October 4, 2016 / 1:01 PM / in 10 months

Europe adopts final swap margin rules

LONDON, Oct 4 (IFR) - The European Commission has adopted new rules that will force swaps participants from January 2017 to post collateral against over-the-counter derivatives exposures that are not cleared through central counterparties.

Just over a month after the new risk mitigation requirements were implemented across the US, Canada and Japan, the European Commission today endorsed regulatory technical standards submitted by three European Supervisory Agencies.

The final rules, which form part of the European Market Infrastructures Regulation, incorporate certain amendments to the RTS, including the removal of concentration limits for pension funds and an updated implementation timeline.

The final pillar of the G20 agreement, which aims to reduce risk by increasing the amount of collateral backing derivatives and incentivising the shift to central clearing, was put on hold by the EC in the summer, throwing the globally agreed implementation timeline into disarray.

"Long-awaited is a bit of an understatement," said Emma Dwyer, partner at Allen & Overy.

"The industry will probably be breathing a sigh of relief that this part of the non-cleared margin rules epic has finally arrived. It's been a long journey and there's still a huge amount of work to be done. One of the hurdles to getting on with that work has now hopefully been overcome."

The most significant change from initial standards is the removal of concentration limits for pension funds. The initial rules required pension funds posting more than 1bn of collateral with a single counterparty to diversify at least half of the collateral across different sovereign debt issuers. The commission ruled against that requirement, arguing that it would force pension funds to take foreign currency risk.

The decision takes the form of a delegated regulation and is now subject to an objection period by the European Parliament and European Council. After that it will be published in the EU's Official Journal for implementation one month later.

For the first wave of participants, with uncleared swaps exposures of over 2.25trn, implementation is expected in January 2017 - more than four months later than the internationally agreed September 1 implementation deadline.

Industry participants have pushed aggressively for European rules to come into line with the US in an effort to avoid fragmentation along regional lines of the global swap market.

Implementation by the end of January at the latest is seen as crucial if European regulators are to get back on track with a global timeline that sees the entire industry forced to exchange variation margin, reflecting daily price moves of bilateral exposures.

Additional counterparties with smaller exposures will be forced to post initial margin in annual waves out to 2020. (Reporting by Helen Bartholomew)

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