Banks and other financial institutions are calling on the United States to follow the European Union in putting off new rules on trading of a type of complex securities to stave off a potentially messy market disruption.

The European Commission recently diverged from the U.S. and Japan by delaying until mid-2017 a global regulation put in place following the financial crisis. The rules require banks to put up billions of dollars in collateral to reduce the risk of trading derivatives.

Derivatives shouldered some of the blame for the financial crisis due to their opacity and subsequent investor losses. As a result, politicians decided at the G20 summit back in 2009 that certain standardised derivatives should be settled at a clearing house. Politicians also stated that the remaining bilateral derivatives should be subject to higher capital requirements.

But the varying speeds of legislative processes in key jurisdictions have tripped up the plan for coordinated implementation across the world’s major capital markets. Unsurprisingly, lots of bankers are unhappy about it.

The additional collateral required by the rules will make bilateral derivatives trades more expensive. In other words, non-EU banks that must follow the rules from September 2016 will be at a competitive disadvantage.

“You’re left with different regimes coming in at very different times,” said one banking source who asked not to be named. “You’re going to have people constantly repapering, and it would create quite a lot of market disruption and uncertainty.”

That has led financial institutions to call for the U.S. to follow suit with a delay until 2017.

But so far, U.S. and Japanese regulators have publicly stated that they will stick with the timeline set by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions.

This stance, however, still leaves open the question of a global delay for the second wave of the rules. The rules take effect for the biggest banks in September 2016, but it’s not until March 2017 that all other financial firms must start posting collateral.

That means the U.S. could compromise and meet the EU part way by aligning the second wave with the EU’s revised mid-2017 date. But with major U.S. politicians already opposing a delay, it might not be politically viable.

In the Commission’s statement on June 9, it said the objective was to deliver final rules by the end of the year and for firms covered by the first wave of the rules to comply before the middle of 2017.

The derivatives delay, however, is the latest EU hold-up in the implementation of post-crisis rules. After it became apparent in October 2015 that the ESMA would not be able to finalise key technical infrastructure on time, the Commission proposed in February a one-year delay to the revised MiFID II.

Market disruption isn’t the only reason the industry is fighting for a uniform start date to the derivatives collateral rules.

ISDA is working with law firms to provide a market-wide protocol to enable industry participants to change their collateral documentation. This is a mammoth task to prevent the industry from having to manually renegotiate collateral contracts. It was due to be finalised before March 2017.


It sounds simple, but given the cross-border nature of the derivatives market, the confusion has left bankers scratching their heads. The scope of the U.S. margin rules reaches any banks dealing with U.S. firms, meaning any EU banks either based in the U.S. or transacting with U.S. banks will still find themselves subject to the rules and will have to put in place interim documentation.

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