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Phase 6 of the Uncleared Margin Rules (UMR) is expected to continue for a “long period of time” as approximately 900 firms are in the monitoring phase and are not “fully engaged” in UMR.
The statement was made at the Securities Finance Technology Symposium in London, SFT’s second in-person event of 2022.
Moderated by Margin Reform’s founder and chief operating officer Chetan Joshi, the Initial Margin panel highlighted initial margin (IM) optimisation, lessons from UMR Phase 5 and first impressions of UMR Phase 6 since it went live in September.
Panellists included Clive Ansell, head of market infrastructure and technology at International Swaps and Derivatives Association, Stuart Smith, co-head of business development at Acadia, and David Beatrix, head of over-the-counter (OTC) and collateral services, Securities Services at BNP Paribas.
Global head of collateral at State Street Staffan Ahlner and VERMEG’s head of collateral solutions product strategy Wassel Dammak, completed the panel.
Speaking at the event, Acadia’s Smith said: “Initial margin brought something new to the margin world, there was a risk-based calculation that firms were going to have to do.
“From Phase 1 to Phase 4, there were around 75 firms that Acadia saw reconcile margin on its platform, but Phase 5 and 6 saw another 400 firms. The magnitude of the firms being onboarded changed, as did the nature of those firms.
“The industry went from [having] enormously experienced, very large firms with sophisticated risk departments, to firms that were experiencing their first time engaging in daily risk calculation.”
The phasing approach drove the volume of clients coming into Phase 5 and 6, the panel heard.
“Firms had to perform various calculations to determine whether or not they were in scope of initial margin requirements,” ISDA’s Ansell explained. “When [the industry] reached Phases 5 and 6 — and for Phase 6 in particular — it appears there was a relatively low number of firms that qualified for the IM threshold calculations for posting margin on day one.”
From a liquidity and initial margin optimisation perspective, State Street’s Ahlner discussed with the panel what he had seen from his clients.
He said that as a large custodian, State Street was working with a lot of new participants coming into this space. “What is interesting, is that the UMR side is forcing a lot of participants into the collateral space for the first time, in a regimented and strict way,” he continued. “That is also putting a strain onto other demands of the assets. Firms are facing a different set of problems on the buy-side.”
According to State Street’s Ahlner: “UMR is not just solving one problem, a firm needs to look at the holistic picture, particularly for the smaller buy-side firms that now have to figure out how to post margin and [they] will have to work out the demand on the asset from a funding, settlement, lending and OTC perspective, in addition to UMR.”
Smith concluded that while a huge number of firms have already gone live on reconciling margin, the vast majority of firms are still in their monitoring phase.
“Phase 6 is not an endpoint, it is a stepping stone along the way as we expect to see a lot of those firms reaching thresholds and coming onboard later on in the process,” he added.
