UMR extension presents change to strategise AANA exposures

The potential ‘big bang’ for buy-side firms being swept into the upcoming initial margin rules for non-cleared derivatives was given a vital delay this summer, with the deadline extended until September 2021.
By Joe Parsons

Sponsored by Cassini Systems

The Basel Committee and IOSCO proposed an extension of one year for the final implementation phase of the margin requirements, which would have enforced thousands of asset managers, hedge funds and insurers that had derivatives portfolios with an annual average aggregation notional amount (AANA) exceeding $8 billion to comply with the rules from September 2020.

It was estimated that more than 700 institutions would be affected by the rules, covering thousands of custodial relationships.

The extension has provided some vital breathing room for firms that, at the present time, had still failed to grasp the impact of the rules on their trading activities and portfolios. “There were a lot of firms coming into scope in phase 5 that had not got around to finalising their preparations, and this was concerning people in the industry that it would cause a rush for the exit,” says Liam Huxley, CEO and founder, Cassini Systems. 

While proposing  the extension, the Basel Committee and IOSCO also announced a new phase to be introduced on 1 September 2020 to cover firms with AANA greater than $50 billion (or equivalent own currency). This will allow those firms that have been preparing to amend their credit support annex (CSA) agreements and establishing third-party/tri-party relationships with custodians, to continue doing so. 

What does this mean for firms with AANA under $50 billion? The global regulatory bodies intend the delay to provide more time for smaller and mid-sized firms to prepare fully, especially in Europe where they are also required to perform back-testing. The temptation will be to simply put the UMR/SIMM project on hold for 12 months but that could be a mistake, as the delay is being allowed specifically to provide additional time to prepare for the upcoming requirements.

For many institutions with larger derivatives portfolios the regulatory timeline remains the same.  Those firms with over $750 billion in AANA will still be required to begin posting initial margin from 1 September, 2019. As before, firms with AANA under $8 billion are exempt.

However, buy-side firms that are on the cusp of the $50 billion threshold are now presented with an opportunity to take steps to temporarily avoid coming under the regulation, potentially saving them millions on collateral financing. 

“Where firms are in terms of jurisdiction affects their timing, so if they are in a position where their AANA is calculated from March next year for the September deadline and are on the cusp of threshold, they can advantageously bring themselves below it,” adds Huxley. 

This will require firms to think strategically about their derivatives and outstanding bilateral margin exposure. Huxley believes there are several methods available within the industry for firms to remain below the $50 billion threshold, however they must be proactive with their approach.

“Vendors such as Cassini can help in-scope firms look at their overall exposure, and then discuss how they can rebalance risk, whether they can clear trades, or potentially compress them to improve their overall positions.

“Firms have a clear choice to be in-scope for either phase five or phase six. Those firms on the cusp have a fiduciary responsibility to look at their book and take any necessary steps to get them out of phase five.”