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EU Proposes Final Rules to Reduce Swap Risks 

March 10, 2016

Matthew Heller, CFO

European regulators have taken another step toward reducing systemic risk in the derivatives market, releasing final draft rules for swaps that are contracted directly between traders rather than being settled at clearinghouses.

The standards require banks such as JPMorgan Chase and Barclays to exchange initial margin, or collateral, at the beginning of transactions to cover the potential future losses stemming from a counterparty’s default, a departure from the current norm of only exchanging collateral daily or during the life of a contract.

EU buyers and sellers of swaps may be required to set aside between 200 billion euros ($220.5 billion) and 420 billion euros in total to meet the standards once they are fully effective in 2020, according to the European Banking Authority, the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority.

“The overall reduction of systemic risk and the promotion of central clearing are identified as the main benefits of this framework,” the EU regulators said.

U.S. banking regulators estimated last year that the rules could require U.S. firms to have $315 billion in initial margin.

After the financial crisis, the Group of 20 nations pledged to undertake reforms aimed at increasing transparency and reducing counterparty risk in the over-the-counter, or non-clearing, derivatives market. Read more


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