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Initial Margin rollout initially marginal

Yesterday marked the first test of the WGMR non-cleared margin rules in the US, Canada and Japan. Even with just over 20 banks in the initial phase, market participants were readying themselves for a rocky start to the new regime. They will not have been disappointed, the afternoon saw the CFTC step in with its favourite no-action remedy, granting 30 days relief for failing to fully comply with the CFTC’s custodial arrangement requirements.

Staff Letter 16-70 grants relief for the requirement that initial margin be held in third-party custodian accounts, it does not remove the obligation for phase-one entities to post and collect IM. Dealers and brokers started the day with lists delineating who may trade with whom, restricting eligible counterparties to an estimated 30-35% of the normal market. Although the situation had rapidly improved by the end of the day, with another 20% becoming eligible to trade, the CFTC had little option but to signal no-action. Delays in the finalisation of rules had already imposed a tight timeline for negotiation of multiple CSAs, custody agreements and IM model sign-offs; the urgency was exacerbated by the widespread misconception that, despite clear warnings to the contrary, the US would extend the implementation date to match Europe.

The CFTC is (unusually) to be congratulated on its swift no-action to clear the custodial bottleneck. However, the relief is unlikely to prove relieving, the majority of phase 1 banks are subject to Federal Regulators who are historically less accommodating to the market’s inability to comply with deadlines. Scott O’Malia, ISDA chief executive said “The industry has been working extremely hard to meet the September 1 deadline, but the scale of the task is enormous and some specific requirements have proved particularly challenging. We therefore welcome the extra time given to the industry by the CFTC to meet the requisite custodial provisions.” Although the exact number is not public knowledge, it can be safely estimated that the required number of custodial agreements runs into the low thousands at most. The scale of the “enormous” phase 1 task is a small fraction of that for the phase 2 March 1 2017 deadline. It is to be hoped that the less than auspicious rollout of phase 1 acts as a wake-up call for the challenge ahead.

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