On February 23, 2017, the European Supervisory Authorities, the FCA, the US prudential regulators, including the Federal Reserve Board and the OCC, and the International Organization of Securities Commissions issued guidance as to the March 1, 2017 implementation of variation margin requirements on uncleared swaps. The guidance indicates how the respective supervisory authorities and regulators will approach compliance with the variation margin requirements.
The ESAs expect national regulators to apply their risk-based supervisory powers in day-to-day enforcement of the applicable legislation, including taking into account the size of the exposure to the counterparty and its default risk. The ESAs expect firms to document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained. The ESAs are not delaying application of the rules but are signaling that compliance will be evaluated on a case-by-case basis and they expect any compliance issues to be overcome in the next few months. This is a not dissimilar to the approach taken to reporting under EMIR, when practicalities prevented many persons from being able to connect to a trade repository on time, and no prosecutions were made for late compliance. The FCA followed the ESA's guidance with a statement indicating that where a firm cannot comply fully it must be able to demonstrate that it has made best efforts to achieve full compliance and explain how it will achieve compliance in as short a time as practicable for all in-scope transactions entered into from March 1, 2017. Firms are expected to have detailed and realistic plans.
The US prudential regulators expect priority to be given to compliance efforts by covered entities based on the size of and risk inherent in the credit and market risk exposures presented by each counterparty. In particular, compliance as of March 1 should be achieved with respect to those counterparties that present significant exposures. Firms must make good faith efforts to comply as soon as possible for other counterparties but no later than September 1, 2017.
The ESA's statement is available at: https://www.esma.europa.eu/sites/default/files/library/esas_communication_on_industry_request_on_forbearance_varia tion_margin_implementation.docx_0.pdf , the FCA's statement is available at: https://www.fca.org.uk/news/news-stories/fca-statement-emir-1-march-2017-variation-margin-deadline , the US regulators' statement is available at: https://www.federalreserve.gov/newsevents/press/bcreg/20170223a.htm and IOSCO's statement is available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD556.pdf .
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