Colateral Chat (Blogs)
They’ve extended UMR, again. What can you solve now?
Chetan Joshi
July 16, 2020

My colleague Shaun Murray and I recently hosted a webinar on how firms can benefit from and capitalise on the additional time the UMR (Uncleared Margin Rules) extension allows.

The one-year extension proposed by BCBS-IOSCO has been supported for the final two implementation phases of the margin requirements by each regulatory jurisdiction. During the webinar, we explored what this time extension meant for the firms impacted and how they could benefit in their thinking and planning to take advantage of the situation.

During the webinar, we held a Q&A which you can read below.

Q: Should firms continue repapering or go on hold? What is the best approach?

Margin Reform recommends firms continue to repaper. Going on hold may create delivery risk with resources being reassigned and not able to return to the UMR project. It is possible with the extended period to ensure all legal documentation is in place and therefore avoid setting up new processes and controls to monitor the 50m IM threshold at a counterparty group level.

Q: Are the dealers still willing / wanting to progress repapering – has COVID slowed their response down significantly?

Dealers are still willing to continue repapering efforts, but the speed of negotiation has slowed down due to COVID.  Dealers are investigating the negotiation of side letters to support IM threshold monitoring with clients who may not be top tier. You must engage early with your dealers to see where you sit in their prioritisation and what legal repapering method they are planning to pursue with you.

Q: Are you seeing any change in strategy at clients with their Eligible Collateral policy due to the delay to reg date and impact of Covid?

We have seen new forms of eligible collateral enter the negotiation process, e.g. Money Market Funds. With additional time for UMR compliance there are several opportunities to review your eligible collateral policy which could lead to enhanced optimisation routines, therefore reducing your funding costs when posting Initial Margin to a segregated custodial account.

Q: How important is collateral optimisation for fixed income where rates are zero and yield curve flat?

While it may not seem that important, negative interest rates and a flat yield curve are additional reasons why banks and buy sides should be looking at collateral optimisation. Spread compression, funding costs and liquidity metrics can all be tied back as specific reasons to measure your collateral costs.

The usage of collateral has had a significant increase over the last decade; the economics make more sense, and recent events should see clients wanting to avoid further lost opportunity. It is not just about one product class; full optimisation is around all eligible assets and understanding what and how collateral should be utilised.

The opportunity to get yourself ready for optimisation is not new, and Margin Reform recommends that firms investigate “full” optimisation and create a strategic enterprise-wide optimisation operating model.

UMR requires a budget to support the regulatory angle and to future proof your franchise, seek that additional budget to build a new or enhanced optimisation process.

Q: What distinguishes you from competitors?

Our partners have over 40 years’ experience in the collateral, margin, and legal domains and are supported by a team of senior consultants, all of whom have a minimum of 10 years in the same areas working in the industry.

All have hands-on experience and knowledge to support programmes for revenue generation, operational transformation, regulatory compliance, technology, assurance and advisory.

Q: Is UMR overall a good thing for the financial industry? Reduced counterparty credit risk vs. large amount of HQLA tied up as dead collateral

Yes, we believe UMR is good for the industry, and the way that the industry has reacted and worked together on efforts such as ISDA SIMM has been positive.

Q: SIMM Model Approval is a mandatory requirement for the US rules. Any intel on whether this is likely to also become a requirement for the EU rules? For now it is not.

The EMIR Refit covers various regulatory requirements, one of which, concerned a potential requirement for EU regulated counterparties to seek SIMM (Standard Initial Margin Model) approval.

Given original deadlines have passed due to CV-19, we would expect to see additional items in the European regulatory work programme reshuffled and items re-prioritised, this could include an extension to the deadline for RTS on EMIR 11(15).

Q: Not sure if already covered, any updates on the equity options (Index + Single-Stock) full exclusion from the EU perspective as the temporary exclusion is coming to an end in 6 months’ time?

The EMIR time-limited derogations under the Margin Regulatory Technical Standards (Margin RTS) for equity options is due to expire 4th January 2021.  The current industry advocacy is seeking to permanently exempt equity options or extend that temporary derogation for a further three years to 4th January 2024.

Q: If the intragroup margin exemption is not extended, where do you see the market going to (clearing, exchange…) How will market participants manage their risks internally?

The EMIR time-limited derogations under the Margin RTS for intragroup transactions are due to expire 21st December 2020. The current industry advocacy is seeking a three-year extension to 21st December 2023.

If the Margin RTS is not amended to exempt equity options or to provide for a lengthier derogation, the European Supervisory Authorities (ESAs) should consult separately (as soon as possible) on the expiry of the equity options derogation. In the past, ESAs have extended the derogation, and our view is that they are likely to be extended by a minimum of 12 months as we come out of lockdown and the reshuffling of regulations are finalised.

If you need any help with UMR, Margin Reform is here, we have programmes designed for:

  • Firms who need instant UMR consultancy support.
  • Firms who need ad-hoc online UMR consultancy to support them until go-live.
  • Support that covers a discrete piece of work to resolve a pressing need.

Should there be further changes regarding UMR, for all firms we are here to help, and consult with you along the way

We also provide our clients with bespoke solutions to address their risk and regulatory challenges across collateral and margin outside of UMR.

If you want to know more about what Margin Reform can do for you, feel free to contact us  / / 020 3662 8805