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Uncleared Margin Rules

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Asset Managers could save millions through clearing ahead of UMR

Our latest research shows asset managers pulled into phases IV and V of the Uncleared Margin Rules (UMR) will be able to save up to 53% in initial margin when clearing compared to uncleared margining. 

UMR which, among other requirements, mandates margining rules for trades that are not cleared by a central counterparty (CCP) has caused great collateral inefficiencies for many in-scope firms. For asset managers with portfolios above €750bn in notional, clearing a greater volume of OTC trades frees up potentially millions of dollars worth of assets to put to use elsewhere. 


Our latest research shows asset managers pulled into phases IV and V of the Uncleared Margin Rules (UMR) will be able to save up to 53% in initial margin when clearing compared to uncleared margining.  Click To Tweet


The findings come as the industry continues to prepare itself to post an eye watering $2 trillion more margin as a result of the rules, the final phase of which has been pushed out until 2021. This means that thousands of asset managers, that have previously never had to post margin, will have much needed additional time to get their operational houses in order. 

In response to the research our CEO Peter Rippon said “The overarching goal of UMR is to strongly incentivise asset managers to stop trading bilateral uncleared derivatives, and shift towards central clearing.”


“Unfortunately, it’s not as simple as just deciding to clear, firms then need to decide where to clear. A derivative may be eligible to clear at numerous venues, but an asset manager then needs to factor in liquidity and whether they have an existing position, not to mention any pricing discrepancies between the clearing houses.” 


He concluded: “The trouble is, at a time when investors are putting fund performance under the spotlight following Neil Woodford’s woes, the last thing asset managers need is to be restricted from delivering strong returns. This problem can be solved, which is why we are seeing more firms carefully considering the differences in the margin calculated, and level of margin that will be required for UMR.” 

Interested in how this saving can be achieved in greater depth? Take a look at our blog on how leveraging other a variety of optimisation techniques can save you up to 80% on the cost of margin


HFM US Breakfast Briefing: How to get ready for the next phase of uncleared margin rules

July 11th saw HFM’s Breakfast Briefing on Uncleared Margin Rules (UMR) take place in New York, with panelists from Seward & Kissel, BNY Mellon, KPMG and OpenGamma joining to explore how to best prepare for the next phase of UMR. 

The briefing began with a discussion on AANA calculations, with each panelist sharing what they had seen working with market participants who were currently one month into the three-month daily calculation period in the US. Issues around jurisdiction differences for global funds and ambiguity on certain derivatives products such as options were discussed, with all parties agreeing that calculating AANA is a challenge in itself.

The discussion then moved onto the challenges of calculating regulatory margin — both from an operational perspective and a quantitative perspective. The panel gave an end-to-end description of the core requirements — touching on a range of points from the challenges of generating sensitivities and the CRIF file for SIMM, all the way to re-papering with 3rd-party custodians and the importance of model governance.


The following points were brought up:

  • Re-papering custodial agreements is a lengthy process and should be done sooner rather than later — particularly for Phase 5 where there is expected to be over 9000 agreement negotiations taking place. Panelists concluded that firms should aim to have everything in place by the end of 2019 for a September 2020 capture date
  • Calculating SIMM is challenging from both an operational and expertise perspective. Panelist reported that many firms that originally intended to build-out their own SIMM-related infrastructure quickly realised that the sensitivities and CRIF generation is a large undertaking for two reasons: 

Firstly, the sensitivities/risk-bucket mapping are different to their existing view of risk, so require an entire new framework.

Secondly, the biggest problem created by regulatory IM is not the upfront build but actually allocating quantitative resources to day-to-day reconciliation.

  • The choice between SIMM vs schedule-based IM (Grid) is not straightforward. While Grid is easier to implement, it is more punitive in almost all cases. However, calculating SIMM — especially on exotic products — requires significant quantitative resources although margin requirements are likely to be lower.

There was debate around the requirement for a firm to repaper given the allowance of a $50m regulatory threshold. Calculating SIMM on today’s portfolio is only indicative of the level of IM that will be incurred after September 2020 — given that UMR does not apply to legacy trades before this date. For this reason, firms may be able to optimize their trading to avoid ever exceeding $50m per counter-party and therefore would have no need to set-up the infrastructure to post regulatory IM. On the flip side, feedback among the panel was that banks will expect all infrastructure to be in place, even if the account is left empty for its entire existence.


Following on from the discussion about the $50m threshold, the panel alluded to the optimization opportunities that are created: 

  • Opportunities to voluntarily clear eligible products such as inflation swaps and non-deliverable forwards are increasing.
  • Having pre-trade tools in place to simulate the impact of adding new trades in a regulatory IM environment are crucial to minimizing margin requirements.
  • Voluntarily backloading bilateral trades can be a mechanism to reduce IM as risk offsets decrease margin requirements under SIMM.

The panel concluded the discussion by talking about what was learnt from Phases 1-3. Everyone agreed that in general the market had underestimated the work involved and therefore left implementation to the last minute, causing a rush in the run-up to the go-live dates. In addition to this, the panel brought up that for Phases 4 and 5, the types of firms that are captured are smaller and less sophisticated in nature — so the reliance on external services is inevitable and should be addressed sooner rather than later.

Questions from the audience centered around issues in reconciliation between hedge fund and counterparty calculations. The panel spoke about some of the examples they have seen. These included:

  • Model differences in swaptions
  • Curve calibration differences for swaps
  • Inconsistent risk bucket mappings for equity TRS.


The impact of these types of issues are detailed in our recent Webinar. More information on our SIMM offering can be found here.

Insights, News

What’s the impact of the one-year extension to the Uncleared Margin Requirements?

So, the expected announcement was made and the Basel Committee and IOSCO announced a one year extension to UMR Phase V – except, of course, it isn’t as simple as that. What we now have, in effect, is a Phase Va and a Phase Vb – and even more confusion over when people are going to be caught by the rules and what they need to do about it.


What exactly are the changes?

The headline is that Phase V where firms with an aggregate average notional amount (AANA) of greater than €8 billion will need to pay Initial Margin on non-centrally cleared derivatives has been moved back a year to 1 September 2021. But what they have additionally done is introduce an interim threshold of €50 billion AANA, which will come into force on 1 September 2020 (the original date for Phase V).


“So, although some firms have got a stay of execution until 2021, others will still need to meet the original date.”


What is the impact?

The obvious answer to this question is a number of firms can delay looking at UMR. However, given the AANA thresholds, the majority of firms will have to continue to run these calculations. Between the €750 billion threshold for Phase IV and the €8 billion for Phase V, it was relatively easy to determine if you were caught by Phase IV or not.

As a result of the extension, there are a lot of firms who could be on the border of the new €50 billion threshold and will need to complete this task to check if they have the extra year. Click To Tweet

Here at OpenGamma, our experience has been that there is still a lot of ambiguity around how to treat certain products in the industry, and that calculating AANA alone is a difficult task, before you even get to Initial Margin. As a result, even if you are likely to fall below the new threshold, it could be a good idea to carry on with this work making lots of notes as you go so that it is an easier task if it has to be repeated next year.


If I’m happy that I’m below the new €50 billion threshold can I relax?

You’d like to think that the answer to this question would be ‘yes’. But the reason the Basel Committee and IOSCO have had to introduce this delay is that so many firms are struggling to meet the original deadline. Even their attempt in March to make the burden easier allowing any entity where the bilateral Initial Margin requirement fell below the €50 million threshold to not complete the necessary documentation and operational set up did not allow the original timescales to be met…well, not in a ‘smooth and orderly’ fashion anyway.


“Firms should really be using this extension as an opportunity to get things right.”


In their press release the Basel Committee and IOSCO stated that they ‘expect that covered entities will act diligently to comply with the requirements by this revised timeline and strongly encourage market participants to make all relevant arrangements on a timely basis’. Meaning, they’re not expecting anyone to sit back and wait until next year before they get going again.


So, what should I be doing now?

The answer is; carry on preparing for the final phase because it will creep up on you sooner than expected. This delay just means that it is less likely that you will be rushed and end up with a sub-optimal implementation. Get those custodial agreements re-papered, work out whether you are using SIMM or Grid. If you decide to use SIMM, choose how you’re going to calculate the necessary sensitivities and don’t forget the day-to-day reconciliation.

And what about that €50 million threshold? Not setting up the infrastructure to post regulatory Initial Margin is fine if you never exceed the threshold (although most banks are likely to expect this to be in place even if it is never used)…but you will need a way of optimizing your trading and monitoring your margin to make sure that you stay below this level.

Some firms dragged into Phase V have only recently realised that they will have to post hundreds of millions in Initial Margin for the first time. So, if nothing else, this delay provides some much needed time to put detailed plans in place in order to trade more efficiently. In the months ahead, expect to see more and more asset managers affected by the rules moving away from trading bilateral uncleared derivatives, and shifting towards central clearing.

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