The much-anticipated final phase of the Uncleared Margin Rules (UMR) has come into play today, concluding a six-year implementation journey with arguably the most discussed phase of all.
UMR Phase 6 will have the biggest impact on the buy-side yet, with approximately 1,100 firms being affected by this final chapter of the regulation.
Over the years, firms with the largest non-cleared portfolios including major bank groups, global dealers and select buy-side firms were affected by the first three phases of UMR. However, since phase 4, the buy-side has been gradually phased into the Standard Initial Margin Model (SIMM) calculations.
As UMR transitioned from Phase 4 to Phase 5, the Aggregate Average Notional Amount (AANA) decreased from $750 billion to $50 billion, resulting in what was the first significant impact on the buy-side, with a much greater number of firms being brought into scope of the regulation.
This number increases with the implementation of Phase 6, as firms with an AANA above $8 billion, or an equivalent measure in non-USD jurisdictions, will now be impacted.
Phase 6 firms did, however, have the benefit of a greater deal of understanding in relation to achieving compliance when compared to previous phases, mainly because they had a reference point from firms who were impacted by previous phases.
“The final phase of UMR sees record numbers of firms pulled into scope, particularly in the investment manager community. However, these phase six firms benefit hugely, both from off the shelf tools and services now available, and lessons learned in earlier phases,” said Neil Murphy, business manager at TriOptima, OSTTRA.
“The market has coalesced around standardised tools in terms of calculation, reconciliation and use of the SIMM model, while new options for Initial Margin (IM) monitoring have removed some of the day one pressures for in-scope organisations.”
As a result of being pulled into scope by previous UMR phases, major investment banks have the advantage of being sophisticated and experienced in the realm of calculation and exchanging initial and variation margin, as well as resolving margin disputes with their larger counterparties. With Phase 6 coming into play, major investment banks will now be faced with dealing with smaller investment managers who are currently not as sophisticated, as a result of different priorities and fewer resources to allocate to operations. Phil Slavin, chief executive of Taskize, noted that in many cases, the result of this will be a higher number of margin disputes.
“While efforts have been made to ensure that the margin exchange process can take place as smoothly as possible in the immediate aftermath of the 1 September date, banks will need to ensure more efficient resolution of margin disputes with those firms less familiar with the process. They will also need to be aware of the fact that unforeseen volatility in OTC markets – as we have seen already in 2022 – could bring more investment managers above the AANA threshold, which would lead to even more instances of margin disputes.
“Reverting to email as a means of resolving this will not be possible, as collateral teams could find themselves buried under unmanageable and inefficient email traffic. As firms muddle through the initial implications of phase 6, specific tailored workflows designed to help firms manage and accelerate collaboration across operations teams need to be adopted to ensure UMR does not become an operational headache.”
Looking at the consequences of not complying to the regulation in time, firms were warned that they may not be able to trade bilateral derivatives with their dealer counterparts – resulting in firms being constrained in terms of access to the market.
However, Paul Houston, global head of FX products at CME Group, noted that the final phase of UMR is symbolic as opposed to ‘a big bang moment’. “Ultimately, the final phase go-live means trades done on or after this date will still count – meaning we are unlikely to see an immediate impact.
“However, UMR will start to act as a catalyst for a new category of investment managers to alter their approach, which market participants will see the impact of over time. Increased usage of cleared alternatives to bilateral FX options for initial margin efficiencies is likely to be a prominent factor moving forward, as well as the ongoing move to listed FX futures away from FX forwards.”
Speaking on today’s go-live of UMR Phase 6, Joe Midmore, chief commercial officer at OpenGamma, stated that market participants with higher risk profiles that need to exchange margin must now ensure they are doing so as efficiently as possible. “This includes either optimising the margin paid, or perhaps looking at the possibility of moving UMR sensitive trades away from a bi-lateral environment to the clearing world. On top of this, firms also need to validate the margin that they are paying to their counterparties.”
Although not preparing for this final phase of the regulation would have an impact on firms’ ability to trade, there are ways in which firms can continue trading despite the deadline – essentially, taking advantage of the UMR threshold of $50 million. Initial Margin (IM) does not need to be posted until this threshold is crossed, allowing firms to trade with their counterparts up until this IM amount has been reached.
This will not necessarily serve as a shortcut for firms, as IM will still need to be calculated. In addition, under this approach, it is very important to assess where a firm stands compared to the threshold to ensure it can become compliant speedily in the event that a firm nears the IM threshold.
“As the final phase of UMR finally goes live, we will see who has taken the steps to prepare their infrastructure to adapt to the operational challenges of the regulation,” said Christian Geiger, head of sales management securities finance at SIX.
“For those who have not, it is crucial they explore a tri-party collateral arrangement, as this is an efficient strategy for enabling UMR compliance. As a case in point, SIX has seen an increasing client demand for a tri-party collateral management solution with the final phase of UMR coming into force. Complying with UMR and posting initial margin has never been easier with the solutions on offer but for those in scope or soon to be in scope, steps should be taken now to minimise the operational burden now that phase 6 is in effect.”