* Letter sent to BCBS, IOSCO
* Banks seeking to year delay to implementation
* Banks not ready for rules
(Adds source and analyst comment, OTC market details)
By Michelle Price
HONG KONG, Aug 21 The international banking
industry has asked regulators for more time to implement
derivatives rules that could add $800 billion to the global
financial industry's cost of doing business, people familiar
with the matter said.
The International Swaps and Derivatives Association (ISDA),
which represents the over-the-counter derivatives market, has
written to the Basel Committee on Banking Supervision (BCBS) and
the International Organization of Securities Commissions
(IOSCO), the global regulatory banking and securities bodies,
requesting a delay to rules that aim to make trading derivatives
safer, the people added.
"Amongst other points, the main submission is that the
market will not be able to meet an implementation date of
December 2015 and therefore suggests that the implementation
date be delayed," one banker who had knowledge of the letter
Any delay would be a further blow for the G20 post-crisis
reform agenda, which is well-behind its original schedule.
The letter is the latest in a series of industry efforts to
delay the implementation of the G20 reform agenda amid fears the
new rules will dramatically overhaul bank business models.
ISDA is seeking a two-year delay to international rules that
will require banks to secure OTC trades with collateral, such as
bonds or equities.
Bankers are asking for more time to make the significant
operational and legal changes necessary, and to help the
financial system adjust more smoothly to the potential drain on
assets the new rules are expected to create, individuals
familiar with the matter said.
Regulators internationally are overhauling the global OTC
derivatives market after it emerged banks such as Lehman
Brothers were able to amass piles of risk in these
privately-negotiated high-value trades.
They aim to make trading OTC derivatives safer by pushing as
many as possible through clearing houses, which sit in between a
trade to guarantee payment in the event of counterparty default.
However, around $127 trillion worth of the global $600
trillion OTC derivatives market are too complex to be cleared,
New guidelines outlined by BCBS-IOSCO in September 2013 aim
to make trading these non-clearable OTC derivatives safer by
requiring banks to take collateral from a counterparty as
protection in the event that firm defaults on the trade. The
process is known as "bilateral margining".
Posting such a margin dramatically increases the cost of
trading an OTC derivative by tying-up liquid assets that could
be used elsewhere to raise funds or generate interest income.
Research published by ISDA in 2012 suggested that, in the
best-case scenario, the introduction of bilateral margining
globally would suck up $800 billion in liquid assets.
Bankers say the rules will require them to create new legal
agreements with clients and recalibrate risk models. In some
countries, it will require changes to the legislative framework
to account for new asset custody arrangements, they said.
"There are quite significant economic and technical
challenges," said Michael Steinbeck Reeves of consultancy
Bankers also fear regulators globally are falling out of
sync on the implementation of the rules, which could lead to
The ISDA letter also requests that regulators phase-in the
introduction of so-called variation margin, a type of bilateral
margin that is posted daily to cover paper gains and losses on
ISDA declined to comment on the content of the letter. IOSCO
declined to comment. The BCBS did not immediately respond to
requests for comment.
The sources declined to be identified as they were not
authorised to speak to media.
(Reporting by Michelle Price; Editing by Denny Thomas, Jason
Neely David Evans)