OSFI offers some flexibility for timing to comply with Variation Margin Rules

Alison Beer

OSFI published a letter on February 24, 2017 allowing for a transition period in limited circumstances to facilitate compliance with the requirements in Guideline E-22 on the exchange of variation margin. This is welcome news for those in the midst of negotiating credit support documentation in order to comply with the new margining requirements for non-cleared derivatives.

Scope of the Transitional Measure

OSFI indicated that federally regulated financial institutions (FRFIs) should prioritize their compliance efforts “based on the size of and risk inherent in the credit and market risk exposures presented by each counterparty,” with full compliance by March 1, 2017 required for in-scope transactions between FRFIs and counterparties to whom they have “significant exposures.” For other in-scope transactions, transitional relief from the March 1 deadline is available until September 1, 2017.  OSFI, however, stated that they still expect FRFIs to meet the variation margin requirements as soon as possible following the March 1deadline.

FRFIs are also expected to track their progress in meeting the requirements of Guideline E-22 on the exchange of variation margin and to be in a position to provide OSFI with status updates on request.

Coordinated Relief by Regulators

OSFI’s decision to introduce a transition measure, which is essentially aligned with the position taken by regulators in other jurisdictions like the U.S., follows on the heels of concerns expressed by trade groups to the regulators in recent weeks that, despite their best efforts, many financial institutions would be unable to put in place regulatory compliant credit support documentation with some of their buy-side counterparties by the March 1 deadline. The decision by OSFI to allow for some additional time past the March 1 deadline ensures that trading activities with buy-side counterparties will not be disrupted. The coordinated approach taken by the regulators to deal with this issue recognizes that the goal of reducing global systemic risk will not furthered by disrupting the risk hedging activities of the buy-side firms and is a welcomed response.

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