By Huw Jones
LONDON (Reuters) – A March deadline for financial firms to post cash to cover uncleared derivatives transactions was “unrealistic” and some firms won’t be ready in time, a top U.S. regulator said on Friday.
Financial firms around the world have to post a so-called “variation” margin from March on swaps trades that have not passed through a clearing house, a third party which ensures a trade is completed, even if one side of the transaction goes bust.
It is among the key global reforms agreed by world leaders at the height of the 2007-09 financial crisis to make the $544 trillion derivatives market safer and more transparent.
Christopher Giancarlo, a commissioner at the U.S. Commodity Futures Trading Commission (CFTC), which regulates derivatives in the United States, said the deadline will pose a massive challenge for market participants.
“Derivatives users must now be working to modify their existing collateral agreements or draft new ones,” he told a conference held by derivatives industry body ISDA in London.
“Unfortunately, regulators imposed an unrealistic deadline on the marketplace and seem intent on sticking to that deadline regardless of the effect on the health of the market and market participants,” said Giancarlo, who is in line to head the agency once Donald Trump is inaugurated as U.S. president on Jan. 20.
“As the variation margin deadline approaches, I call on my fellow regulators to determine the market’s readiness and help ease the transition as much as possible to ensure the orderly functioning of the marketplace.”
Australia, Hong Kong and Singapore have already said they would allow a six-month phase-in approach from March, but the EU is heading for a hard deadline.
Giancarlo, who was meeting British regulators during his visit to London, said it was too early to know what needs to be done about a deadline that will affect many trades in a cross-border market.
“The concern I have with the March deadline is some of the smaller firms, asset managers and pension funds, may not be able to get their documentation done in time with some of the sell-side firms,” Giancarlo told reporters.
Trump has said a reform of Wall Street known as Dodd Frank, which includes derivatives rules, should be scrapped as it has failed to lift economic growth.
Giancarlo, the sole Republican on the CFTC, said he was a “long standing” supporter of core elements of the derivatives reforms in place, but not the new trading rules for swaps.
“The time has come for the CFTC to revisit its flawed swaps trading rules to better align them to market dynamics, allow U.S swap intermediaries to fairly compete in world markets, and reverse the tide of global market fragmentation.”