Six years ago on the 13th of July, I was sitting on the same beach, reflecting on the remaining days of Phase one going live for UMR. The industry had spent three years planning, designing and testing solutions for September 1 2016, which was phase one going live for firms with over three trillion in Average Aggregate Notional Amounts (AANA).?We were ready and lots of testing had taken place.???
So what has changed six years on from phase one go live? What do phase six firms have to do at a minimum to continue trading on September 1 2022???
- Self Disclosure?- In Phase 1, There were around 20 firms, so it was easy to self-disclose as most of them were members of ISDA (International Swaps Derivatives Association). When we fast forward to face 6, there are around 700 firms, and it isn’t easy to know who’s in scope as a majority of these are managed by multiple asset managers. Tip: Use the ISDA self-disclosure spreadsheet, which allows you to receive updated lists from my ISDA of firms who have self-disclosed themselves.???
- Client Engagement?-?The biggest challenge in getting ready for phase 6 with many firms come into scope with either a one-to-one relationship (principle to principle) or one-to-many relationships (multiple managers trading with one principle). Tip: If you use a manager(s) to trade on your behalf with an in-scope sell-side(s) (broker(s)), then set up a time to speak to the underlying principle. The sell-side wants to speak to underlying clients to ensure they can provide the best advice and prepare for UMR.???
- Rules Distillation - In earlier phases, rule distillation was a critical regulatory artefact sent to each regulator that governed the parent entity. This was either required for the SIMM model approval process or a self-attestation to identify any gaps with action plans in place to close those gaps in a timely manner. Tip: regulators are keen to see their rules understood by individuals in each in-scope organisation, and there is clear accountability on who owns which rules and what solutions are in place to provide evidence that they comply with those rules.??
- Legal Agreements?- This part of the project remains the most time-consuming and complex due to the number of stakeholders involved in negotiating and agreeing on bilateral (IM CSA/CSD) and custodial documents (ACA, CTA, SA & ECS). As new custodians come into later phases, new legal agreements are required to be reviewed to perfect the legal enforceability of segregated IM at third-party or triparty custodians. In Phase 3, we saw the first Buyside come into scope, which meant the treatment of independent amounts (IA) needed to be incorporated into the next generation of legal documents. Tip: Speak to your counterpart early about the IA you have posted to them to ensure your future derivative pricing doesn’t change if you choose the wrong approach (greater off, allocated, and distinct).???
- Custodial Onboarding?- In the early phases, there were only four triparty agents; since Phase 5, we have seen several third-party custodians offering solutions which mean dealers are posting IM via triparty agents, and most of the buy-side is posting from third-party custodians. This creates a number of onboarding challenges and multiple legal agreements that need to be negotiated, plus a number of soft deadlines to meet per custodian to ensure your segregated IM account is open in time. Tip: Some custodians can reserve accounts from you. They need minimum information from you to create the shell accounts ready to use once trading increases over pre-agreed soft threshold limits.??
- Operations - In earlier phases, the operations team were able to join the legal and the project teams in discussing the front-to-back processing flows. In the latter phases of UMR, with the sheer volume of clients coming in that hasn’t been possible for operations to be on every single call with clients. Therefore there are operational risks in phases five and six with the operations team not being fully engaged or pulled into the process late, which will cause problems to trade if margin calls can’t be generated in a timely manner. Tip: Complete testing with one or two counterparts before you go live to ensure the operational pipes work from start to finish. Current stats show in Phase six; there isn’t much testing before going live.??
- Technology - This area of the project has seen a large number of Technology vendors and utilities coming in to create a collaborative ecosystem of UMR solutions. In earlier phases, most firms had to build their own. i.e. IM calculators. In the latter phases, the firms now have a difficult decision in choosing which vendor to select as multiple good vendors offer IT solutions for front-to-back processing. Tip: Choose a maximum of two to help you as there isn’t one IT solution provider who can provide you with all the IT solutions you need.??
- Optimisation?- All earlier phases heavily focus on this area when negotiating economic terms into bilateral and custodial documents. There is heavy involvement from the front office with experts in IM modelling scenarios on previous trading behaviours and potential future trading behaviours to predict the right IM Model and thresholds. Tip: It’s worthwhile investing in technology to allow you to optimise your trading decisions and what types of collateral to pledge to counterparts. We have seen a number of our clients invest in optimisation technology and techniques to ensure they post cost-effective forms of IM collateral and their IM Model correctly gives them accurate IM ramp-up calculations.??
- IM Model Governance - Last but not least, this is the most crucial area of the project to get right, but many firms brush past it thinking it’s not aimed at them but the earlier phases. To date, we have seen one earlier phase swap dealer fined $900,000 from the US regulator for inappropriate margin collection, model monitoring and reporting requirements. Regarding Model Governance, they Used inadequate processes to assess the risks of its uncleared swaps and backtest, benchmark and validate its margin model. A couple of weeks ago, the UK regulator issued a letter to earlier phase banks to respond to their queries on the IM Model by December 2022. Soon we will see the EU regulator's changes (EMIR Refit) finalised around IM model governance changes. Tip: Ensure you have documentation in place to show regulators how you 1) Escalate issues with the IM model and 2) IM Model Development. Regulators focus heavily on this area, particularly the suitability of the IM model chosen with regard to firms' specific portfolios.??
If you have any queries on this write-up, please email me at?[email protected]?or head over to our website for more information at?www.marginreform.com.?
