The problem for the Commodity Futures Trading Commission (CFTC) is that it has to balance playing hardball on the date from its own side, with the discord and disadvantage this would create for the biggest US dealers.
The revelation on Friday that the European Commission had postponed implementing margin rules for uncleared swaps until mid-2017 was not a huge surprise to many in Europe. On the contrary, it had already appeared almost inevitable since the European Securities and Markets Association only published the final regulatory technical standards in March.
Also softening surprise was the fact this was just the latest European hold-up in an ever-lengthening post-crisis regulatory overhaul that looks set to take many years to work its way through.
In November, Europe’s chief markets regulator had demanded a delay of as much as a year before implementing its flagship regulation, Markets in Financial Instruments Directive (MiFID II), from the previously planned rollout on January 3, 2017.
The only people who did seem surprised by the European Commission’s announcement on Friday were at the CFTC. The US regulator has not commented publicly on how it intends to proceed, but market feedback this week suggests that it is standing firm on its planned September 1 date to bring in the rules (see separate story).
Imposing margin on swaps from this date will create confusion in the market and incentivise players to avoid the US when entering a swap trade. That must put US market makers and their clients at a disadvantage.
Working out how big a disadvantage that is will be compounded by the complexity of the CFTC’s own rules, adopted last month, on applying margin in cross border trades. The final rule, which pares back the definition of a US person, was adopted on a 2-1 vote of commissioners. But Commissioner J Christopher Giancarlo dissented due to the "complicated matrix" of the CFTC’s approach.
That complexity will now be put to test if the CFTC proceeds ahead of Europe on September 1. Lawyers believe it will affect US banks, their overseas subsidiaries, the units of non-US banks operating in that country, as well as anyone who deals with a US or US-guaranteed counterparty.
The upshot of the delay for European banks seems positive on the surface. After all, some were always going to struggle to hit the deadline. Now they have more time — and perhaps that means they and other banks can divert all of their attention to solving the US side of compliance rather than doing everything in a mad rush.
That might prove of even greater benefit if the UK votes to leave the European Union next week. There will be plenty to keep them busy as it is if that happens.
But the problems will lie on a global level — and that is where a global bank needs to think most keenly after all. Many things will need to be worked out amid a great deal of uncertainty.
How will a global dealer negotiate documents before the September deadline in relation to the US/Japan rules alone, knowing that the EU rules may change? How will market infrastructure aimed at enabling mass implementation of multiple rule sets develop without final EU rules?
It’s easy to see how administration and legal discussions could become tortuously messy unless the US and Japan agree to delay as well. Japan has indicated previously that it would follow Europe's lead, so a delay in Asia is also possible. The CFTC must think hard — but not too long — on whether it is worth sticking to its guns. For such a big change in how the market does business, a nine month delay, in order to simplify the international environment, wouldn't not be such a terrible outcome.
The political uncertainties that dog the US and UK this year would be much clearer by 2017 as well. While major banks in the US all profess to being on top of margin ahead of September 1, traders have had a difficult time keeping on top of the extra administrative work while doing the job they are paid for, ie making money. There will be no plaudits for achieving regulatory compliance if they also find themselves on the wrong side of the year's biggest trading events.
If the CFTC does push ahead, one other potential silver lining could be that it will put additional focus on the need of regulators to agree substituted compliance across the different jurisdictions. That is another area where more work and greater speed would be widely welcomed.
Bringing Europe and the US regulation into line in the years since the financial crisis has been a real slog, but there have been notable successes recently, such as mutual recognition of clearing houses.
Let's keep up the co-operation, even if Europe can't keep to time.