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A survey of 300 asset managers and asset allocators in 16 countries found that 81 percent are not prepared to comply with all facets of the Uncleared Margin Rules (UMR) — the final two phases of which are due in September 2021 and 2022.
UMR aims to reform the over-the-counter (OTC) derivatives market and was among the flurry of regulations created after the 2007/8 financial crisis.
The survey, conducted by State Street via Oxford Economics in June, found that roughly a year away from the next deadline, which was extended due to COVID-19, firms remain primarily unprepared for the different aspects of the regulation.
Earlier this year, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) agreed to extend the deadline for completing the two final implementation phases of the margin requirements for non-centrally cleared derivatives by one year.
Under the revised deadlines, covered entities with an aggregate average notional amount of non-centrally cleared derivatives above €8 billion will be subject to the requirements on 1 September 2021.
Overall, the survey reveals that buy side firms are in different stages of compliance preparedness by both phase and function:
- The vast majority (86 percent) are preparing for phases five or six, representing the significant proportion of buy-side firms, which State Street describes as a “steep learning curve” as many are unfamiliar with initial margin (IM) rules and operations
- For those in the preparation stage, only 19 percent say they are fully prepared for compliance. 42 percent are preparing in all relevant functions, while the remaining 39 percent have begun preparations in just a few areas
- Nearly eight in 10 have not agreed on how to approach settling segregated collateral with counterparties
As it stands, third-party custody with account control agreements remains the favoured approach amongst respondents, explains State Street. “Many firms underestimate the difficulty associated with compliance with UMR. While 68 percent of those preparing for compliance are very confident in their ability to handle the new workflows, 80 percent of those in compliance said they faced challenges in incorporating them,” the bank adds.
Other key findings include that institutions are turned to third parties to ease the burden of complying with UMR:
- Of those in compliance functions, 80 percent of say they have faced some degree of challenge in incorporating new workflows. To ensure on-time compliance, the majority of firms are employing a mix of in-house capabilities and outsourcing to third parties with operational expertise
- Just over half (56 percent) of firms are planning to adjust strategies by reducing OTC contracts to limit the impact of UMR
For those already in compliance, 80 percent reported a reduction. The majority are using compression strategies to limit UMR’s impact. Firms will seek various optimization strategies with third parties
Nadine Chakar, head of State Street Global Markets, comments: “UMR signifies a major change in the industry that aims to bring greater stability and transparency to the OTC derivatives market.”
“As we approach the deadline for the next phase, it is critical for buy-side firms of all sizes to be aware of the pending requirements and to not only effectively manage, but optimise, their liquidity and collateral needs with the right solutions and technology in place.”
