Global regulators delay new derivatives margin rules to avoid market fragmentation
- Deadline for implementation of new margin rules extended by one year to September 1, 2021
- The Basel Committee on Banking Supervision said that the potential benefits of margin requirements must be weighed against the impact on liquidity
Global banking regulators have delayed the implementation of a rule forcing smaller firms to back their derivatives trades with cash, in a bid to avoid market fragmentation.
The Basel Committee on Banking Supervision and its global securities market counterpart, the International Organisation of Securities Commissions (IOSCO), had agreed new rules requiring that derivatives trades that have not cleared to be backed by a “margin” of cash to limit excessive and opaque risk taking.
This rule is designed to reduce risks to the global financial system following the central role played by the multi-trillion dollar derivatives sector in the global financial crisis a decade ago.
However, to ensure the rule is applied consistently, the final implementation has been extended by one year to September 1, 2021, at which point firms that handle an aggregate average amount of derivatives greater than 8 billion euros (US$8.95 billion) that are not cleared at exchanges will be subject to the requirements.
“The Basel Committee and IOSCO have agreed to this extended timeline in the interest of supporting the smooth and orderly implementation of the margin requirements which is consistent and harmonised across their member jurisdictions and helps avoid market fragmentation that could otherwise ensue,” a statement read.
In the final phase of implementation, initial margin requirements will apply to a large number of financial entities for the first time.
Jurisdictions including the United States, European Union and Japan have implemented margin requirements for non-cleared derivatives in line with the first phase of Basel standards in 2016.
But various industry bodies have said new entities that would be subject to the new rules needed more time because there were still some differences that existed across jurisdictions in certain areas – for example, eligible collateral, settlement time frames and the treatment of inter-affiliate transactions. If not addressed, these could contribute to market fragmentation.
The Basel committee added that the potential benefits of margin requirements must be weighed against the impact on liquidity.
Margin requirements will not apply to physically settled foreign exchange forwards and swaps because of their unique characteristics or particular market practices but will apply to all other non-centrally cleared derivatives.