UMR Extension: A Roadmap For The Buy-Side
Placing technology spend on platforms that allow unbundling of liquidity from credit restrictions could weather the initial margin storm, argues Vikas Srivastava, Chief Revenue Officer at Integral.
On the surface, the news that BCBS and IOSCO have granted an extension to the final phase of the Uncleared Margin Rules (UMR) is likely to be welcomed by asset managers currently trading uncleared derivatives with a notional between $8 billion and $50 billion. The extension pushes the initial margin compliance date out by exactly one year to September 2021 for an estimated 8,000 firms. However, this additional year does not apply to the 1,000+ firms that have a notional threshold between $50 billion and $750 billion. And to be honest, the truth is that much elbow grease is still needed in the coming months to prepare for what is essentially a major structural change, regardless of whether an asset manager falls under Phase 5 or Phase 6.In addition to new documentation requirements, affected firms will also need to gain a new understanding of collateral optimisation, wherein each additional counterparty adds to the level of complexity and exacerbates the inability to realize netting benefits. Since FX is overwhelmingly an OTC market based on bilateral relationships, the challenges of collateral optimisation that large and medium-scale asset managers face across multiple counterparties is not an easy one to tackle. In addition, because the new UMR rules will result in much more exchange of margin than previously experienced, it will lead to more monitoring, reporting, reconciliation and operational burdens.
Asset managers pulled into the final two phases should have a roadmap for their respective deadlines. From shifting towards clearing certain instruments, to considering the use of prime brokerage, there are many things that the buy-side should think about and consider. As the burden of managing many more counterparties grows, we should expect to see a movement towards credit intermediation models and toward technology vendors that have a strong understanding and deep experience in facilitating credit intermediated trading. Those who place their technology spend on platforms that allow unbundling of liquidity from credit restrictions will undoubtably be better placed to weather the initial margin storm.