• Melissa van der Merwe (Director)

What Does the Rest of 2019 Have in Store for the Derivatives Market?

Updated: Jan 27, 2020

As we launch ourselves into the second half of 2019, here’s a snapshot of what we can expect in the derivatives market:

  1. US Resolution Stay regulations will apply to financial institutions dealing with US GSIBs from 1 July 2019

  2. Phase 4 IM implementation in September 2019 under EMIR and Dodd Frank, and (hopefully ...)

  3. A finalisation of the South African margin rules with a possible 1 September 2019 phase-in for Variation Margin for the largest market players.

There’s a lot happening!

  1. The US Resolution Stay regulations: The ISDA 2018 US Resolution Stay Protocol (‘US Stay Protocol’) aims to achieve the orderly resolution of systemically important financial institutions. This is considered to reduce systemic risk: if there is an orderly unwind of an insolvent institution, it will avoid the knock-on effects and volatility in the market that usually results from a large-scale entity going insolvent. The US Stay Protocol aims to achieve this orderly unwind process by requiring counterparties of the systemically important financial institution to amend their qualifying contracts (like ISDA, GMRA and GMSLA), such that their insolvency-related default rights under such contracts are time limited in relation to the unwind proceedings. Regulations have been issued by the FRB, the FDIC and the OCC (‘US Stay Regulations’) that require US global systemically important banks (‘GSIBs’), and US branches and subsidiaries of foreign GSIBs, to amend certain qualified financial contracts (‘QFCs’) with their clients. The date to comply is 1 July 2019 if the client of the GSIB is a financial institution. However this excludes what are defined as ‘Small Financial Institutions’ (being a banking entity with less than $10 billion in assets). All other entities trading with US GSIBs will be required to comply on 1 January 2020. Clients of GSIBs can efficiently amend their in-scope QFCs to comply with US Stay Regulations by adhering to the US Stay Protocol. This protocol modifies any in-scope QFCs with GSIB counterparties and provides enhanced creditor protections otherwise not available. Alternatively, parties could enter into bilateral amendments to provide for the Stay regulations, but this is considered a less desireable way to proceed, as this will mean not all counterparties are subject to the same terms. In addition, creditor protections are enhanced if signing-up to the US Stay Protocol, as end users will have greater rights to terminate under the US Stay Protocol.

  2. Phase 4 IM implementation: On 1 September 2019, the EU and US regulations for Initial Margin will apply to Phase 4 entities who transact with any other Phase 4, 3, 2 or 1 entities. Phase 4 entities include those whose aggregate month-end notional amount in March, April and May of 2019 is greater than EUR 0,75 trillion / USD 0,75 trillion. It is anticipated that this will see a further 60 entities being in-scope. New generation IM documentation will be required for these 60 new entities and all their relationships with Phase 1, 2, 3 and other Phase 4 entities. The documentation requirement is substantial, with up to five new legal agreements per in-scope counterparty pairing.

  3. The Joint Standard for Uncleared Margin Rules in South Africa: The April 2019 draft joint standard provides for Variation Margin and Initial Margin to be posted for the largest market players (those exceeding R30 trillion aggregate month-end average gross notional as of March, April and May of 2019) from 1 September 2019. All other in-scope entities would have to post Variation Margin from 20 March 2020. This will require new variation margin documentation (or amendments to current collateral arrangements) in order to be compliant with the rules. Initial Margin regulations require an entirely new set of documentation (and custody agreements), to ensue that IM is segregated from the assets and estate of the party holding the IM. Whilst the rules are not yet in final form, it is hoped that these will be finalised with sufficient time to allow the first phase compliance timeframes to be achieved.

There’s a lot happening, but do not fear – DeriviDoc is here to assist!

We offer training courses to ensure you are kept up-to-date and informed. Our most relevant course to cover all these new topics is:

An Update on Developments to OTC Regulation – 2017 to Present

In order to ensure you stay ahead of the curve and equip yourself with information on what’s to come in 2020 (as documentation always takes time), come and get informed on:

An Introduction to Central Clearing

The Legal Agreements Required for Clearing

And finally, DeriviDoc always offers the option of tailor-making a course to suit your precise requirements. Gather together a minimum of five colleagues and get in touch with your ‘wish list’ of topics. But our availability for in-house courses is very limited, so secure your date now to avoid disappointment.

#USStayProtocol #GSIB #QFC #USStayRegulations #Phase4IMimplementation

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