November 24, 2017 / 12:54 PM / a year ago

EU watchdogs flag leniency in FX cash call from January

LONDON (Reuters) - The European Union has suggested that national regulators could be more lenient in how they enforce a rule from January that requires banks and other market participants to post cash on hedges against currency swings.

The EU rule imposes a “variation margin” on banks, companies and funds that use currency forwards and other derivatives to hedge exposures to currency risks.

That means they must put up cash to back the trades every day in a bid to make markets safer and apply lessons learned from the 2007-09 financial crisis.

The rules stem from a global agreement but the United States is applying a looser version.

The EU’s banking, markets and insurance watchdogs said in a joint statement on Friday that they have been “made aware of challenges for certain counterparties” the new rule presents.

They also acknowledged it was being applied in a more limited way in some parts of the world.

The watchdogs said they expect the bloc’s national regulators to “generally apply their risk-based supervisory powers in their day-to-day enforcement” in a proportionate manner — effectively giving cover to be more lenient in some cases.

“This is a very welcome announcement and helps build towards a more globally harmonised environment for end-users of FX markets,” said James Kemp, a managing director at GFMA, a global industry trade body.

In the meantime, the watchdogs said they are working on amendments to bring the EU rules in line with what other key countries are doing.

“Clearly, with deadlines looming, both sight of the final text combined with confirmation from each EU country, as soon as possible, regarding the amended scope and timing expectations will help to further clarify the position,” Kemp said.

Reporting by Huw Jones; Editing by Catherine Evans

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