Derivatives users not ready for margin regulations
06 January 2015 New York
Image: Shutterstock
Derivatives end users are concerned about their ability to meet new margin requirements for non-cleared derivatives, according to a survey by the International Swaps and Derivatives Association (ISDA).
Of 400 respondents, on third were unsure if they have to comply with the new requirements. While 36 percent knew they had to comply, of these, 65 percent expressed concern about meeting the requirements.
Under the new requirements, most derivatives users will be obliged to post initial and variation margins on their non-cleared derivatives transactions. Rules will be phased in from December 2015 to December 2019, starting with the largest derivatives.
Despite confusion over the new requirements, the survey showed that derivatives are still a valued risk management tool for end user firms, with 81 percent of respondents calling them important, or very important, to their risk management strategies. This echoes the results of similar surveys conducted in April and September of 2014.
During Q1 2015, 78 percent expect their use of derivatives to either increase or stay the same. The most popular usage is for risk management purposes, with 65 percent using derivatives for managing exposure to currencies, interest rates, exposure and credit.
Second was the purpose of hedging exposures to international markets, with 52 percent citing this, while 38 percent used them for reducing financing costs.
Increasing costs of hedging was the top concern around derivatives, with 59 percent citing this, while regulatory uncertainty and the scope of cross-border derivatives regulation also emerged as worries, with 38 percent and 36 percent concerned about these, respectively.
More than half thought that derivatives markets were fragmenting along geographical lines because of new regulation. Of these, 55 percent said this is having a negative, or strongly negative, effect on their ability to manage risk.
CEO of ISDA, Scott O’Malia, said: “The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms still appear unsure whether the rules apply to them.”
He added: “Once the margin rules are finalised, it is vital that market participants have sufficient time to allow for the legal, operational and technological enhancements necessary to effectively and safely implement these new requirements.”
“That’s why ISDA has recommended a longer phased implementation schedule to accommodate the adoption of a transparent standard industry model and the necessary documentation to exchange collateral on a global basis. It is also important that there is consistency between the various sets of rules, particularly regarding which market participants must post and collect margin.”
The survey included respondents from financial institutions and non-financial corporate companies, mainly headquartered in Europe and North America.
Of 400 respondents, on third were unsure if they have to comply with the new requirements. While 36 percent knew they had to comply, of these, 65 percent expressed concern about meeting the requirements.
Under the new requirements, most derivatives users will be obliged to post initial and variation margins on their non-cleared derivatives transactions. Rules will be phased in from December 2015 to December 2019, starting with the largest derivatives.
Despite confusion over the new requirements, the survey showed that derivatives are still a valued risk management tool for end user firms, with 81 percent of respondents calling them important, or very important, to their risk management strategies. This echoes the results of similar surveys conducted in April and September of 2014.
During Q1 2015, 78 percent expect their use of derivatives to either increase or stay the same. The most popular usage is for risk management purposes, with 65 percent using derivatives for managing exposure to currencies, interest rates, exposure and credit.
Second was the purpose of hedging exposures to international markets, with 52 percent citing this, while 38 percent used them for reducing financing costs.
Increasing costs of hedging was the top concern around derivatives, with 59 percent citing this, while regulatory uncertainty and the scope of cross-border derivatives regulation also emerged as worries, with 38 percent and 36 percent concerned about these, respectively.
More than half thought that derivatives markets were fragmenting along geographical lines because of new regulation. Of these, 55 percent said this is having a negative, or strongly negative, effect on their ability to manage risk.
CEO of ISDA, Scott O’Malia, said: “The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms still appear unsure whether the rules apply to them.”
He added: “Once the margin rules are finalised, it is vital that market participants have sufficient time to allow for the legal, operational and technological enhancements necessary to effectively and safely implement these new requirements.”
“That’s why ISDA has recommended a longer phased implementation schedule to accommodate the adoption of a transparent standard industry model and the necessary documentation to exchange collateral on a global basis. It is also important that there is consistency between the various sets of rules, particularly regarding which market participants must post and collect margin.”
The survey included respondents from financial institutions and non-financial corporate companies, mainly headquartered in Europe and North America.
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