* Designed to ease demand for collateral
* Global initial swaps margin to be phased in from 2015
* Banks can use wider range of assets as collateral
* Initial margin exemption for some forex contracts
* Lawyers say new rule will lock up big chunks of collateral
By Huw Jones
LONDON, Sept 2 Global regulators have eased the
impact of new rules designed to make the $630 trillion
derivatives market safer as they seek to avoid too-tight
controls on the sector that some banks argue could harm economic
The Basel Committee of regulators and central bankers
published their final rule for requiring banks and brokerages to
post an initial margin on trades in derivatives known as swaps,
if those trades do not pass through a "clearing house" which in
itself generates a back-up if one party to the trade goes bust.
The reform is part of a wider shake-up of derivatives among
the 20 leading economies (G20). It includes mandatory clearing
and on-exchange trading of contracts where possible, and for all
transactions to be recorded.
Regulators want to apply lessons from the 2007-09 financial
crisis in which the opaqueness of derivatives such as credit
default swaps - used to insure against falls in bond prices -
played a central part in creating market uncertainty.
Use of a clearing house means trades are backed by a default
fund as insurance.
The aim of an initial margin - where cash or top quality
government bonds are used to back a trade - is to provide a
similar safety cushion.
The final rule was published on Monday ahead of a summit of
G20 leaders in Russia on Thursday and Friday which will review
progress on regulatory reforms.
Mark Carney, chairman of the Financial Stability Board (FSB)
which coordinates G20 regulation, said countries still lagged in
directing trades to electronic platforms to improve safety.
The European Union and United States have pledged to
cooperate over derivatives rules after initial spats and Carney
hoped other G20 countries will follow suit.
"With respect to derivatives, deferring to each others'
rules where outcomes are similar is an effective way of
preventing regulatory arbitrage but also being realistic about
the prospect of having one regulatory standard," Carney told
A margin on uncleared swaps will provide the incentive to
move trades to platforms and through clearing houses, he said.
In many cases, the new rule will require both sides of the
trade to post an initial margin of between 1-15 percent for the
first time. They already post a variation margin that takes into
account daily changes in the value of the swaps contract.
Damian Carolan, a lawyer at Allen & Overy, said Basel could
not be too mindful of the impact on the economy otherwise it
would end up being cheaper not to clear trades.
"They have tried to do what they could but they have not
rowed back from a fundamental, material change to the industry
which is a two-way margin which is a large amount of collateral
to be locked up," Carolan said.
Some banks have warned that the new rule, coupled with other
reforms forcing traders and banks to use more collateral, will
create a shortage of top quality collateral.
Industry officials say this would make some users avoid
buying derivatives to insure against risks such as adverse
changes in currencies, and hit availability of collateral in
other markets for financing the economy.
"The Basel Committee ... acknowledge that the margin
requirements are new to the market and that their precise impact
will depend on a number of factors and market conditions that
will only be realised over time as the requirements are put into
practice," the regulators said in a statement.
Airlines and other industries using derivatives to hedge
their raw material costs will likely benefit from a threshold
that exempts them from initial margins, said Ed Parker of
lawfirm Mayer Brown.
The final framework also allows a wider array of eligible
collateral for initial margins than was previously envisaged.
Banks would be able to re-use initial margin collateral, a
process known as re-hypothecation, but only once, a big setback
as collateral is recycled many times currently, Parker said.
The rule will in addition be phased in over a longer period
than originally set out, starting in December 2015 for only the
very biggest derivatives dealers, and rolled out for the rest of
the market over four years.
Other changes from the draft version include an exemption
from initial margin requirements for physically settled foreign
exchange forward contracts and swaps.
Earlier this year Basel scaled back its new rule requiring
banks to build up a buffer of liquidity reserves, again to ease
demand for top-quality government bonds.