Buy-side still overwhelmingly unprepared for uncleared margin rules from 2021

State Street polled 300 buy-side firms and found that less than a fifth were fully ready to comply with UMR from September 2021 or September 2022.

A recent survey of asset managers and asset allocators has found the vast majority are still hugely unprepared for the uncleared margin rules (UMR) when it comes into force for them next year.

The survey from State Street, which measured perceptions and readiness of 300 buy-side firms in 16 countries, showed 81% of firms with a September 2021 or September 2022 deadline are unprepared to comply with all facets of the rules. 

Only 19% said they are fully ready for compliance, while 42% said they are preparing in all relevant functions, and the remaining 39% have only begun preparations in just a few areas.

“As we approach the deadline for the next phase, it is critical for buy-side firms of all sizes to be aware of the pending requirements and to not only effectively manage, but optimise, their liquidity and collateral needs with the right solutions and technology in place,” Nadine Chakar, head of State Street Global Markets, commented.

The survey also revealed that close to 80% of asset managers have not agreed on how to approach settling segregated collateral with counterparties, a key requirement of the rules. As it stands, third-party custody with account control agreements remains the favoured approach amongst respondents. 

The findings of the buy-side’s overwhelming lack of preparedness comes despite a one-year delay of the rules, granted by regulators, as a result of the COVID-19 pandemic. 

Under the rules, buy-side firms with non-cleared derivatives of a notional value exceeding €8 billion will have to post collateral to cover their positions. Thousands of asset managers, hedge funds, pension funds and insurance companies are expected to fall under the regulatory scope.

The State Street study suggested many firms have underestimated the difficulty associated with compliance. Some 80% of those in compliance functions indicated that they have faced some degree of challenge in terms of incorporating new workflows, and are employing a mix of in-house capabilities and outsourcing to third parties with operational expertise. 

To limit the impact of the rules, more than half of firms said they are planning to adjust strategies by reducing over the counter (OTC) contracts, while the majority are also using compression strategies.

“While it’s tempting to circumvent the complexity of UMR by simply reducing the volume of in-scope contracts, I’d argue this approach is short-sighted,” added Gino Timperio, head of funding and collateral transformation at State Street. “Recent market volatility underscores the need to consider collateral, funding and liquidity at a firm-wide level, and buy-side firms should adopt a strategic approach to UMR compliance, with the right external support to manage some or all components of the process.”