Cassini Commentary: UMR Implementation One-Year Delay
As our clients and firms across the buy side begin to process the recent BCBS and IOSCO recommendation to delay by one year the implementation of phases 5 and 6 of the uncleared margin rules (UMR), we wanted to share why Cassini Systems supports this move.
Although these regulations were introduced to mitigate systemic risk in times of stressed markets, we have two primary reasons for believing this is the right move during these challenging times.
First, the operational impact of firms having to organize teams to remote work, and the reallocation of IT resources to help firms restructure day-to-day operations, has been very significant for a lot of firms. This has naturally had an impact on teams’ bandwidth to support technology and implementation work relating to supporting the UMR operating model.
Second, introducing UMR to new firms in a stressed market would place even more onerous collateral requirements on the industry than were expected just a few short weeks ago. The new Initial Margin (IM) requirements for ISDA SIMMTM and Grid methodologies would require many firms to find and post significant amounts of new collateral. However, the recent market volatility has had the effect of increasing IM levels for cleared trades, creating large Variation Margin (VM) requirements and likely also increasing the UMR IM requirements. That would mean firms having to find higher amounts of collateral than they had anticipated in a world where eligible collateral is already getting further squeezed as a result of market conditions. Given that the intent of UMR is to protect firms in volatile markets, it would have been ironic and counterproductive if its implementation resulted in additional collateral stress for the market.
This delay will impact hundreds of firms – many of which may not be sure exactly how they should respond or what specific impact it has on them, and they will look to their solution partners to help them adjust plans accordingly. As the leading margin analytics firm as well as a major ISDA SIMM provider, we are already starting to work hand-in-hand with institutions across the buy side to help them adjust their business and technology plans to the revised timelines.
One of the most significant impacts of this period of market stress has been that many firms are seeing cleared and exchange-traded derivatives (ETD) portfolios with very large margin calls and daily swings in VM so this highlights even more the importance for firms to have a holistic margin and funding solution across all business lines.
This postponement in the UMR roll-out allows breathing space for the buy side to adjust to and come out the other side of the current period of market volatility and uncertainty without having the pressure of sourcing large amounts of new collateral hanging over them. However, the delay should not be cause for phase 5 firms to suspend their preparedness projects. Rather, this provides an opportunity to fully evaluate the impact of collateral and liquidity across the business and ensure that they put in place strong tools to understand and mitigate the effect of ISDA SIMM and cleared margin on their portfolios.
As always, we at Cassini are focused on helping our clients maximize the efficiency of their margin trading and collateral deployment. The current market has only added another spotlight on the need for analytics to:
- Identify margin-reducing trades
- Explain movements in margin and drill into the portfolio
- Identify novation or switch trade opportunities
- Optimize collateral allocation itself.
We stand ready to help firms navigate this new landscape. Please get in touch with any member of our expert team to discuss how you could improve your operating model.