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Apr 12, 2022Insights

What is UMR?


As a result of the global financial crisis, the G20 countries committed themselves to reforming the Over the Counter (OTC) derivatives market. There were two main components to these reforms; the first was that standardized derivatives would be cleared at central counterparties (CCPs) to help mitigate the counterparty credit risk presented by bilateral trading.

The second was that non-standardized derivatives unsuitable for central clearing could remain bilaterally traded, but would be subject to Initial Margin and Variation Margin requirements to protect each counterparty from the failure of the other. In the following years, this broad outline was further developed and refined by BCBS-IOSCO and ultimately adopted by market supervisors in Australia, Canada, the European Union, Hong Kong, Japan, Korea, Singapore, Switzerland and the United States. Between 2016 and 2020 the first four phases of noncleared margin requirements (UMR) were introduced across the globe, bringing the largest non-cleared derivatives users into scope under these new rules. According to the US Commodity Futures Trading Commission, “while phases 1 through 4 capture just over 40 entities,” Phase 5 could bring hundreds of entities in scope. Phase 6, which was delayed until September of 2022 due to the global pandemic, may see over 500 entities in scope under the complex Global UMR rules.

Am I in scope?

Determining whether you are in-scope is based on whether your average aggregate notional amount (AANA) of non-cleared OTC derivatives exceed a certain threshold over a defined period. This is generally referred to as the AANA calculation. Hazeltree AANA estimator provides a daily view of your AANA and can serve as an early warning to clients as they approach these amounts.

  • For September 2021, also known as Phase 5, the AANA threshold amount is 50 Billion.
  • For September 2022, Phase 6, the AANA threshold amount is 8 Billion.

I’m in scope, what do I need to do?

While you may be in scope of the UMR rules due to breaching the AANA threshold, you may not be required to post collateral just yet. The regulations allow for an initial margin threshold to be applied, as agreed between the parties, up to a regulatory maximum of $50mm in the US or €50mm in Europe.

Non-US/EU jurisdictions allow roughly equivalent maximum thresholds. While the IM threshold can provide some temporary relief, it’s important to note that regulators have been clear that parties who breach the IM threshold must be in position to post and receive collateral immediately (on the same day that the breach occurs).

Before collateral can be posted or received, there are several factors that need to be considered:

Firstly, legal agreements need to be negotiated.

  • Reg IM CSA- with your trading counterparties
  • Collateral Account Control Agreement (CACA)- with both the counterparty and Segregation Agent
  • Custody agreement with your Segregation agent, provides custodial and safekeeping of collateral assets
  • Collateral Schedule- with your trading counterparty and Segregation agent, provides the guidelines of what collateral will be acceptable to be held in the segregated account

Secondly, you will need to determine which model you will use to determine the amount of margin to post.

  • Schedule – Pre-determined percentage by asset type
    • Often results in a higher IM amount to be posted
  • SIMM – Complex risk-based model
    • Will you calculate the SIMM value internally (and get regulatory approval)
    • Hire a third-party agent to calculate on your behalf
    • Have your trading counterparty provide the value

Thirdly, once the margin calculation model is selected, determine which approach will be used when Reg IM and House IA both exist. The industry has defined 3 possible approaches to handle this situation:

  • Distinct Approach – Both requirements are met via two distinct flows, IM directed to the segregated account and the House IA to counterparty
  • Greater of Approach – Whichever amount is greater is deposited into the segregated account
  • Allocated Approach – IM is deposited into the segregated account, remaining IA allocated to dealer

Finally, setting up systems and processes to administer Initial Margin. The use of technology and advanced workflow connectivity between your trading counterparties, your custodian and segregation agent are critical. Margin flows may occur each day, and the ability to monitor these regulatory-mandated flows is critical.