CFTC Postpones Enforcement for Collateral Rule

U.S. swaps regulator gives grace period until Sept. 1 amid concerns the rule's March 1 deadline would cause disruptions.

The U.S. Commodity Futures Trading Commission says it will give swaps dealers more time to comply with collateral requirements scheduled to take effect March 1, aiming to ease concerns that global markets could face disruptions without a transition period.

In a no-action letter issued Monday, the CFTC said that from March 1 through Sept. 1, it will not recommend enforcement action against dealers for failing to comply with the new rules. The action doesn’t delay the effective date, but simply gives market participants a grace period, the agency said in a statement.

“The CFTC remains committed to the March 1 date, agreed with its fellow U.S. and overseas regulators, for posting of variation margin on swaps transactions between swaps dealers and their financial end-user customers,” Acting Chairman J. Christopher Giancarlo said in a statement. “Nevertheless, the facts on the ground cannot be ignored that as much as 90 percent of those end-users are not ready to meet the new requirements.”

The collateral requirement is one of the bedrocks of global regulatory efforts to curb risk in the market after swaps were blamed by lawmakers for fueling the 2008 financial crisis. The international standards were completed at the global level in 2015 and then written into national laws before beginning to take effect. U.S. bank regulators completed their version of the rule in October 2015.

Thousands of companies have been working to redo legal agreements to comply with the rules, but they’re unlikely to finish by the March 1 deadline, executives for groups including the International Swaps and Derivatives Association, the Global Financial Markets Association and the American Bankers Association, wrote to authorities in a Feb. 7 letter.

The CFTC said it issued the no-action letter after hearing from industry participants about operational challenges in preparing documentation for so-called financial end-users that rely on swaps to hedge financial risk. Without the relief, swap dealers might have to stop trading with nondealer counterparties, which could reduce market liquidity and limit the ability to hedge positions for pension funds, asset managers and insurance companies, the CFTC said.

“We hope that other agencies and jurisdictions can take similar action so that there are coordinated, clear rules of the road,” David Hirschmann, president and CEO of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, said in a statement. “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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