European concerns over custodian readiness for margin rules

European swap dealers are concerned they may face the same custodian issues which hit their US equivalents ahead of the introduction of margin requirements.

In September, some US swap dealers weren’t able to post margin with custodians and were granted an extension period by the US Commodity Futures Trading Commissions (CFTC.)

Speaking to Global Custodian, Eric Litvack, head of regulatory strategy for global banking and investor solutions, Societe Generale said that European swap dealers are concerned that history may repeat itself but believes that phase 1 EU banks will successfully go live at the January 2017 deadline.

“The concerns related to negotiating custody agreements and opening segregated custody accounts are the same as we saw in the run-up to 1 September,” said Litvack

“In some aspects they might be slightly aggravated as we are seeing anecdotal evidence that custodians are requiring a longer lead-time to process new custody accounts in advance of a January 2017 go-live.”

The extension in the US had reportedly been put down to custodian hold-ups with a lack of custodial accounts for banks to post initial margin for their uncleared derivatives after collateral requirements for uncleared derivatives came into force on 1 September for the US, Canada and Japan.

Litvack suggested that a similar extension was unlikely to be granted to European swap dealers.

“I think that we’re unlikely to see any formal extension of the deadline, although I would expect supervisors to be paying close attention to market readiness as the deadline approaches,” said Litvack.

“We saw in September that the regulatory authorities were prepare to hold firm to the start date against a background of only incomplete readiness, accepting that some participants would need to complete their preparations subsequent to the start-date, even if this resulted in some limitations to trading.”