The news last month of a delay to the onset of UMR for phases 5 and 6 was a welcome relief during a time of crisis. Even if a pandemic hadn’t altered our reality, many parties who would have been in-scope for phase 5 in September of this year were not prepared and had found themselves scrambling. Now, with global regulators agreeing on a 1-year delay, phase 5 & 6 parties have the runway they need to make the decisions and take the steps needed to achieve compliance in time… barely.

The fact is, making the needed decisions and taking the steps necessary to achieve compliance with UMR can be a very lone endeavor. One aspect that is often overlooked is the additional documentation. UMR will require significant changes to legal documentation. This includes executing a custodial agreement with your chosen custodian, and then an IM CSA, and two ACAs with each of your counterparties. A Fund with 10 counterparties can have as many as 31 new contracts to negotiate and sign. A Fund Manager with 10 funds can have as many as 310 new contracts to negotiate and sign. It adds up quickly.
The new IM CSA covers many topics and includes many points of negotiation that are new to the buy-side, including:

• IM will be held using segregated accounts and custodians for both parties
• Which Margin Approach will be used (Distinct, Allocated, Greater Of)
• How IM will be calculated (SIMM or Schedule)
• Thresholds for posting of IM
• The regulatory regimes and jurisdictions that apply
• Transfer timing, MTAs, eligible collateral, haircuts, disputes…

Then the ACAs (Account Control Agreements) need to be considered. This process will find in-scope parties negotiating 2 documents (one for each posting party) with each counterparty and custodian. The ACA is a 3-party agreement, which can at times be more difficult to negotiate than a bilateral agreement. When 3 sets of lawyers get involved, the resulting process is not always quick…
It’s not hard to see why it can take many months to negotiate and sign all these documents. That timeframe can be delayed further when you consider that in the months leading up to the deadline, hundreds of market participants will be trying to negotiate with the same group of Dealers and Custodians. Parties who wait can find themselves trapped in a huge bottleneck. Custodians have increasingly lengthy AML/KYC requirements. It can take months just to clear AML/KYC at a Custodian with them requiring very detailed information about a Fund, its Manager, directors, officers, and investors.
The best advice for phase 5 & 6 parties is to avoid the trap of feeling like you have plenty of time. The time is now to start to put the pieces in place to achieve compliance with UMR. Otherwise you may find yourself on a high-wire without a net.
Want to learn more? Download a free copy of Hazeltree and HedgeLegal’s Clearing Up The Uncleared Margin Rules (UMR): A Comprehensive Guide for Hedge Fund and Asset Managers

Still have questions? Give us a call.