Mar 18, 2016

After a long delay, Margin Requirements for Uncleared Derivatives (MRUD) are finally being phased in by various regulators. The requirements, obligating institutions to post initial and variation margin, are not unclear, in fact many would argue they border on prescriptive. This is not FATCA all over again, where the lack of understanding and clarity around the Act meant that a 2012 implementation got pushed back year upon year. With the MRUD there have been multiple iterations and no surprises in the final version. More importantly, much of the information required by the framework due to be implemented by the regulators is today already captured by the front office. So the big question then, is why is there and has there been so much recalcitrance to MRUD?

Before we get to this, let’s start with some basics to clear away a few of the many acronyms surrounding MRUD. BCBS/IOSCO, which is what many refer to MRUD as, stands for the Basel Committee on Banking Supervision, which is part of the Bank of International Settlements (BIS), and the International Organization of Securities Commissions. BCBS / IOSCO have jointly published the framework that establishes the global standards for margin requirements for non-centrally-cleared derivatives. This is to be reviewed by US regulators, the national regulators in APAC and implemented by EMIR (European Market Infrastructure Regulation) via supplementing RTS (Regulatory Technical Standards) and drafted by ESMA (European Securities and Markets Authority). With little to no confusion around the framework, the role of the regulators or the data requirements, why is there this recalcitrance to MRUD?

One could blame the amount of regulation that has preceded MRUD. Have financial institutions simply been left lethargic and apathetic towards new regulation? This is a possibility, but it seems unlikely that this is the sole reason as to why many are delaying their approach to an implementation strategy. However, could it be that the issue lies not in what the approach to implementation should be, but where the decision makers lie? For many previous regulations, Operations has borne the brunt and felt the pain of implementation and have subsequently learned to move quickly in their approach. This time around, the implementation will sit within Legal, a department that many may argue moves slowly and has been known to sit on the fence. It is, based on this premise, possibly not the best placed department to make strategic implementation decisions. So could this be the reason why the financial institutions are reluctant to start implementing, or is this just clever strategy?

In fairness, many legal departments may have been waiting to see if the International Swaps and Derivatives Association (ISDA) would show its hand, yet it has remained eerily silent. No protocol has been released and – leaving aside whether this was the right approach or not – this has removed the option of this particular implementation approach. There is also a divide in opinion around the right technology and collaboration tools for the negotiation / re-negotiation of Credit Support Annexes (CSAs). Or has the tried and tested paper based negotiation won favour?

Regardless of any of the above, come September, the financial institutions will be on the clock and will have to show their hand in terms of how they are implementing MRUD. So whether it has been lethargy, regulatory exhaustion, or game theory at play, now is the time for legal departments to get motoring on their implementation and approach to MRUD. What should not be forgotten, whilst many undertake the burden of the re-papering, is that the uncleared derivatives market is estimated to be around USD127trillion. This market is not getting any smaller, so now is the time to standardise the agreements and terms used in the market and to leverage the collaboration and technology tools that are available today.