Many firms that use derivatives aren’t clear on whether they have to follow new margin requirements for non-cleared transactions that are starting to be phased in later this year, according to a new survey from the International Swaps and Derivatives Association, Inc. (ISDA).
The ISDA says that its survey found that end users of derivatives are concerned about the impact of new margin requirements, and that many don’t know if they have to comply with the rules. The new rules, which will require most derivatives users to post margin on non-cleared derivatives transactions, will start to be phased in beginning in December. The rules are to be fully implemented by 2019.
But, the ISDA says that it found that a third of respondents to its survey said they were unsure whether they would be subject to the rules. And of the 36% that knew they would have to comply, it reports that 65% said they were concerned, or somewhat concerned, about their ability to meet the new requirements. The ISDA notes that firms will have to make significant changes to their systems, processes and documentation to comply with the new requirements. Yet, the rules in this area have yet to be finalized.
It reports that the top three concerns flagged by end users of derivatives were increased costs of hedging (59%), regulatory uncertainty (38%), and concerns about the scope of cross-border regulation (36%). Amid concerns about cross-border regulation, the ISDA says that 53% of respondents thought derivatives markets are fragmenting along geographic lines as a result, and that 55% claim this is having a negative, or strong negative, impact on their ability to manage risk.
The survey also found that, despite the concerns about evolving regulatory requirements, 81% of respondents say derivatives are important, or very important, to their firm’s risk management strategy. And, 78% expect their use of derivatives to increase, or stay the same, over the first three months of 2015.
The ISDA says that firms use derivatives for a variety of risk management purposes. Managing exposures to currencies, interest rates, commodities and credit is the most popular use, followed by hedging exposures to international markets, and reducing financing costs.
“The survey results indicate that many market participants may struggle to meet the December 2015 effective date, especially given that a large number of end-user firms still appear unsure whether the rules apply to them,” said Scott O’Malia, CEO of the ISDA.
The ISDA is calling for more time to implement the new rules. “Once the margin rules are finalized, it is vital that market participants have sufficient time to allow for the legal, operational and technological enhancements necessary to effectively and safely implement these new requirements,” O’Malia said. “That’s why ISDA has recommended a longer, phased implementation schedule to accommodate the adoption of a transparent standard industry model and the necessary documentation to exchange collateral on a global basis. It is also important that there is consistency between the various sets of rules, particularly regarding which market participants must post and collect margin.”
The survey generated approximately 400 responses. Of those, 57% are employed by financial institutions, and 24% work at non-financial corporates. By geography, 47% work at firms based in North America, and 41% are based in Europe.