The introduction on March 1 of new rules that mandate
the allocation of variation margin poses some tough questions
for derivatives users, a panel of experts has warned.
Speakers at Deutsche Börse's Funding and Financing
Summit in Luxembourg this week said the global rule changes
slated for early March are causing serious headaches for
"The fact is we’re not far from that date at
all, and there is a huge amount of work still to be done," said
panel moderator Bill Hodgson, founder of magazine The OTC
In a poll during the event, only 17% of delegates said they
felt "ready" for the looming deadline, with regulatory
agreements in place and operational changes made.
"The most important thing is created by the fact the rules
only apply to the new trades that you do," said David White,
head of sales triResolve at NEX-owned compression firm
White said firms have "a decision to make". He asked: "Do
you as a market participant either amend the collateral
opinions you’ve got to reflect the regulatory
requirements you have to adhere to, or do you continue to
collaterise those legacy trades you have traded?"
He also cited the legal challenge of working out which of
your agreements are "regulatory-aligned" and which are not, and
the significant operational challenges.
"The collateral ecosystem has only been built to deal with
one margin variation on a given day," White said. He added the
industry is now moving into a new world, progressing from one
margin call to many margin calls.
"The collateral system has not been built to perform those
calculations, so fundamental change has to take place."
Phil Simons, global head of sales fixed income at Deutsche
Börse, asked: "Are we now going to start seeing a
significant price differentiation between cleared and
Responding, Benoit Gourisse, director of European public
policy at trade body the International Swaps and Derivatives
Association (ISDA), said almost all trades that can be cleared
are being cleared. "The rest that aren’t cleared
are simply not cleared."
Simons disagreed, arguing there are a lot of buy-side trades
exempt from clearing but he questioned whether firms will
accept less favourable terms on their new trade
Standard Chartered’s Matthew Turner cited the
Bank of England as a good example of "putting a Credit Support
Annex in place, with a two-way collateral to get better
The panelists agreed however that clearing is only going to
become more rather than less important.
"Clearing has become a reality," said Gourisse. "71.5% of
interest rate derivatives have already cleared and this is
He added: "Central counterparties are growing more
interconnected and handling multi-currency clearing. Some of
them are now systematic."
Almost a third of delegates predicted the further extension
of mandatory clearing while less than 2% expect a reduction in
the use of central clearing.