February 16, 2013 2:34 am

Regulators loosen swaps rules

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A global council of financial regulators has eased proposed rules governing non-standard derivatives, allowing banks more time to comply and introducing the possibility that collateral could be used for other purposes.

The new proposal, described as “near final” and issued on Friday by the Basel Committee on Banking Supervision and International Organisation of Securities Commissions, gives financial groups until 2019 to come into compliance.

It also exempts financial groups from exchanging the first €50m of collateral for so-called uncleared swaps, a type of derivative that is not routed through a central clearing house that guarantees the trade for both counterparties.

Both moves were largely expected.

But in a potential victory for the financial industry, regulators are asking market participants whether they should allow financial groups to reuse the collateral put up as margin for uncleared trades in certain circumstances.

In the previous proposal, issued in July, regulators effectively said they would not allow market participants to use collateral for other purposes. Since then, an industry outcry has prompted regulators to reconsider their stance.

Regulators had initially hoped to publishfinal guidance by the end of 2012, in line with the mandate laid down by the G20 group to have more so-called over-the-counter derivatives backed by collateral. However, proposals have met fierce industry resistance, with warnings of a potential collateral shortfall as banks are squeezed by regulation and falling profits.

The International Swaps and Derivatives Association, a trade body, estimated that the total extra initial margin that would have to be found by financial markets could be $1.7tn to $10.2tn.

The €50m per counterparty threshold proposed by regulators would reduce initial margin requirements to around $700bn, similar to Isda’s previous estimate of $800bn.

David Wright, secretary-general of Iosco, told a conference in London this week that “there was still a lot of work to do” to implement the rules.

“There is a strong signal from the world’s regulatory community that we need to do more economic thinking on the balance of the overall package,” he told market participants at an event organised by the Association of Financial Markets in Europe.

Regulators also said there would be a minimum threshold, of €8bn of gross notional outstanding amount, that institutions would be able to trade before being subject to the initial margin requirements.

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