“We welcome the F.D.I.C.’s approval of its final rule on margin requirements,” said Mary Johannes, a senior director at the International Swaps and Derivatives Association, which represents participants in the swaps market. But Ms. Johannes added that adapting to the rule before next September 2016 would be “challenging, particularly as regulators in other jurisdictions have not yet published final rules, and harmonization across jurisdictions is not yet clear.”
A version proposed last year called for both sides to post collateral when two affiliates of the same firm deal with one another, such as a U.S.-insured bank trading swaps with a U.K. brokerage. The final rule requires that only the brokerage post, cutting collateral demands by tens of billions of dollars across the banking industry. Those costs would still be significantly higher than the collateral they currently set aside.
“Establishing margin requirements for non-cleared swaps is one of the most important reforms of the Dodd-Frank Act,” Federal Deposit Insurance Corp. Chairman Martin Gruenberg said before his agency’s vote, noting that changes were made in response to objections raised by the industry.
The rule is one of the last major requirements stemming from U.S. regulators’ swap-market overhaul, which began after largely unregulated credit-default trades helped fuel the 2008 market meltdown. The 2010 Dodd-Frank Act sought to increase the amount of collateral backing swaps in an effort to reduce broader systemic risks stemming from a default. The law called for most swaps to be guaranteed at third-party clearinghouses that stand between buyers and sellers. Still, many trades in the multi-trillion global swap market remain uncleared.
Now, most swaps must be routed through clearing houses, which function as middlemen to guarantee trades. But some custom-designed trades are too complex to go through clearing houses. The new rules set out how much collateral trading partners need to protect against possible default when making those trades. Regulators think the requirements will push big swap dealers like JPMorgan Chase and Goldman Sachs to clear more trades.
“These margining practices will promote financial stability by reducing systemic leverage in the swaps marketplace,” FDIC Chairman Martin Gruenberg said in a statement.
Five agencies, including the FDIC and Federal Reserve, wrote the rules, and two still must approve them. The Commodity Futures Trading Commission and Securities and Exchange Commission must write their own margin rules, a potential complication for the industry.
While the bank regulators’ approach is good news for Wall Street, all eyes now turn to the Commodity Futures Trading Commission. Like the CFTC, the Securities and Exchange Commission is also drafting a final version of similar requirements to be imposed on separate parts of banks.