Margin Settlement Blues

Our days at ISDA start pretty much the same as everywhere else: get into work, sip on a double macchiato, and get up to speed with the day’s events. Given the avalanche of emails and news alerts, the challenge is always deciding what to read and what to skip. But this opinion piece from Risk grabbed our attention – Regulators must scrap T+1 timezone tax.

The alliterative headline helped – we’re suckers for that kind of thing. But, more importantly, it chimed exactly with what we’ve been hearing ourselves, and have repeatedly drawn attention to. Over the past few months, derivatives users and regulators in the Asia region have become increasingly concerned – and increasingly vocal – about the timing of settlement for collateral posted under US and European margining requirements.

A quick word of explanation. As part of their forthcoming rules for the margining of non-cleared derivatives, US regulators have stipulated that initial and variation margin has to be settled on the day after execution of the trade, or T+1. Europe has taken a similar route in its proposed rules – although the final text now won’t be published until the end of the year following the announcement of a delay earlier this month.

So, why is this a big deal? In short, because timezone differences make it more or less impossible for derivatives users in Asia to meet the requirement when trading with counterparties further west. A margin call at 9am in New York, for instance, would be 9pm in Hong Kong, 10pm in Tokyo and 11pm in Sydney.

There is a way round this: the Asian counterparty could pre-fund margin to cover the time lag. But posting extra collateral comes at a cost – a “timezone tax” as Risk puts it. Asking Asian firms to pay more than other counterparties when trading with US banks, purely because of where they are located, seems deeply unfair to many Asian firms and even regulators.

Risk speculates on the ultimate outcome:

Asia-Pacific dealers have already voted with their feet with regard to the US Dodd-Frank regulation and opted to trade with European counterparties instead. If T+1 is imposed on cross-border trades, this trend will accelerate and expand to include Europe’s lenders.

Japan’s dealers don’t want to see a shift to Asian autarky, but the biggest losers in this scenario could well be Europe and the US.

This comes on top of cross-border challenges caused by the European delay. Global regulators have made real effort to ensure the margining framework in each jurisdiction is as closely harmonized as possible. After all that work to harmonize the national rules, it would surely be a failure if the end result is even more fragmentation.

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