It’s been a long and winding road, but phase 6 of the Uncleared Margin Rule (UMR) goes live today, impacting more than 1000 firms.
Although the initial phases covered banks and global dealers, this final chapter comprises firms with total notional exposure of €8 billion. This means that many buy side firms will now be affected.
Many in this category have never had to post initial margin (IM) before and did not have the dedicated compliance teams to meet the requirements. In many cases, it required an overhaul of business processes.
In response, regulators have given firms more time and remain exempt from UMR if their counterparty relationships fall below a €50 million initial margin threshold. Until this threshold is crossed, initial margin (IM) does not need to be posted. This should allow firms more tim to become fully compliant with requirements.
The repapering process can take up to a year to complete, which means that firms that have not prepared for the new phase may not meet the deadline. This could result in bans on trading, if the IM surpasses €50 million.
“The final phase of UMR is symbolic, as opposed to a big bang moment,” said Paul Houston, global head of FX Products at CME Group. “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.
He adds, “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.”
Neil Murphy, business manager of TriOptima at OSTTRA believes that “Phase 6 firms will benefit hugely, both from off-the-shelf tools and services now available, and lessons learned in earlier phases. The market has coalesced around standardised tools in terms of calculation, reconciliation and use of the standard initial margin model (SIMM) model, while new options for IM monitoring have removed some of the day one pressures for in-scope organisations.”
