The Uncleared Margin Rules (UMR) has meant that the industry has got closer to regulators and brought those previously considered competitors closer together, says one panellist at the Securities Finance Technology Symposium.
Speaking at the session, ‘Drilling down into margin reform and UMR’, the panellist adds that this is particularly true in terms of technology.
The panel included Katie Emerson, executive director and head of agency lending and collateral management sales, EMEA at J.P. Morgan; Nick Short, chief operating officer of HQLAx; John Pucciarelli, head of industry and strategy at Acadia; and Mark Jennis, head of strategy and partnerships at Transcend.
Discussions began around the go-live of phase 5 on 1 September, which was agreed to have not presented too many surprises as the year delay from the COVID-19 pandemic, as well as lessons learned from previous phases, considerably helped firms take the time to get everything in order.
However, another panellist notes that as a collateral manager and tri-party agent, they observed that a lot of clients were working to the deadline for phase 5 and had not fully effectively taken advantage of the delay.
Challenges in the implementation of phase 5 for buy-side organisations included the oversight and group nature of companies, which made some projects difficult to navigate and execute on.
In addition, legal negotiations between clients and counterparties posed a more significant challenge than was anticipated, particularly concerning negotiations around eligibility.
Looking to phase 6, panel moderator Shaun Murray, CEO of MarginReform, estimates that this is due to bring approximately 800 firms in-scope.
One panellist predicts that phase 6 will be just as hard or harder than phase 5, noting that the industry will have a much more comprehensive understanding of the situation once firms have disclosed whether they are in-scope.
“The message is and always has been to disclose as early as possible,” they advise.
Another panellist adds that phase 6 of UMR will see different client behaviour, as widening the net of in-scope firms will see the inclusion of less sophisticated organisations. These firms will have “one foot in”, the panellist notes, as they will be captured by the regulation but are likely to remain under the threshold for quite some time.
This will require an extended toolset within the margin analytics space in order to help clients predict margin impact more effectively.
The panellist summarises: “Phase 6 is bigger but the clients are smaller.”
Continuing the focus on phase 6 of UMR, another panellist identified four areas of note, beginning with the heightened importance of buy-side connectivity to tri-party custodians from an optimisation perspective.
In addition, firms receiving collateral will need to validate it to ensure it meets all requirements of detailed agreements, while harmonised data is essential for firms to gain a view of their inventory and be able to pledge collateral, particularly securities. Finally, optimisation processes in general were highlighted as critical.
Optimisation was a key theme discussed throughout the panel, with one speaker noting that phase 6 will require firms to reconsider their operating model to incorporate distributed ledger technology (DLT), which will allow them to effectively change ownership while leaving securities where they are.
Another panellist adds that UMR has caused firms to realise that they need to look at optimisation more holistically, as a narrowed silo point of view does not generate the optimal use of collateral and costs significant opportunities.
This has meant that the buy-side is now more involved in the lending market as there is a desire to optimise data across different groups with the recognition that each market operates symbiotically.
This level of interoperability to address clients’ pain points may further extend to include third-party additional service providers in the marketplace, adds one speaker.
The session concluded by examining the future landscape of the market from a technology perspective, with one panellist predicting that industry groups will begin to harmonise data, such as the expansion of the Common Domain Model.
In addition, it is expected that ESG criteria will play a more critical role in decision-making when it comes to pledging collateral.
