The US Commodity Futures Trading Commission issued on Monday no-action letter 17-11, granting swap dealers time-limited relief from compliance with the obligation to post and collect variation margin from their OTC swaps counterparties.
Note however that no-action letter 17-11’s relief expires on 1 September 2017 and is not a blanket relief from compliance.
The fine print
The original deadline to implement variation margin across the board (dubbed “VM big bang”) is 1 March 2017, but many industry groups have reached out to the CFTC to warn that most counterparties were not expected to have completed the necessary repapering in time and/or did not have the necessary systems and procedures in place.
Relief is provided whenever the requisite documentation, or operational arrangements (such as custodial agreements) are not in place by 1 March 2017.
Swap dealers are nonetheless required to use their best efforts to comply with the regulation, and start applying it as soon as the documentation and necessary arrangements with each counterparty are in place.
Most swap dealers are regulated by a prudential regulator (typically, the Fed), which means that the CFTC no-action letter does not apply to them.
It remains to be seen whether the prudential regulators (and financial regulators in the EU and elsewhere) follow suit and adopt a similar deadline extension, or whether they will stick to the original deadline, with a resulting unlevel playing field, and likely market fragmentation come 1 March.
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