June 13, 2019 / 11:33 AM / a month ago

Global regulators seek to head off derivatives cash clash

LONDON (Reuters) - Global banking regulators meet next week to try to bridge divisions over whether to delay forcing smaller firms to back their derivatives trades with cash for the first time.

Regulators fear that if no common ground emerges, countries could take different approaches and fragment a global market used by companies to insure themselves against risks.

“This will be discussed at next week’s Basel Committee meeting and I can’t prejudge the outcome,” William Coen, the committee’s secretary general, told Reuters.

Following the central role played by the multi-trillion dollar derivatives sector in the financial crisis a decade ago, new rules were agreed requiring “margin” or cash to back uncleared derivatives trades.

The rules, written by Basel and its global securities market counterpart IOSCO, have been rolled out over several years with the final “Phase 5” due in 2020.

It would bring an additional 1,100 new entities into scope globally, but industry bodies say these firms need more time or even exempting, given they are not systemically important.

Smaller firms fear having to complete the paperwork and other requirements but not actually having to post margin because their exposures fall below the initial margin threshold.

A regulatory source from a major Basel member country said regulators in Britain, the United States and Asia are sympathetic to making changes, but the European Union is leery given a delay would mean having to change an EU law that enshrines next year’s deadline.

“There are two sides to the debate,” Coen said.

Some argue the bulk of activity targeted by the margin rules is already covered, he said.

“On the other side of the debate, I ask what difference is there today in the circumstances that led Basel and IOSCO to develop the margin framework?” Coen said.

“This has been around for at least 6 years, the implementation expectations have been well flagged.”

Scott O’Malia, chief executive of ISDA, the global derivatives industry body, said the most appropriate solution would be to lift the Phase 5 compliance threshold.

“This will create certainty and reduce operational complexity for smaller firms, without compromising safety and soundness,” O’Malia said.

IOSCO would also need to agree any changes and some of its members are privately calling on it to show more flexibility, the regulatory source said.

Reporting by Huw Jones; Editing by Keith Weir

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