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International Organization of Securities Commissions (IOSCO) said it is concerned that some firms for non-centrally cleared derivatives may not be able to fully comply on time with the pending variation margin requirements, which are scheduled to take effect from 1 March. This could result in reduction in firms’ ability to hedge positions and could potentially impact liquidity.
Some market participants are facing challenges with the completion of the necessary documentation and processes, required to be in full compliance with the variation margin requirements. In particular, they are finding it difficult to complete the necessary credit support documentation and operational processes to settle variation margin in accordance with the requirements despite efforts to do so.
“While the Board recognizes that some market participants have been exchanging variation margin on a regular basis for some time, some firms, including, in particular, smaller financial firms, buy-side firms, asset managers, pension funds, and insurance companies, may not yet have well-developed infrastructures to calculate and exchange margin by 1 March 2017,” the Commission said in a statement.
The margin standards are established by IOSCO and the Basel Committee on Banking Supervision (BCBS) and are implemented under domestic laws in various jurisdictions. They are outlined in the European Market Infrastructure Regulation’s (EMIR) framework. The first implementation data for initial and variation margin for major firms was 1 September, 2016, and the second implementation date for variation margin for a broader class of firms is 1 March, 2017. Although the IOSCO thinks some market participants may not be able to implement the new requirements on time, it “remains committed to the prescribed deadlines”. Moreover, it expects market participants “to make every effort to fulfill the necessary variation margin requirements by the prescribed deadlines”.
“While reaffirming its commitment to implementation of the margin requirements by 1 March, 2017, the Board [of IOSCO] believes that relevant IOSCO members, to the extent permitted by their relevant legal and supervisory frameworks, also should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements,” the Commission said in a statement.
The margin requirements are part of a set of unified Regulatory Technical Standards (RTS) that the European Securities and Markets Authority (ESMA) drafted in 2016. At the time, the ESMA said it based the RTS on the framework established by the IOSCP and the BCBS supervisory guidance for managing risks associated with the settlement of foreign exchange transactions.