It’s now over a month since go-live of UMR Phase 5, with many more firms required to exchange margin.
On the whole it seems to have been a quiet start. From what we have seen, margin levels for new counterparties are still low, and in many cases below the $50 million regulatory buffer.
However, we anticipate that will change as margin requirements rise, with reconciliation, optimisation and automation all becoming more important. We have also seen more interest from Phase 6 firms who are aware that they have less than a year to prepare.
So what have we seen in detail?
While margin levels remain low, many firms are happy to rely on the banks to take the lead in any reconciliation. We have heard of some issues over which trades to include in the calculation, but in general no problems with SIMM itself.
Firms are monitoring their margin levels against the $50 million regulatory threshold, using the time available to enhance their processes and ensure that they are ready to challenge margin calls if required.
As margin starts to increase, we are expecting more firms to start using analytics to help optimise the level of their margin requirements. One part of this is the ability to attribute margin to traders so that they are aware of the new costs that UMR introduces. When margins reach a particular level, firms are potentially going to charge traders for their contribution to the overall margin requirements. The phased introduction will hopefully allow them to get used to the idea.
We have seen increasing demand for pre and post trade optimisation, allowing firms to choose the cheapest venue for their trades, including the possibility of moving business from bilateral to cleared. And with increasing margin requirements, firms will want to look for ways to reduce their overall requirements so we expect activity in this area to accelerate soon.
Off the back of UMR, we are seeing more firms looking to improve on their existing treasury processes. They are interested in a system that can support the validation of margin calls and dispute resolution. In addition, they need to be able to manage their collateral and interface with custodians and payment systems. This requires support for various messaging standards, including SWIFT.
The Phase 5 firms are considerably smaller than those that were in scope of earlier phases of UMR. They don’t have the same infrastructure as the larger companies and therefore are looking for a single solution covering all their requirements, removing the need to integrate multiple systems.
The introduction of Phase 5 seems to have raised the awareness for Phase 6 firms that there is less than a year to go. We’ve seen a lot of interest from these companies. They are usually looking for a single solution that will support all their requirements, starting with AANA calculations to confirm that they are captured by UMR, then moving on to margin calculation functionality; generating CRIF files and calculating SIMM or Grid across all in scope products.
Other firms are looking for a complete solution that goes beyond the functionality required specifically for UMR. This includes margin optimisation analytics and treasury workflow. For these firms, an affordable solution that is easy to implement is key.
Read our latest guide to find out the cost effective way to comply with this new regulation.