effect in some nations, regulation of the remaining bi-lateral derivatives market has lagged. Finally, this month, the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) jointly released their global framework establishing margin requirements for non-centrally cleared derivatives. This framework (“Framework”) is BCBS/IOSCO’s third and final iteration, and takes into account public feedback from their prior two joint proposals.

The Framework is important because, even with mandatory clearing live in the US, a significant portion of the global derivatives market will not be cleared and will therefore remain bi-lateral. In seeking to regulate these trades, the Framework remains consistent with many of the principles discussed in BCBS/IOSCO’s previous February 2013 “near final” proposal.

Now that the BCBS/IOSCO has completed its efforts and issued this Framework, the next step is for national regulators to translate it into regulations that will become binding on market participants. In the US, the five prudential regulators have proposed a joint rule for those swap dealers and major swap participants under their jurisdiction, while the Commodity Futures Trading Commission and the Securities Exchange Commission have issued separate proposals. These proposals (issued in 2011 and 2012) differ from the BCBS/IOSCO Framework in several critical areas; however, given the potential for regulatory arbitrage should rules differ across jurisdictions, and the fact that the FRB co-chairs the BCBS/IOSCO working group that established the Framework, we expect the US rules will ultimately align with the Framework and will be finalized next year. We further expect that upcoming rules in the European Union (“EU”) will conform to the Framework because of the Framework’s similarity to the previously expressed views of the European Securities Market Authority and because the EU’s rules were postponed pending release of the Framework.

This Financial Services Regulatory Brief analyzes the Framework’s main points, assesses the Framework’s implications on the market and its participants, and suggests what actions firms should be taking now.

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