Late on the 1st day following the first compliance date for rules proposed by the CFTC in relation to uncleared swaps between swap dealers, the CFTC have endorsed a “no-action” position that recommends no enforcement action subject to the September 1st compliance date during the first 30 days of implementation.

We took the time to speak to a number of market participants involved in the discussions and impacted by the rules to better understand the implications.


The uncleared swaps rules have been a long-standing point of contention amongst international regulators owing to the complexity of the required rules within a global marketplace. In March 2015 BCBS-IOSCO finally published the final policy framework setting out margin requirements for non-centrally cleared derivatives transactions between certain financial entities and since then market participants have been petitioning for a delay in implementation given the short timeframe from to definition to implementation, the associated scale of change required and the aggressive timeframes for compliance prescribed. Recently the European Commission, Switzerland and regulators from the Asia-Pacific region including Hong-Kong, Singapore and Australia announced implementation delays suggesting it was “the most practical way forward to avoid unintended consequences to financial markets”.

However the CFTC have remained resolute about the September 1 implementation date despite subsequent concerns being raised that the asynchronous implementation gives rise to the potential of dramatic revenue loss due to market participants choosing to trade within other jurisdictions that have not yet enforced the rules. CFTC Commissioner Giancarlo himself (in an attempt to promote the concept of a delay) referred to the situation as “…yet another example of the failure of U.S. policymakers to negotiate harmonization in regulations as called for in the September 2009 G-20 Leaders’ Statement in a manner that does not place American markets at a competitive disadvantage,”

So what does it mean?

The no-action relief cites an ISDA/SIFMA survey of readiness by those firms impacted by the compliance date that shows that not all Phase 1 firms have completed all documentation required to comply with the custodial requirements of the regulation referring to (i) high volume of custodial agreements that must be completed and (ii) insufficient time to test the new agreements, processes and infrastructure to mitigate any operational or control risks.

In reality, none of the Phase 1 firms let alone “not all” have the necessary completed documentation to be “ready-to-trade” with all of their in-scope counterparts and the backlog that has been created in relation to the custodial agreements (given there are only 4 major custodians that the Swap Dealer community will all be working with) will be challenging to overcome within the 30 day grace period being proposed by the CFTC.

The firms impacted by this compliance date have undertaken a significant amount of work and have invested substantial financial and human resources (Working long hours) to try to meet this date in good faith but it has been known for some time that they would not be ready by September 1st. The no-action relief letter provides no respite from this effort and firms need to continue to work extended hours and making significant infrastructure enhancements to be able to manage this process in an effective and efficient fashion that does not introduce further operational or credit risk to the organisation.

From conversations this morning we understand that there were a number of calls coordinated by the industry associations late last night and the common view from market participants is that the proposed no-action relief is ineffectual and potentially meaningless without further clarity and a similar commitment from the Fed. There is a clear preference to create a reasonable path to implementation over a longer period that gives greater assurance that the requisite outcomes can be achieved without the level of market disruption that has already been experienced.

Whilst I believe many organisations acknowledge the move by the CFTC at least represents an awareness of the challenges, the limited relief being offered means that it does not provide safe passage through a scenario where phase 1 firms may be required to stop trading with some counterparties and as such reducing access to liquidity and the ability to hedge positions of other counterparties.

The biggest concern for many familiar with this topic will not be the challenges with compliance date 1 which affects 20 of the world’s largest dealers but the reality of what will occur when other organisations/jurisdictions will be brought into scope and when variation margin, which must be exchanged daily to reflect changes in valuation of swaps contracts, will be required to be posted by all participants from March 2017. The convergence of all this activity would already feel like something of a disaster waiting to happen but the concerns will undoubtedly have been exacerbated with the experiences related to compliance date 1.

The biggest frustration for many here is that this was not unforeseen or without precedent. At a time when markets remain fragile and businesses are under increasing pressures to reduce their costs and improve controls; a co-operative rather than oppositional relationship between regulators and market participants is of greater importance than ever before. I only hope that inevitable discussions between the parties over the coming 30 days can establish a pragmatic way forward to meet shared long-term goals of a better functioning market without introducing additional risks and inefficiencies in the intervening period.


The CFTC letter can be found here: