UMR Extension: Cassini Commentary

BCBS/IOSCO have announced the delay of the roll out of the final phase of Uncleared Margin Rules.

Those firms with over 750 BN in AANA will still be required to begin posting Initial Margin from September 1st, 2019. Firms with 50BN-749 BN notional exposure will now begin posting in September 1st, 2020 and those with exposure between 8BN and 49BN will begin posting from Sept 2021. As before, firms with AANA under 8Bn are exempt.

For many institutions with larger derivatives portfolios the regulatory timeline remains the same.  What does this mean for firms with AANA under 50Bn? BCBS/IOSCO intend the delay to provide more time for smaller and mid size firms to prepare fully, especially in Europe where they are also required to perform back-testing. The temptation will be to simply put the UMR/SIMM project on hold for 12 months but that would be a mistake, as the delay is being allowed specifically to provide additional time to prepare for the upcoming requirements.

There is a distinct opportunity for those who the delay provides additional preparatory time. Rather than being forced to move quickly, firms can now take a more holistic, strategic approach to their collateral and margin management processes.   Having to post initial margin bilaterally can lead to a drag on derivatives trading and heavily impact funding and liquidity. Being able to calculate, analyze and optimize Initial Margin can help greatly in reducing the overall costs of derivatives trades.

Firms that now find themselves in range of this new threshold can take strategic actions to reduce their AANA level and defer or remove the additional compliance overhead, depending on jurisdiction.

The key takeaway here is not to delay. Use the additional time granted by the regulators to better tackle the challenges around initial margin and capital consumption. Tools such as Optimization Initial Margin pre-trade, attributing margin internally to better monitor margin consumption, and porting / novation of trades to reduce IM are just some of the ways firms can better optimize their margin consumption.

Remember that best practice now requires Initial Margin to be a part of your front to back trade control process, and smart optimization will significantly reduce the portfolio drag of collateral.

Do not put the pen down and delay the inevitable.  Keep working to build a more robust, and optimal margin management strategy!