Banks may be unable to meet new collateral requirements for OTC derivatives if the EU accelerates implementation of the rules, the head of the international derivatives trade body says.
Last week the European Commission began its process to ‘fast-track’ adoption of initial margin rules. If approved by the EU Parliament, the rules could go live by mid-November, instead of January 2017.
However this could prove problematic to banks, according to Scott O’Malia, CEO of the International Derivatives and Swaps Association (ISDA).
“Many banks enforce an end-of-year code freeze that prevents them from making any changes to systems and models,” says O’Malia in an online blog.
“Introducing far-reaching margin rules during this freeze could pose risks. Worryingly, it could hamper the ability of banks to make fixes to newly installed collateral systems and processes if something goes wrong.”
O’Malia says he is in favour of a mid-January implementation date for Europe, which would allow banks to finish its ‘code freeze’ and any emergency IT fixes.
He also warned that the initial margin rules must come into force prior to the variation margin rules which go live globally in March 2017.
“This deadline will affect a much wider universe of firms, and will involve thousands of counterparties having to make changes to thousands of outstanding collateral agreements at once,” he adds.
“This on its own will pose major resource issues for the industry. If combined with the delayed European phase-one requirements, it could stretch capacity to breaking point.”