Acadia: start dynamic backtesting now for UMR’s phase 5&6 firms

Acadia has partnered and advised many firms over the past years regarding Uncleared Margin Rules (UMR). The European Banking Authority finally issued the latest RTS (Regulatory Technical Standards) for comment in November 2021- providing specific clarity on European Market Infrastructure Regulation (EMIR) for Initial Margin Model validation.

Many firms may assume that since the RTS will not be “in force” for another two to three years (Phase 5 & 6 respectively) that they are exempt up to that time from any requirements with regard to model validation. Unfortunately, according to current regulation this is not the case, writes Robert Kirchner, head of European Quant Services at Acadia.

If you are in Phase 5 and are using a model like ISDA SIMM, you need to be performing a quarterly backtest. Phase 6 firms that plan to exchange initial margin will also need to put in place a backtest, which will move to a “dynamic” or daily backtest once the RTS comes into force.

It is also important to stress that a model validation process is a requirement under existing EMIR regulation. If you plan to move margin within the next 12 months start implementing a SIMM model now along with a backtest to ensure that you are compliant with the regulation. Whatever you put in place today, will be fit for purpose once the RTS comes into force.

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