On June 16, 2016, the European Commission (EC) informed the European parliament and the council that it is reviewing draft regulatory standards (RTS) submitted by the European Supervisory Authorities and the standards will not be finalized in time to implement the rules by the original September 1, 2016 deadline. According to an EC spokesperson, the EC intends to deliver the final RTS before the end of the year. Firms covered by the first wave of the rules would be required to comply before the middle of 2017, though a date has not yet been set. Banks and other financial institutions are calling on the United States to follow suit.

The delay has been welcomed by market participants as the industry struggles to comply with draft rules that have many issues and ambiguities still to be ironed out. The scale of work involved is great as parties are faced with complex renegotiation logistics with respect to their uncleared credit support documentation to achieve compliance (see Practice Note, ISDA CSA Renegotiation and the ISDA Standard Initial Margin Model (SIMM) and Legal Update, ISDA Publishes 2016 Credit Support Annex for Variation Margin (New York Law)). As a result, ISDA requested a delay by global regulators of implementation of the uncleared swaps margin rules in August 2014 (see Legal Update, ISDA Requests Delay of Global Uncleared Swaps Margin Rules).

The delay interferes with plans for simultaneous implementation of BCBS-IOSCO standards for non-cleared margin across regions (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final BCBS/IOSCO Guidelines on Uncleared Swap Margin Collateral). The decision could put European implementation almost a year behind similar rules in the US and Japan, presenting the opportunity for regulatory arbitrage. Many in the industry believe the splintered timeline could also pose a problem for infrastructure providers that are attempting a mass implementation of multiple rule sets without the final EU rules in place.

Final US margin rules were approved by the CFTC in December and market participants say there is little appetite to change the timeline for US implementation, since the original implementation date of December 2015 was already delayed by nine months. However, the threat of further swaps market fragmentation as a result of the mismatch could raise calls for the US to follow suit.

The largest derivatives dealers have just over two months to re-negotiate their credit support agreements before September implementation of US and Japanese rules, while draft European rules remain subject to change.

Under the original timetable, which still stands for US and Japanese rules, the largest derivatives dealers will be required to post initial margin beginning in September (parties with in excess of $3 trillion in average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps (SBS), FX forwards, and FX swaps for March, April, and May preceding the threshold phase-in date). Others will be brought into scope in yearly waves, with the final derivatives users with exposures of less than $750 billion subject to initial margin beginning in September 2020.

Variation margin, which must be exchanged daily to reflect changes in valuation of swaps contracts, will be required to be posted by all participants from March 2017.

The EC notes that the small number of firms covered by the first wave of the requirements will in many cases also be covered by rules in other jurisdictions and therefore should continue to prepare for implementation.