US regulator backs derivatives rule delay
The top US derivatives regulator has backed calls to delay new rules that require thousands of asset managers to set aside cash to cover their bespoke derivatives deals, as a result of the disruption from the coronavirus pandemic.
Heath Tarbert, chairman of the Commodity Futures Trading Commission, told the Financial Times that global authorities were discussing a further delay to standards that come into effect from September 2021, and he would be open to a 12-month extension beyond that date.
The rules, brought in by Basel regulators, will require smaller users of swaps contracts, such as pension funds and insurers, to set aside margin on transactions that do not go through central clearing houses.
The shift to a new regime has been likened to an industry “big bang” because it would be the first time many small asset managers, which trade the instruments only a few times a year, will need to find extra collateral to back the deals.
A 2018 study by ISDA and Sifma, the trade associations, estimated that it would affect more than 1,000 institutions and require banks to set up 18,800 new accounts for their customers to cope.
However the impact of the coronavirus pandemic has forced many banks and asset managers to divert resources from preparation, and led to a co-ordinated industry call for a further extension.
“If there’s a consensus throughout the G20 jurisdictions, both among banking regulators and market regulators, for a delay of one year, then we’ll also go in that direction,” Mr Tarbert said in an interview on Thursday.
While he was keen to bring in the new rules, he acknowledged the impact of the coronavirus pandemic.
“If the operational difficulties that they’ll bring are going to come in a time when the market participants themselves are undergoing considerable amount of strain, I have to ask myself, is the benefit worth the cost,” Mr Tarbert said.
“I’m OK in the interest of continuing to have orderly and liquid markets having a one-year deferral,” he added.
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The comments are a sign of compromises financial regulators across the world have been considering in light of the economic and logistical upheaval caused by the pandemic.
Authorities have long sought to strengthen the market for privately negotiated derivatives, whose opaque standards were seen as exacerbating the credit crunch of 2008. The new rules were due to be introduced in two phases, in September 2020 and September 2021.
In 2019, the BCBS and the International Organization of Securities Commissions, the umbrella group for global markets watchdogs, agreed to postpone introducing the rules beyond September 2020.
The CFTC unanimously finalised that extension last month, with Mr Tarbert at the time citing the coronavirus upheaval as an additional impetus for the delay.
As traders grapple with a combination of working from home and a sharp economic downturn, regulators have sought to balance the immediate functioning of the markets with strict adherence to rules designed to mitigate risks in the system.
Finance trade associations have lobbied for a further delay beyond September 2021, with almost two dozen such groups collectively writing to the Basel Committee on Banking Supervision in late March to warn that the coronavirus pandemic meant it was not “possible or practicable to meet documentation and operational requirements” by that date.
The rules are designed to drive more activity through clearinghouses, where regulators have better visibility into the functioning of the markets and where potential risks may lie.
This article was tweaked immediately after publication to clarify the current implementation date