WASHINGTON U.S. regulators joined their European counterparts on Thursday and granted some last-minute relief on a swaps rule, after the derivatives industry said it was overwhelmed with record-keeping requirements by the rule coming online next week aimed at driving down risk in the financial system.
The country's banking regulators - the Federal Reserve, Office of Comptroller of the Currency and Federal Deposit Insurance Corporation - said parties trading swaps without a central clearinghouse must follow the rule for their biggest and riskiest trades by the original March 1 deadline.
But they granted more flexibility for smaller trades, giving the firms until September to comply with the rule on variation margin, the cash and bonds traders put up to cover losses from day-to-day swings. That will lighten some of the more burdensome requirements for smaller firms.
Much of the global $544 trillion market is dominated by U.S. banks. Swaps, a form of derivatives, mushroomed before the financial crisis, when they were lightly regulated. Since the 2007-09 credit meltdown, most are routed through clearing houses, but some are so complex they will not be cleared.
The rule, part of the Dodd-Frank Wall Street reform law, was finalized in December 2015. Along with requiring adequate collateral, it is also intended to set margin requirements high enough to curb firms' abilities to take on large risks.
"This flexibility is welcome and needed," said Scott O'Malia, CEO of the International Swaps and Derivatives Association.
He added that despite the industry's extensive efforts, it had struggled with a requirement to amend all outstanding collateral documents "in a relatively short period of time."
Asset managers in January asked for more time, citing record-keeping challenges, and earlier this month the top U.S. derivatives regulator said it would hold off on strictly enforcing the rule until September.
On Thursday, European banking authorities announced they too were giving wiggle room for a similar rule coming online March 1.
Raf Pritchard, CEO of triResolve Margin, a service created to help firms deal with the increased volume and complexity of margin calls under the rule, said that over the years, each region has customized its part of the market, which will make automation and standardization around the globe difficult.
"There is an element here where everyone is being tracked onto a common timetable," he said. "There’s only so many firms the entire industry can onboard at once. There may be bottlenecks."
(Reporting by Lisa Lambert; Editing by Dan Grebler)