ESMA Provides Confirmation, Relief for Fears of Front-Margin for Swaps

The European Securities and Markets Authority (ESMA) has said that a new regulatory regime will not impose swaps margin requirements retroactively. The prospect of changing margin costs for enduring trades came to be know “front-margining,” and a substantial amount of worry had developed in anticipation of this regulatory move.

“It would have killed some trades. It’s impossible to price for rules that aren’t written – it would be pure guesswork. So if it turns out – a year down the line – that you’re required to post initial margin on the trade, then you will have severely underestimated the funding component of the trade and will lose a lot of money over the life of the transaction, especially if that trade is long-dated,” one derivatives trader told Risk.

The confusion stemmed from a date listed in a published rule in EMIR, European Market Infrastructure Regulation, which stated that “the timely, accurate and appropriately segregated exchange of collateral with respect to OTC derivative contracts that are entered into on or after 16 August 2012.”

Market Uncertainty for Swaps

The move by ESMA is largely designed to prevent market uncertainty. AsRiskstates in a recent article:

According to a letter sent to Esma by the International Swaps and Derivatives Association on June 26 last year, the imposition of retroactive margin requirements would be likely to dramatically alter the nature of an agreement between two counterparties – potentially increasing the costs associated with the transaction and creating serious legal uncertainty as a result.

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About The Author

Felix Shipkevich

Mr. Shipkevich’s practice focuses on regulatory, transactional, and enforcement matters in the fields of futures, commodities, and derivatives. He works with Futures Commission Merchants (FCMs), Retail Forex Exchange Dealers (RFEDs), Introducing Brokers (IBs), Commodity Pool Operators (CPOs), Commodity Trading Advisors (CTAs), Swap Dealers (SDs), Swap Execution Facilities (SEFs), and domestic and offshore hedge funds. Mr. Shipkevich guides clients on procedures related to registration with the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), as well as domestic and international regulators in local jurisdictions. Mr. Shipkevich prepares and helps implement compliance, anti-money laundering (AML), and Electronic Trading Systems (ETS) procedures for clients in the commodities and derivatives fields.