December 18, 2019

The consequences of LIBOR replacement on UMR

The consequence of solving the replacement of LIBOR may cause unexpected problems in UMR portfolios

ISDA have written a letter to the US prudential regulators (The OCC, The Federal Reserve, FDIC, FHFA and FCA) to support a proposed rule (here) which will disentangle LIBOR replacement from UMR.

 UMR makes a distinction between trades executed prior to an applicable start date (such as Sept 1st) and trades executed after that date. A trade executed pre-UMR is excluded from post-UMR margin calculations provided it remains unchanged. By amending a pre-UMR trade (or via novations or compression activity) the trade could be deemed as now post-UMR and therefore become part of your post-UMR margin agreements and calculations.

The CFTC believes up to 70% of all OTC trades are based on LIBOR so could be caught in this situation. From a margin perspective, this could mean a hit to IM of:

  • USD 100 billion if calculated using the grid or schedule based method
  • USD 44 billion if calculated using SIMM

And a large part of this additional IM would be funded by asset managers, insurance companies and pension funds.

The letter from ISDA supports the proposed rule saying:

  • Rebooking LIBOR should not cause the trade to become in-scope for UMR
  • Nor should a change to the notional or maturity, when directly linked to a LIBOR change
  • Extend the rules to all derivatives not just Rates

The full ISDA letter can be found via their website here, or attached below.


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