Image
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.

 


Popular
Most Viewed

Image

Related Articles


September 15, 2022

Tradefeedr Hires Alexis Fauth as Head of Data Science and Client Analytics




2 MIN



FX


September 6, 2022

Siege FX announces the launch of NetFix




2 MIN



FX


August 2, 2022

OSTTRA and LCH collaborate to reconcile bilateral OTC trade data




2 MIN



Post Trade Processing