On September 1, 2016, the largest derivatives dealers started complying with initial margin and variation margin requirements for non-cleared swaps, which came into force in the U.S., Japan and Canada. Similar rules have been delayed in the E.U., Australia, Hong Kong, and Singapore, creating the potential for market fragmentation and complexity (especially for entities that trade on a cross-border basis).

Generally the September 1 rollout date came and went with little fanfare, although it appears that some dealers were unable to set up third party custodial accounts in order to comply with the requirement to segregate initial margin amounts. By the end of the day the CFTC had issued a 30-day time limited, no-action letter in order to provide conditional relief to dealers that were unable to set up segregated custody accounts. CFTC Chairman Massad issued a related statement, acknowledging that “CFTC staff has been made aware that some dealers have not been able to complete all documentation required to comply with the custodial arrangements required by CFTC rules, due to the limited number of providers of such services and the volume of custodial agreements that market participants are requesting.”

One takeaway from this first compliance date for financial end users or smaller banks that may get caught in future IM phases is that segregated IM arrangements can take time to implement. As anyone who has had the pleasure (or pain) of negotiating a custody agreement knows, there are a limited number of large custodians in the market. Negotiating changes to a custodian’s standard terms can also be a time-consuming process. As we noted in November of 2015 , a primary action item for financial end users that must comply with the IM requirements (i.e. they have material swaps exposure), is to implement and test segregated IM lines. As regulatory margin requirements are phased in, the IM rollout dates will act as pressure points on custodial capacity – which may limit the opportunity to negotiate custody agreements and test the facilities if they are implemented at the eleventh hour.