• Melissa van der Merwe (Director)

A Road Map for the Derivatives Industry in 2017

The year 2016 was characterised by change and surprise: first the news of the Brexit vote, and then that Donald Trump had been voted in as the 45th US President. Finally, in late 2016, the SARB proposed a directive in terms of the Banks Act outlining the margin rules for uncleared derivatives in the South African market. All of these events are likely to have a large impact on the derivatives industry in 2017. Global financial regulatory reform continued rolling out in 2016 and more regulatory changes will continue to be implemented throughout the course of 2017. So, what should we have on our road map for 2017 in the derivatives industry?

The financial industry globally has tried to achieve harmonised financial regulation. However, with the Brexit process likely to start this year, the question looms: will this lead to a fragmentation in the way financial regulations apply to UK banks? It is necessary to watch this process carefully to ensure that any regulatory requirements, which may apply differently for UK banks, are complied with. In addition, London is the home of Euro-denominated clearing. If the UK leaves the EU, this may necessitate the need to move Europe’s clearing hub out of London. This may result in new clearing documents having to be established, or a different clearing house needing to be appointed.

In addition, Donald Trump has made it clear that he is not an advocate of the Dodd Frank Act, and has threatened to repeal it. Much of the regulatory reform prescribed under the Dodd Frank Act has already been implemented in the US market (and at great expense too: it is estimated that the 6 largest US banks have spent in excess of US$70 billion just complying with the Dodd Frank Act reforms). It will be imperative to watch developments in the US, once Trump comes into power, to assess the impact of any potential changes that are made to the Dodd Frank Act, and any resulting mismatch with financial regulations in the rest of the world.

Regulations relating to posting collateral are going to have a major impact on the market in 2017. Variation margin requirements under EMIR are going to apply to uncleared derivatives for transactions with financial counterparties from 1 March 2017. It is important to note that South African insurance companies, pension funds, life and assurance companies will all qualify as financial counterparties and will be subject to these variation margin requirements when they transact with an EU financial counterparty. In the South African market, variation margin requirements will apply to uncleared derivatives once the subordinate legislation under the Financial Markets Act (FMA) is finalised, and potentially for the majority of banks, from 1 September 2017 in terms of the proposed directive under the Banks Act. The requirement to post variation margin will put enormous pressure on parties to ensure that their documentation is updated to provide for the posting of margin for their uncleared swaps. The operational impact of having to deal with larger volumes of variation margin should also not be underestimated.

In addition, the European regulations on initial margin requirements for uncleared swaps will be phased in from 4 February 2017 for the largest EU market participants, from 1 September 2017 for phase 2 EU entities, with smaller firms being impacted over the next 4 years. Again, new documentation will have to be signed, likely in the form of the ISDA® Initial Margin CSA published in 2016. South Africa has yet to finalise regulation on initial margin, but it is possible that these requirements will be published during the course of 2017.

In terms of the FMA in South Africa it is likely that trade reporting will be implemented in the latter part of 2017, which will require parties to report their derivatives trades to the central trade repository. It is also possible that a central clearing house will be licensed and registered under the FMA this year, and once that is done, central clearing may become a reality in the South African market (likely starting with vanilla interest rate swaps).

Central clearing began in Europe for the largest market participants in June 2016. The next phase of central clearing (applicable to large buy-side and alternative investment funds who hold derivatives positions in excess of EUR8m) began on 21 December 2016. The last phase of clearing which will apply to infrequent users of interest rate swaps, will be subject to clearing from the latter part of 2017. So to the extent that a South African entity is facing an EU entity who has to clear their vanilla trades, the South African entity will have to clear too in order to allow the EU counterparty to comply with their regulations. This will require the South African entity to set up a relationship with an EU-approved clearing house (or find a clearing member who will clear trades on its behalf). This will require various new documents to be put in place (e.g. an ISDA® FIA Client Cleared OTC Derivatives Addendum, a Cleared Derivative Execution Agreement and possibly signing up to the clearing house rules).

Look out for DeriviDoc’s new course, 'The Legal Documentation Required for Clearing', which will take a look at these new documents.

So, it certainly seems as though 2017 will be another year of change in the derivatives space. Regulatory compliance continues to be the key focus for many institutions. DeriviDoc is committed to remaining up to date with all the regulatory changes in the major jurisdictions. We will continue to update our training sessions as regulations are implemented to ensure that our training courses remain current. In some instances we will be offering an ‘update module’ to an existing course, allowing you to attend only the updated part of the training session. An example of this is our upcoming 'Collateral and the CSA Master Agreements' course being offered on 25 January. If you would like to learn about the updates in the collateral space please register to attend our afternoon session.

Our 'ISDA® Master Agreements' course on 24 January offers legal, credit and business personnel great insight into this agreement.

DeriviDoc also offers consulting services on all financial master agreements and regulatory issues. Please do not hesitate to contact Melissa van der Merwe ( to enquire more about our consulting services.

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