What to Expect in 2019 ...
The year 2019 is upon us and as we look forward, we can expect to see the derivatives market being focused again on further regulatory changes.
In the local South African market the most anticipated reform will be around the finalisation and implementation of the margin rules for uncleared OTC derivatives. The last draft of these rules was published for comment in September 2018, and the revised (and probably final) rules are likely to be published imminently. This will result in some substantial changes to the way we trade OTC derivatives, as collateral management processes and legal agreements will be required in order to comply with these rules. The challenge is likely to be felt more acutely by the buy-side and asset managers who have not previously had to collateralise their OTC positions.
Another imminent deadline is 31 March 2019, by which time all OTC derivative providers (‘ODPs’) are required to be registered and authorised in terms of Conduct Standard 1 of 2018.
The Conduct Standard 3 of 2018 outlines the requirements for reporting transactions to a central trade repository. These reporting rules will come into force when announced by the regulator (anticipated to be soon after a trade repository is licensed). The reporting rules will require ODPs and central clearing houses to report certain products to a trade repository within T+1. Compliance to these rules may require some operational and systems changes in order to meet the timeframes outlined in the rules.
It is hoped that the regulator will focus on authorising a clearing house (‘CH’) for OTC derivative products in 2019. This will become crucial for the market once the margin rules for uncleared derivatives are implemented, as the margin costs of clearing are lower than those required for uncleared transactions.
In the international market, regulation will continue to be a focus (especially streamlining and perfecting compliance to MiFID II). The bank resolution stay protocols will likely be implemented over the course of the year in various jurisdictions. Regulators are focused on implementing resolution stays (where a non-defaulting party’s termination rights will be stayed and subject to a standard termination regime when a significantly important financial institution goes insolvent). This is aimed to ensure an orderly unwind and close-out of transactions.
Brexit is also likely to dominate the headlines in 2019, and with it questions around where Euro-denominated clearing is likely to happen; whether English law governed contracts will need amending; and the possibility of using the newly published ISDAs governed by Irish or French law.
Under EMIR there will further phasing-in of initial margin requirements for entities which will be in scope under phase 4 and 5 of the initial margin regulations. This will require new initial margin credit support annexes (‘IM CSA’) to be signed for these in scope entities.
There is certainly plenty to keep us busy! Luckily, DeriviDoc continues to be committed to offering training and consulting services on all these topics and more in 2019, to ensure you keep up with all the changes. Wishing you all of the best for this year.