Under 50 Million: What you need to know about the UMR IM Threshold
When global regulators were writing the rules for UMR, there was general agreement that those rules should not necessarily require a small volume of uncleared OTC derivative trades to trigger a requirement to post collateral. The regulators eventually settled on an IM threshold of $50 million in the US, and €50 million in the EU, as a guideline to differentiate between significant vs insignificant levels of risk. If the total IM requirement is under that threshold, there is no requirement to post, but above the threshold, collateral posting must begin. In consideration of the fact that the preparations for posting IM entail a significant effort and cost, regulators gave guidance that there is no requirement for any party to have agreements and workflows finalized while they are under that 50mm threshold. However…
“The Basel Committee and IOSCO note that the framework does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework’s €50 million initial margin threshold. It is expected, however, that covered entities will act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded.”
-BCBS/IOSCO statement, March 5, 2019
A few things are important to note here. First, it seems that the regulators have offered some relief, that entities under the threshold don’t have to go through the trauma of setting up legal, custodial and operational documents and workflows by Sept 1 of their compliance year if they won’t immediately be over the threshold. But actually, the “relief” is somewhat different than that. While entities under the threshold don’t have to have all these arrangements in place by Sept 1, they do have to be 100% ready on the day they cross the threshold. It won’t be good enough to begin those preparations at that time, the preparations have to be completed. So really, the relief only kicks the can down the road a short while. If entities wait until they get too close before beginning the loooooong process of documentation and setting up operational workflows, they may find themselves halting trading to avoid a regulatory breach. Not a good place to be.
Secondly, in order to know how close they are to passing the threshold, entities will need to be able to monitor the IM calculation against that threshold. There are services on the market that can help with this… for a cost.
In the end, many buy-side parties may decide to get all their ducks in a row prior to the Sept 1 deadline regardless of any threshold “relief”. Unless a given entity does not expect to cross the 50mm threshold for a very long time (or maybe ever), it may be wise to start those documentation and workflow efforts right away, before you find yourself running out of time.