Phase 5 of Uncleared Margin Rules (UMR) has been delayed by a year, but firms will need to know which phase they fall in, continuously monitor their thresholds, and start preparing for compliance now. In a recent DerivSource webinar, Duncan Scott, MTU Product Development, DTCC discussed the operational challenges that UMR and other regulations (SFTR, CSDR) present for buy-side firms, and the ways in which improved operational efficiency across the collateral management ecosystem can help firms meet their regulatory requirements.
The final two implementation phases for the Uncleared Margin Rules (UMR) will differ significantly from previous phases (Phases 1 through 4) in various ways.
Firstly, Phases 1 through 4 were relatively small in terms of the number of market participants impacted, but Phase 5 will see several hundred, predominantly buy-side firms, coming into UMR scope for the first time. Going forward, firms that do not meet the entry requirements for UMR in a given year will have to continuously monitor every year to see whether they meet the thresholds.
Secondly, these phases face yet another deadline extension, with regulatory bodies choosing to defer the final two deadlines for Phases 5 and 6 by a year and to September 2021 and 2022 respectively.
While the regulatory deadline delay gives Phase 5 and 6 firms more time to prepare for these new margin rules, the scope of the change required remains significant. As such, firms need to look to achieve efficiencies across their entire margin management operation necessary to comply or monitor thresholds effectively when the rules eventually do come into force.
UMR challenges for buy-side firms
UMR requires a new type of margining based on new factors. It is more risk-based calculation than traditional margining, which involves the simple netting of present values (PVs). As a result, many firms will need to hire people with new types of skillsor consider outsourcing some processes.
Operational complexity presents an additional challenge. There will be new volumes of calls and a compounding factor is that UMR requires two-way margining, with no thresholds and no minimum transfer amounts (MTAs). There will be increased volumes and, critically, new types of margin arrangement because the regulation requires segregation of collateral. It is not just a question of dealing with a counterparty and negotiating a document. UMR effectively requires a third-party custodian or a tri-party agent to hold the collateral.
Finally, there is the challenge of liquidity management. When firms hold collateral in a segregated account, there is no opportunity for rehypothecation (re-use). Market participants may have to go looking for additional collateral elsewhere.
Regulatory cross-over – SFTR and CSDR
The burden of UMR is further compounded by the upcoming Central Securities Depositories Regulation (CSDR) and the Securities Financing Transactions Regulation (SFTR). There is a clear link between increased volumes from UMR and the increased potential for failure rates. Some market participants contest the applicability of CSDR to margin settlement. Margin disputes and settlement have their own reporting regime, and collateral buy-ins make very little sense.
Firms will need to source high-quality collateral – cash in certain currencies and government bonds. Some market participants will turn to repo or stock loans to raise the collateral they need and transform the collateral they have into eligible collateral, which, in turn, may bring them into scope for SFTR.
Regarding the liquidity challenge, firms will need to source high-quality collateral – cash in certain currencies and government bonds. Some market participants will turn to repo or stock loans to raise the collateral they need and transform the collateral they have into eligible collateral, which, in turn, may bring them into scope for SFTR.
UMR solutions and opportunities
DTCC’s automated margin settlement service, Margin Transit Utility (MTU) connects clients directly into the margin settlement ecosystem. When two parties agree a margin call in AcadiaSoft, the platform connects straight through to MTU. That is a preference that users can set in AcadiaSoft at the margin call level and it becomes an automatic connection. MTU then connects to the DTCC ALERT database to pick up the standing settlement instructions (SSIs) for the counterparty.
MTU provides connectivity to both third-party custodians and tri-party agents from a settlement perspective, so buy-side firms don’t have to build it. AcadiaSoft automates the margin matching and MTU facilitates the automated settlement of margin. MTU provides a dashboard for users to see settlement status updates received from custodians and agent banks, but also delivers this data back to clients either via AcadiaSoft or via SWIFT or MQ channels. Lastly, MTU is a one-stop shop for consolidated end-of-day reporting. By automating margin settlement and using ALERT as a golden source, MTU has a significant impact upon the prevention of fail rates.
MTU was created to reduce operational complexity and risk for collateral call processing — all through automation. The platform helps validate, enrich, settle, report and monitor matched collateral calls globally while easily connecting to and sharing information with multiple counterparties.
In addition, times of high-volume and high-volatility like we are experiencing during the pandemic crisis, spotlight a critical problem that is straining trading operations and infrastructure, particularly for buy-side firms: the lack of automation in collateral processing workflows. Automated tools like MTU can help alleviate this burden and allow for greater focus on the larger issues.
