Global derivatives industry calls for phase-in of new rule

LONDON (Reuters) - The world’s $544 trillion derivatives market warned on Tuesday of potential market disruption without a six-month phase-in for a new rule requiring trades to be backed by cash in case of default.

Opacity in the market for credit default swaps, interest rate swaps and other derivatives contracts helped to fuel market uncertainty during the 2007-09 financial crisis.

A decade on, counterparties to swaps trades must post a so-called variation margin, typically cash or top quality bonds, from March 1 to cover market price fluctuations.

The rule represents a big administrative change and the International Swaps and Derivatives Association (ISDA) said it has written to regulators in Asia, Europe and the United States asking for a “soft” start next month, lasting up to six months.

This would mean that by September, all transactions from March 1 would be fully compliant.

ISDA Chief Executive Scott O’Malia said the “sheer operational challenge” of amending outstanding documentation backing trades, more than 150,000 pieces, is stretching dealers and customers to the limit.

“Without regulatory forbearance, we think there is a material risk that many firms, particularly the smaller end users, will be unable to access the market from March 1,” O’Malia said in a statement.

Swaps help companies “insure” themselves against adverse moves in interest rates and corporate defaults.

“As such, we urge regulators to provide a six-month transition, which leaves the March 1 start date intact but allows firms to continue trading while they finish the substantial work needed to amend their documents,” O’Malia said.

Hong Kong, Australia and Singapore have already announced a six-month phase-in for the margin rule, and U.S. regulators have already signaled some concern about the March 1 start date.

ISDA’s appeal is backed by other trade bodies, such as The Investment Association in Britain, and the American Bankers Association.

Reporting by Huw Jones; editing by Susan Thomas