FX market participants face numerous challenges next year in adhering to regulatory deadlines, according to experts on a recent Profit & Loss webinar.
One of the more immediate regulatory deadlines that firms are currently preparing for is on March 1, 2017, when the new variation margin requirements for non-cleared derivatives come into force.
But as Gabriel Rosenberg, a partner at Davis Polk pointed out, there are a number of factors within these requirements that are making them difficult for firms to comply with, even in instances where they are already exchanging variation margin with their counterparties.
One issue that he highlighted is just the documentation effort that is needed to comply with the new rules. And while Rosenberg said that in some cases the documentation itself might not be that complex, after six years of working through different regulatory documentation “we just see an enormous amount of regulatory fatigue at various levels and this is just another nail in the coffin”.
He also highlighted challenges arising from the fact that there are certain requirements in the variation margin regulation that are not necessarily consistent with how people trade, such as the demand that firms transfer and document their variation margin on a daily basis.
Another difficulty firms are experiencing, said Rosenberg, is that the rules limit the types of collateral that are permitted to be transferred as variation margin and market participants need to make sure that their documentation reflects this.
Then there is the complication that in the US, the margin rules are not applicable to every counterparty pair, and even when they are, different regulatory bodies are responsible for overseeing different types of counterparties.
“So there’s a lot of, in my view, unnecessary regulatory complexity here that’s making people work hard in preparation for the March 1st date,” concluded Rosenberg.
Edward Brown, CEO of GTX SEF, echoed Rosenberg’s comments with regards to the massive documentation effort that his platform’s clients are currently undergoing to meet this deadline, and also noted that Christopher Giancarlo, a Commissioner at the Commodity Futures Trading Commission (CFTC), has publicly expressed concerns about the ability of market participants to be ready for a March 1 implementation date.
Asked whether he thought the market would be ready in time, Brown responded: “I think that the market would tell you “no”, but the market has a unique skill of being ready when their feet are held to the fire.”
Given Giancarlo’s comments about the potential need to delay the go-live date for the variation margin rules, especially because he is widely expected to be named as acting Chairman of the Commission once Timothy Massad departs in January, the question was raised about whether a delay would be feasible, or even likely.
“Any deadline is immovable until it is moved,” said Justin Slaughter, chief policy advisor and special counsel to CFTC Commissioner Sharon Bowen.
He added: “All it takes to move a deadline, as we saw with the de minimis change earlier this year, and as we’ve seen with any number of other deadlines over the course of the last six years, is that if you have the votes at the CFTC, you can push the deadline off.”
Therefore, Slaughter said, if Giancarlo is made acting Chairman and can get the votes needed, then he could push back the deadline date.
“But if I was a practitioner, I would continue to operate under the view that the deadline is going to happen,” he went on to caution.
Whether or not the deadline stands, Brown claimed that the consequence of the proposed variation margin rules will be to push more FX activity into central clearing.
“If we zoom up to the 40,000 foot level and try to examine some of the underlying rationale with respect to the margining of uncleared derivatives, I think part of that would be to drive towards clearing and that is already happening.
“The intended effect is occurring irrespective of whether or not we are implementing variation margin. All you have to do is take a look at the most recent BIS piece with respect to NDF markets and the data that is coming out of LCH and you can see more and more NDF transactions are finding their way into a clearing house,” he said.
Meanwhile, even though the deadline for adhering to the Mifid II requirements is not until January 2018, having been pushed back by a year already, Robin Poynder, regulatory advisor at Velador Associates, warned that FX market participants may not be ready for it.
“The market has been getting ready for Mifid for some years now and the delay by a year from January 2017 to January2018 should have given everyone an extra 12 months and, in theory, people would be comfortable. But unfortunately, I think that institutions took that as a sign that they could take their foot off the gas a bit, and I suspect as we get into Q1, it’s going to be another mad rush starting again to try and get ready,” he said.
In addition, Poynder emphasised that he views one of the biggest challenges facing firms trying to become Mifid II compliant in 2017 is to go beyond just technically fulfilling the requirements and to actually implement them in a way that makes a real difference to how these firms operate.
“I think the biggest focus is going to be around the client and there are two levels to this. One is ticking the box and making sure that everyone is happy that they are, in theory, doing the right thing.
“I think what’s far more challenging is understanding and monitoring the investor protection elements to make sure it’s genuinely what is happening, because unfortunately when we see errors coming up, or even deliberate bad activity somehow getting around the rules; being in control of that as a senior manager is a major challenge. I think that gap between ticking the box and having confidence in your true compliance, that the truth is out there is the big focus,” he said.
The webinar also addressed the impact that a Trump presidency might have on the regulatory landscape, whether there will ever be a mandate to centrally clear certain FX products and the complications arising from the cross-border application of regulatory requirements.
The full audio for the webinar can be accessed here.