Lessons Learned from Uncleared Margin Rules Phase 6

Now that a couple of months have passed since Phase 6 of Uncleared Margin Rules (UMR) was implemented, it’s time to examine some of the lessons learned from this latest stage.

One lesson that stands out is how important it is to use time wisely. Finalizing CSAs (Credit Support Annexes) and ACAs (Account Control Agreements) took more time than expected as such a large number of firms came into scope, with additional delays on custodian accounts and counterparties signing documents. Threshold monitoring can help you avoid delays by giving you the ability to monitor REG IM (Regulatory Initial Margin) values from your broker, which allows for parties to finalize onboarding activities when they are still under the $50 million threshold. This is also a great cost-saver for relationships that may never breach the REG IM threshold or take years to do so. 

On top of that, operational setups across agreements and SWIFT messaging are critical.  There were significant differences between Phase 6 firms’ expectations and how a given counterparty handled its processes, leading to operational differences. These differences can lead to larger disputes and cause confusion across all involved parties.

Testing with counterparties is also key to reducing disputes and trade population differences ahead of go-live. The testing window of a few months was not enough for some Phase 6 firms—all parties were stretched thin across onboarding, testing and development, resulting in differences not being identified within testing. Going forward, managers need to ensure counterparties are onboard to participate in testing and that ample time is allotted.

Reconciliations are a significant undertaking for all parties. Delays onboarding IMEM (IM Exposure Manager) and differences in trade populations lead to higher-than-expected differences from the start—ensuring both parties were sending data daily was also a greater-than-expected challenge. Establishing contacts and understanding broker processes was a challenge initially, but has become easier as relationships are formed.   

So what’s next for UMR and life after UMR

There will be additional go-live dates each year going forward across every jurisdiction.  After the implementation of Phase 6, all entities not already in scope will need to calculate their AANA (Average Aggregate Notional Amount) annually to see if they will become subject to the regulations in the future. Each year going forward any in-scope entity that falls under $8 billion AANA can also fall out of scope as well.

Key Dates for USPR, CFTC and EMIR/UK:

*Non-Standard dates & approaches highlighted in red

You can also expect improved REG IM reconciliation processes and standardization, with a better definition of industry best practices and processing for REG IM differences, as well as increased scalability and decreased resolution times.   

Looking toward the future and life post-UMR, the industry has other critical issues to solve. One area of opportunity is the automation of releases for segregated or custodian-held collateral. Thousands of faxes and emails are still used to authorize segregated collateral each day, and the industry needs to work together to develop ways to remove these manual efforts and reduce the operational effort and time to authorize collateral held by a custodian.

The industry should also focus on real-time settlement of collateral, by working together to confirm settlements for both cash and non-cash collateral and automating collateral movement reconciliations through SWIFT settlement messages and blockchain technology. As UMR resources are reallocated across firms the focus on this topic should increase significantly.    

Another area that would benefit from increased automation is the cleared margin space. Currently, there is a hard push to increase the number of parties and cleared margin calls through Acadia’s Margin Manager application, but more standardization of broker-cleared reporting and data is needed to increase automation opportunities. Cleared margining is one of the most defined workflows but has the least amount of automation which makes it a significant opportunity for all involved parties.

As you plan for your 2023 dates and actions we hope you keep these lessons in mind. Please contact us to find out how our subject matter experts can help with your firm’s UMR and non-UMR collateral needs or questions.