Uncleared Margin Rules Insights
Uncleared Margin Rules have fundamentally changed the bilateral OTC derivatives trading space for in-scope firms. While the rules have applied to the biggest tier 1 & 2 banks starting from 2016, their impact is only now being felt by most firms active in derivatives.
Given the market dislocation and displacement of staff prompted by the ongoing global pandemic, Basel and IOSCO have recently announced a delay for phase 5 and 6 firms, which number over 1,000 according to ISDA estimates. This should not be interpreted as an opportunity to ease up on preparations. The delay is a gift to many firms that have thus far inadequately prepared for the many new necessities of Uncleared Margin Rules, including implementing new technology for initial margin calculation using capital-efficient ISDA SIMM methodology, onboarding custodial relationships and creating segregated accounts for initial margin, and negotiating new regulatory CSA agreements to name just a few.
We are now entering the home stretch of the implementation period for the regulatory reforms devised by the G20 at the Pittsburgh summit in 2009. Among the key reforms are new regulations for initial margin.
The new initial margin rules are intended to reduce systemic risk by decreasing the chances of counterparty defaults, and to increase market stability by requiring parties to post more collateral for derivative trades. They also aim to increase the amount of capital that financial institutions hold on their balance sheets to cover their exposure in the event of a counterparty default.
This impending transition closes the window of time firms have to prepare for implementation, including the onboarding of a proper collateral management system and a strategy for long-term, firm-wide compliance.
Organizations with aggregated average notional amounts (AANA) in gross notional exceeding $3 trillion, $2.25 trillion, $1.5 trillion and $750 billion became subject to the initial margin requirements in September of 2016, 2017, 2018 and 2019, respectively.
Originally, firms with $50 billion and $8 billion of AANA were scheduled to begin compliance with the new margin rules in September 2020 and 2021, respectively. However, given the market dislocation and staff displacement resulting from the ongoing global pandemic, global regulators have proposed a one-year delay for so-called phase 5 and 6 firms. As of April 2020, new margin requirements will apply to phase 5 firms with average aggregate notional amount (AANA) of more than $50 billion in September 2021, and phase 6 firms with AANA greater than $8 billion in September 2022. Roughly 1,100 are expected to join the regulatory regime in the final two phases due to take effect in 2021 and 2022.
Firms scheduled to come into the fold in phase 5 need to start their decision-making process and figure out all new documentation and technology required to trade ahead of September 2021. Many firms are running AANA calculations now to determine their notional exposure to meet the scope for next year’s margin requirements. By getting such an early start, it is the hope of the market to ensure all firms become aware as soon as possible of whether they will be subject to the requirements in 2021 or 2022 so they can prepare accordingly.
The first challenge firms face in trying to comply with the new margin rules is the multiple systems many currently rely on to deliver transaction information and execute the collateral process as needed. Eric Leininger, a Bloomberg Risk representative focused primarily on sell-side risk sales, said during a webinar that firms are still using spreadsheets as the primary means to understand what their collateral needs are, access valuations and communicate them to counterparties.
Second, asset and investment managers, insurance firms and other buy-side players will need to negotiate and sign new counterparty and custodial agreements and put in place new processes and technology in order to be allowed to trade uncleared derivatives bilaterally.
Choosing a technology partner that can help firms determine their top requirements to be in compliance with the regulation, while waiting to implement the less critical functionalities until later, is a natural place to start preparations. Likewise, a solution that can be integrated into a wide range of asset classes that require initial margin calculations is crucial for a scalable approach.
The ability to store collateral agreements that facilitate the workflow of margin calculation events across all asset classes that require collateralization is also critical. Having all this data readily available lets firms easily reconcile portfolios, view and act on collateral calls, run what-if scenarios and communicate with colleagues internally and counterparties externally.
A solution intended to provide seamless real-time tracking of all collaterized products, Bloomberg’s Multi-Asset Risk System (MARS) is a unified platform that encompasses cross asset margin and dispute management, substitutions, interest calculations, portfolio reconciliations, and reporting.
Knowing how much collateral to post, what’s eligible to post and what’s available to post via access to a firm-wide view of all collateralized trades and agreements workflows can help firm stakeholders act decisively and with a shared vision of compliance at scale — strengthening the case for a trusted technology partner.
Learn how Bloomberg's Multi-Asset Risk System (MARS) can help your firm prepare for UMR. Get in touch.
