There are some 650 firms now in scope for the broadest initial margin calculation rules. Securities finance pros weigh in on what the market should be thinking about.
Sabine Farhat, head of securities finance and repo product management at Murex, said: “UMR phase 6 will require in-scope firms to post more margin for their uncleared OTC trades in order to comply with the regulation. The availability of collateral is crucial in order to minimize costs, creating greater need for collateral sourced efficiently through securities lending and repo markets.”
The problem is, she added, that this market is still largely very manual and securing pre- and post-trade collateral can take time as well as extra resources to manage this process.
“In order to unlock trapped collateral and manage it more effectively for UMR, market participants need the data synchronized in real-time with positions, market data and settlement events from multiple sources and legal entities, solving the fundamental collateral management challenge of timely data aggregation. This enables global visibility and resource sharing by providing an holistic overview of collateral management exposure which will enable firms to concurrently manage their UMR margin requirements and securities finance operations,” she said.
Christian Geiger, head sales management securities finance at SIX, said: “As the final phase of Uncleared Margin Rules (UMR) finally goes live, we will see who has taken the steps to prepare their infrastructure to adapt to the operational challenges of the regulation. For those who have not, it is crucial they explore a tri-party collateral arrangement, as this is an efficient strategy for enabling UMR compliance. As a case in point, SIX has seen an increasing client demand for a tri-party collateral management solution with the final phase of UMR coming into force.”
SIX recently introduced launched the solution for two parties to a transaction to delegate their day-to-day operational responsibilities around collateralization to SIX. This helps ensure the correct amount of margin is being posted and that risks are managed should volatility enter into the market and skew margin for posting.
Geiger said: “Complying with UMR and posting initial margin has never been easier with the solutions on offer but for those in scope or soon to be in scope, steps should be taken now to minimize the operational burden now that phase 6 is in effect.”
Phil Slavin, CEO and co-founder of Taskize, said: “Major investment banks, pulled into the earlier phases of UMR, may well be highly sophisticated and experienced at calculating and exchanging initial and variation margin, and resolving margin disputes with their larger counterparties. The reality is that they now face the daunting prospect of dealing with hundreds of smaller investment managers who are not as sophisticated, due to different priorities and fewer resources to allocate to operations. In many cases, the result will be a higher number of margin disputes.”
Euroclear-owned Taskize is a provider of intercompany workflow for financial services, performing functions such as CSDR-related penalties appeals for example.
Slavin added: “While efforts have been made to ensure that the margin exchange process can take place as smoothly as possible in the immediate aftermath of the 1st September date, banks will need to ensure more efficient resolution of margin disputes with those firms less familiar with the process. They will also need to be aware of the fact that unforeseen volatility in OTC markets – as we have seen already in 2022 – could bring more investment managers above the AANA threshold, which would lead to even more instances of margin disputes. Reverting to email as a means of resolving this will not be possible, as collateral teams could find themselves buried under unmanageable and inefficient email traffic. As firms muddle through the initial implications of phase 6, specific tailored workflows designed to help firms manage and accelerate collaboration across operations teams need to be adopted to ensure UMR does not become an operational headache.”