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IM Phase 5 delay on the horizon?

Risk Magazine is reporting today about the keynote speech given by Patrick Pearson (Head of the Financial Market Infrastructure and Derivatives unit at the European Commission) at the OpRisk Europe conference in London earlier today.  He is reported to have hinted that a delay in the implementation of the final phase of the IM rules may be in the offing.

“The worst thing to do for the industry is to give up and walk away…If there’s a problem, talk about it, raise it and we’ll see what happens to the $8 billion.  I don’t think it will be scrapped, but deferring the $8 billion is a possibility I know some people are thinking about.”

If this turns out to be correct, it would represent a further development in the ongoing saga that is initial margin.  The saga began on 5 March 2019 when the BCBS and IOSCO published their initial IM ‘guidance’.  Broadly, this said two things:

  1. Amendments to legacy derivative contracts which are made solely for the purpose of addressing interest rate benchmark reforms will not trigger either the VM or IM margining requirements; and
  2. Firms aren’t required to put in place documentation or operational requirements if the amount of IM to be exchanged would not exceed the €50 million initial margin threshold mandated by the BCBS and IOSCO.

However, the sting in the tail was the BCBS and IOSCO expected that covered entities would “act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded”.  Firms were left confused.  Mr Pearson was undoubtedly correct when he commented today that the BCBS guidance “wasn’t enough”.

Subsequently, on 20 April 2019, Christopher Giancarlo (Head of the CFTC) sent a letter to Randal Quarles (Vice Chairman for Supervision at the Federal Reserve System and Chairman of the Financial Stability Board) “recommending” (what does that even mean?) that US regulators issue guidance clarifying that US regulated entities need not have in place systems and documentation to exchange IM if the IM requirement would be less than the $50 million threshold.  Whilst still not definitive, the stance adopted by Mr Giancarlo was a lot more certain than the previous BCBS/IOSCO guidance.  The FCA, Bank of England and ESMA were all included in the letter, increasing the sense that others might follow the CFTC’s lead.

So where does that leave us?  Are we looking at ‘Phase 6’ of IM?  If so, when might we get some REAL clarity?  Nobody really knows.  As Mr Pearson noted, a delay is only a “possibility”.  It’s not yet a “probability”.  Nonetheless, the chances of a delay have certainly just increased – but not to the point where you’d be wise to mothball your Phase 5 preparations.

Just like Mr Giancarlo, Mr Pearson also appeared to pour cold water on the prospect of raising the swap exposure threshold from $8 billion.  This may be the real story behind today’s “Risk” article.  Whilst the industry may be granted a grace period, the suggestion is that, fundamentally, there is no reverse gear here.  To that extent, the best course of action right now is to continue with the implementation of existing plans in the hope that you can benefit from the luxury of having more time as the ultimate deadline (whenever that might be) approaches.

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