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The main US derivatives regulator has provided insurers, pension funds and other financial end-users some respite from complying with new rules that triggered a last minute scramble for compliance by the industry.
The Commodity Futures Trading Commission issued a “no-action” letter on Monday, meaning that it will not recommend enforcement action against derivatives users that breach the rules. The new rules cover more bespoke contracts that are traded bilaterally between banks and their customers. From March 1, those entering into contracts would need to supply “variation margin”, or collateral, to cover daily price fluctuations, but the relief offers no action until September 1.
Many derivatives users already post some form of variation margin, but there have still been widespread complaints that there has not been enough time to come into compliance with the specificity of the rules, including drafting new trading documentation.
“While over time the change is manageable, in the short term it poses an operational nightmare,” said Kevin McPartland, head of market structure research at Greenwich Associates.
The fear has been that without some concession, many derivatives users that use bespoke derivatives to protect against fluctuations in market prices would no longer be able to do so. The new rules are part of the Dodd-Frank Act that has drawn scrutiny in recent weeks as President Donald Trump hones in on relaxing financial regulation introduced in response to the 2008 financial crisis.
Acting chairman of the CFTC Christopher Giancarlo added: “The facts on the ground cannot be ignored that as much as ninety percent of those end-users are not ready to meet the new requirements despite their best efforts to do so.”
While the CFTC is the main regulator for the US derivatives industry, it is not the only agency with oversight.
“We hope that other agencies and jurisdictions can take similar action so that there are coordinated, clear rules of the road,” said David Hirschmann, president and chief executive of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness. “A failure to provide similar relief will only increase risk in our financial system by cutting off access to the derivatives markets as a result of noncompliance.”
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