Swaps Rules Start to Tighten in Unprepared $544 Trillion Market

Regulators will start to gradually enforce a new regime that forces counterparties to exchange collateral on a daily basis to protect against swings in the value of contracts. The slow implementation of the rules, which officially come into effect on Wednesday, is partly to avoid disrupting the market by

shutting out thousands of unprepared firms.

"It's a softer start than expected, but the changes are still significant," said Jeremy Jennings-Mares, a partner at law firm Morrison & Foerster in London. "There is a pretty large portion of the market that won't be compliant as of today."

Traders have some breathing space, with authorities in the U.S. and Asia allowing a six-month grace period, and the European Union saying it will assess compliance on "a case-by-case basis." That also gives them more time to digest costs from the changes, which form part of global efforts to curb risk after lawmakers blamed swaps for fueling the 2008 financial crisis.

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The changes mean traders have to post easy-to-sell assets, such as cash or bonds, as so-called variation margin. This collateral will then cover a counterparty's losses if a trader defaults on a swaps deal.

More than 150,000 collateral agreements need to be renegotiated because of the new rules, Scott O'Malia, chief executive of the International Swaps & Derivatives Association, said by email. Doing this "has proved hugely challenging," he said.