U.S. and European Regulators Join Other Global Regulators in Easing Enforcement of March 1 Variation Margin Deadline

Since we first prepared this update, the International Swaps and Derivatives Association (ISDA), who has spent over 30 years working to make global derivatives markets safer and more efficient, has prepared a summary table (available here) of regulatory transition periods, relief and guidelines with respect to variation margin requirements effective March 1, 2017.

Recently, United States prudential regulators and the European Supervisory Authorities (ESAs) announced various forms of easing enforcement of OTC derivative variation margin rules previously set to take effect on March 1. The derivatives market had come to refer to this date as the “Variation Margin Big Bang” on account of the operational challenges market participants faced in preparing to comply with these rules. This relief aligns the prudential regulators and ESAs with the Commodity Futures Trading Commission (CFTC) and regulators in Australia, Hong Kong, and Singapore, as well as Japan and Canada, who also issued similar relief recently.

What Does This Mean for You?
The collective relief issued by these international regulators effectively grants many market participants additional time, until September 1, 2017, to come into compliance with the rules. While this does not represent a wholesale extension of the March 1 implementation deadline, based on our discussions to date with major dealers, we expect that most derivatives end users will not encounter a disruption in trading for failure to have margin-compliant documentation in place by that date, particularly if they engage in a good faith attempt to meet the deadline. That said, we continue to encourage our clients that are subject to the margin rules to endeavor to put in place margin-compliant documentation before March 1 to reduce the chance of any trading delays.

United States Prudential Regulators and the CFTC
The recent guidance issued by the Federal Reserve Board (Fed) and the Office of the Comptroller of the Currency (OCC), two United States prudential regulators, effectively allows financial institution examiners to exercise discretion in how they evaluate compliance with the variation margin rules. The Fed and the OCC have directed examiners to focus on a dealer’s “good faith efforts” to comply as soon as possible, and further advised that where the dealer’s counterparty does not present significant credit and market risks, compliance should be expected by September 1, 2017. The Farm Credit Administration, the Federal Deposit Insurance Corporation, and the Federal Housing Finance Agency supported the guidance issued by the Fed and the OCC.

Ten days prior to the guidance issued by the Fed and the OCC, the CFTC’s Division of Swap Dealer and Intermediary Oversight had issued no-action relief indicating that it would not recommend an enforcement action against any swap dealer for failure to comply with CFTC variation margin rules through September 1, 2017.

Fed Guidance: https://www.federalreserve.gov/bankinforeg/srletters/sr1703.htm
OCC Guidance: https://www.occ.gov/news-issuances/bulletins/2017/bulletin-2017-12.html
FDIC Press Release: https://www.fdic.gov/news/news/press/2017/pr17013.html
CFTC No-Action Letter: https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-11.pdf

European Supervisory Authorities
While the ESAs noted that they are not able to extend application of the variation margin rules, they did indicate that they expect member state-specific regulators (national competent authorities, or NCAs) to apply their own discretion on a case-by-case basis regarding enforcement of these rules. The ESAs noted that the NCAs could take into account the size of exposure to the counterparty plus its default risk, as well as documented efforts towards full compliance and pursuit of alternative measures to contain risk of non-compliance. To date, the UK Financial Conduct Authority, Germany’s BaFin, and the Dutch Authority for the Financial Markets have indicated that they will exercise this discretion.

ESA Guidance: https://www.esma.europa.eu/sites/default/files/library/esas_communication_on_industry_request_on_forbearance_variation_margin_implementation.docx_0.pdf