UMR Phase 6 implemented today
01 September 2022 Europe
Image: DragonImages
UMR Phase 6 has been implemented today (1 September), impacting more than 1000 firms.
The last element of a gradual rollout, UMR Phase 6 extends compliance requirements to firms with total notional exposure of €8 billion. While initial UMR phases primarily hit major banks and global dealers, the reduction of this threshold means that many buy-side firms will now be affected.
Challenges surrounding Phase 6 include the need to overhaul business processes, and the cost of compliance. Smaller firms often do not have the dedicated compliance teams of those impacted earlier on in the implementation of UMR, and the cost of meeting requirements can be significant. Furthermore, as far more firms are affected by the process in this phase, there may be difficulties around the limited industry resources available.
To help the transition run more smoothly, regulators have outlined that firms remain exempt from UMR if their counterparty relationships fall below a €50 million initial margin threshold. Until this threshold is crossed, initial margin (IM) does not need to be posted. This should allow firms more time to become fully compliant with requirements.
The repapering process can take up to a year to complete, so firms that have not prepared for the new phase may not meet the deadline. This could result in bans on trading, if the IM surpasses €50 million.
Commenting on Phase 6, Sabine Farhat, head of securities finance and repo product management at Murex, says: “UMR phase 6 will require in-scope firms to post more margin for their uncleared over-the-counter trades in order to comply with the regulation. The availability of collateral is crucial in order to minimise costs, creating greater need for collateral sourced efficiently through securities lending and repo markets. The problem is this market is still largely manual, and securing pre- and post-trade collateral can take time as well as extra resources to manage this process.
"In order to unlock trapped collateral and manage it more effectively for UMR, market participants need the data synchronised in real-time with positions, market data, and settlement events from multiple sources and legal entities, solving the fundamental collateral management challenge of timely data aggregation. This enables global visibility and resource sharing by providing a holistic overview of collateral management exposure, which will enable firms to concurrently manage their UMR margin requirements and securities finance operations.”
Neil Murphy, business manager of TriOptima at OSTTRA, comments: “Phase 6 firms [will] benefit hugely, both from off-the-shelf tools and services now available, and lessons learned in earlier phases. The market has coalesced around standardised tools in terms of calculation, reconciliation and use of the SIMM model, while new options for IM monitoring have removed some of the day one pressures for in-scope organisations.”
The last element of a gradual rollout, UMR Phase 6 extends compliance requirements to firms with total notional exposure of €8 billion. While initial UMR phases primarily hit major banks and global dealers, the reduction of this threshold means that many buy-side firms will now be affected.
Challenges surrounding Phase 6 include the need to overhaul business processes, and the cost of compliance. Smaller firms often do not have the dedicated compliance teams of those impacted earlier on in the implementation of UMR, and the cost of meeting requirements can be significant. Furthermore, as far more firms are affected by the process in this phase, there may be difficulties around the limited industry resources available.
To help the transition run more smoothly, regulators have outlined that firms remain exempt from UMR if their counterparty relationships fall below a €50 million initial margin threshold. Until this threshold is crossed, initial margin (IM) does not need to be posted. This should allow firms more time to become fully compliant with requirements.
The repapering process can take up to a year to complete, so firms that have not prepared for the new phase may not meet the deadline. This could result in bans on trading, if the IM surpasses €50 million.
Commenting on Phase 6, Sabine Farhat, head of securities finance and repo product management at Murex, says: “UMR phase 6 will require in-scope firms to post more margin for their uncleared over-the-counter trades in order to comply with the regulation. The availability of collateral is crucial in order to minimise costs, creating greater need for collateral sourced efficiently through securities lending and repo markets. The problem is this market is still largely manual, and securing pre- and post-trade collateral can take time as well as extra resources to manage this process.
"In order to unlock trapped collateral and manage it more effectively for UMR, market participants need the data synchronised in real-time with positions, market data, and settlement events from multiple sources and legal entities, solving the fundamental collateral management challenge of timely data aggregation. This enables global visibility and resource sharing by providing a holistic overview of collateral management exposure, which will enable firms to concurrently manage their UMR margin requirements and securities finance operations.”
Neil Murphy, business manager of TriOptima at OSTTRA, comments: “Phase 6 firms [will] benefit hugely, both from off-the-shelf tools and services now available, and lessons learned in earlier phases. The market has coalesced around standardised tools in terms of calculation, reconciliation and use of the SIMM model, while new options for IM monitoring have removed some of the day one pressures for in-scope organisations.”
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