An uphill struggle to implement variation margin requirements by 1 March 2017

The OTC derivatives industry is working very hard to comply with variation margin requirements that will go live in a number of regions on 1 March 2017. Entities caught by the rules and who do not have regulatory compliant collateral documentation in place for 1 March will not be able to trade.

Deepak Sitlani, Derivatives partner at global law firm Linklaters, says: “The new variation margin rules are not being phased in and so will immediately apply to a wide variety of counterparties, including dealers, hedge funds, insurance companies, pension funds and some corporates. Whilst a number have started preparations, there is a large part of the industry that needs to get moving quite quickly.”

The new margin rules will require parties to uncleared OTC derivatives to exchange variation margin daily on a fully collateralised basis. This is with a view to protecting counterparties against potential losses on a default. Regulators around the world have agreed to implement the rules but not all jurisdictions are on the same timetable. The EU, US, Japanese and Canadian variation margin requirements will all go live on 1 March 2017. The Hong Kong, Singapore and Australian requirements will also go live on 1 March 2017 but with a six month transitional period during which time compliance is on a best efforts basis. The Swiss variation margin requirements are expected to apply from September 2017.

Sitlani says: “in one respect, the fact that rules will go live in a number of jurisdictions at the same time forces the market to focus and broadly update their arrangements in one go. However, identifying and complying with the various regulatory regimes that apply to each trading relationship is no easy task.”

In order to assess whether the margin rules apply to a particular relationship and if so, which rules apply, as a first step, market participants need to provide information about the regimes applicable to them and to their counterparties. The International Swaps and Derivatives Association has published a Regulatory Self Disclosure Letter (SDL) to help the industry provide and receive the required information.

Sitlani says “The SDL in conjunction with ISDA Amend is a great way to facilitate the exchange of regulatory information. What a number of in-scope entities are struggling with, particularly on the buy-side, is understanding how they fit into regulatory regimes with which they are not familiar. The issue isn’t with the number of questions or the detail that is required, it’s actually understanding the pieces of each regulation that underpin the questions. So you might have a US pension fund, for example, that needs to comply with the US regulations but also needs to complete sections on the EU and Japanese rules because of the counterparties with which it trades. That fund may not fully understand the regulations in the EU and Japan. It becomes a bit of a minefield to provide the right information.”

Linklaters has therefore produced a tool to bring together guidance from each regime covered by the SDL to assist market participants in completing the questionnaire. The tool is equally helpful if regulatory information is being provided outside of the SDL. Covering the EU, US, Japan, Canada, Switzerland, Australia, Hong Kong and Singapore, it sets out regulatory information to help firms approach the SDL. Linklaters believes that it is an easy to use and cost effective way to obtain a focused explanation of the relevant pieces of regulation, which should be more cost and time effective than seeking advice on a bespoke basis.

Sitlani comments “This tool has been launched in response to increasing client demand as they navigate a complex but necessary minefield of cross-border regulation.”

The SDL Guidance tool from Linklaters can be accessed via the Client Knowledge Portal – for more information, see here .


Notes to Editors

For more information, contact Surinder Sian on +44 207 456 4842

  • Linklaters LLP is a leading global law firm, supporting clients in achieving their strategies wherever they do business. We use our expertise and resources to help clients pursue opportunities and manage risk across emerging and developed markets around the world. Linklaters is a recognised market leader for advice on public takeovers, cross-border and multi-jurisdictional mergers and acquisitions, joint ventures, disposal and other corporate advisory matters and capital markets issues. Our clients are drawn from a broad base including the FTSE 100, Fortune 500, DAX 30, CAC 40 corporates, private equity houses, investment banks and governments.