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5 Alarming Things You Must Know Before Starting A UMR project (#4 be warned)
Chetan Joshi
August 11, 2020

Are you comfortable with the intricacies of the Uncleared Margin Rules (UMR)?

Getting ready and maintaining regulatory compliance to UMR can be challenging. At Margin Reform, we have summarised all the essential steps into our UMR ‘Wheel of Pain’. In this article, we will cover the five things you should prioritise.

  1. AANA Calculations with Self-Disclosure Letter
  2. Legal repapering
  3. Custodian Onboarding
  4. Initial Margin (IM) Model
  5. Technology

1. AANA Calculations with Self-Disclosure

  • Have you calculated your AANA and disclosed to the market your status?

How do you self-disclose your AANA (Average Aggregate Notional Amount) calculation? Your AANA calculation requires good risk practices to be utilised, such as clearing and compression. If you can manage yourselves under the regulatory thresholds, you should.

Once you are clear on your phase (five or six), then you need to disclose this to the market. There are a few options available to you, for all of them, early communication is critical for two reasons 1) To ensure your investment managers can support you and 2) Your dealer counterparts can prioritise you within their work stack.

2. Legal repapering

  • Do you have an Initial Margin negotiation playbook? Have you decided on regime elections? What about acceptable eligible collateral?

UMR requires a significant amount of legal repapering and can, in parts, be tedious and manual. Setting your teams up for success is vital at the outset. A legal playbook helps the documentation team navigate smoothly through the negotiation process with presets/clauses agreed in advance as your starting position.

The collateral agreement regime table allows the parties to comply with the multiple regulatory regimes which may apply under one agreement. e.g. a party may be based in the USA and need to comply with one rule (Dodd-Frank) and another in Europe (EMIR), the collateral agreement will provide that IM exchange must meet the requirements of each regime applying to the parties.

Eligible collateral will need consideration for pledging and receiving of IM. What can you utilise to pledge, do you have the appropriate collateral in place and will you look to be optimised?

3. Custodial Onboarding

  • Have you onboarded with your chosen custodian? Have you got a relationship with your counterpart’s choice of a custodian?

Completing the KYC (Know Your Client) and AML (Anti-Money Laundering) process is time-consuming, the earlier you start, the better. There is a process to understand; each custodian has different documentation requirements. It is essential to avoid basis risk between your IM CSA (Credit Support Annex) and the custody agreement.

Is your settlement process fit for purpose? Do you have the swift capability and is your process automated and efficient?

Have you understood the pros and cons of a Tri-Party model vs a Third Party model and how this will be supported once you go-live?

4. Initial Margin Model (be warned!)

  • Buy vs Build? Which model should I be using for which products?

All past phases of UMR are utilising the ISDA SIMM (Standard Initial Margin Model) or the standardised grid approach when calculating IM; we expect this to be the same for future phases. There are multiple vendors now supporting a SIMM calculation and buying the model rather than building is likely for most phase five and six firms. Whether you use SIMM or the grid, you need to understand the costs associated with that for implementation and the future funding requirements of IM.

The governance behind the model is important; regulators expect a firm to stand behind the model when utilised for their portfolio. You should consider who is the model owner, and for what are they accountable? Have you gone through a process internally to determine what the day to day support of the model will entail? Depending on your regulator, you may have backtesting and benchmarking to consider on a daily and quarterly basis, being able to support this continuously is a future requirement of UMR.

On October 30, 2018, the NFA (US Regulatory body) ordered a New York swap dealer to pay a $900,000 fine. They found the swap dealer had ‘used inadequate processes to assess the risks of its uncleared swaps and backtest, benchmark and validate its margin model. It also found that they failed to take the necessary steps to satisfy the initial margin and variation margin collection requirements, failed to supervise diligently its business activities related to margin and model monitoring, and repeatedly submitted inaccurate, incomplete and inconsistent information in reports provided to NFA’.

We regard this as a warning fine and believe that firms should take heed that the regulators are interested in how you set yourselves and perform on an ongoing basis.

5. Technology

  • Can you support the volume and complexity of margin calls going forward? Are you automated and at your most efficient?

The margin and collateral ecosystem have significantly evolved over the past decade, multiple vendors are providing solutions to support you for UMR compliance, and with the right approach can help you future-proof your collateral and margin strategy.

Understanding which vendors suit your business profile, how they can connect you to the broader community, improve your operational capacity and reduce your operating costs is something to consider. Investing your time wisely at the outset could be of significant support to your firm on its compliance journey.


At Margin Reform, we offer various solutions to support your UMR compliance journey. You can utilise us to support you at the outset via workshops or to accompany and complement the existing plans and strategies that you have in place.

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