Buy-side firms under pressure to finalise preparation ahead of next UMR phase

With less than a month to go, the pressure is on for buy-side firms to finalise documentation and custodial arrangements on their initial margin.

A large portion of buy-side firms will have only a matter of weeks to finalise collateral agreements before they are swept under the latest phase of the uncleared margin rules (UMR).

From September, investment firms with OTC derivatives of over $50 billion in average aggregate notional amount (AANA) will be required to establish tri-party collateral management arrangements for the first time under the next phase of the rules.

The next phase is expected to bring over 300 entities into scope.

With less than a month to go, the pressure is on for buy-side firms to ensure they have finalised the necessary documentation – such as credit support annexes (CSAs) – and custodial arrangements in place with dealer counterparties.

If these preparations are not completed in time, the result could be major operational complications and even trade fails.

“UMR is likely to require many firms to make significant changes to their existing collateral management processes – a large number of which are manual today – and can often lead to processing errors and trade settlement failures,” said Bob Stewart, executive director of Institutional Trade Processing (ITP), DTCC. 

“Another area of concern is segregated margin accounts, as they are a mechanism that many buy-side entities will not have used before and are likely to be a challenge due to the existence of multiple manual processes and associated errors.”

In April last year, regulatory authorities moved to delay the final two final implementation phases for UMR by one year due to disruptions caused by the coronavirus pandemic.

The push back was welcomed by the industry as the majority of buy-side firms were unprepared to comply with all facets of the rules, according to a survey from State Street last year of 300 buy-side firms last year.   

In response, banks and market infrastructure firms have rolled out new services to help clients overcome the operational pressures of managing their initial margin in-house.   

Earlier this year, BNP Paribas Securities Services expanded its collateral management services in Asia-Pacific to help firms manage their initial margin requirements ahead of the incoming regulations. 

Clearstream and FinTech firm CloudMargin have also launched a new joint service that aims to automate the collateral management process for non-cleared derivatives.

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