Uncleared margin rules (UMR) are a part of the G20’s commitment to managing risk from over-the-counter (OTC) derivatives transactions. These were proposed by the Basel Committee of Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in light of 2008 global financial crisis.
The implementation timeline for initial margin (IM) has been phased from September 1, 2016, to September 1, 2020, to the entities based on aggregate average notional amount (AANA). The covered institutions for phases 4 and 5, including smaller banks, a broad range of buy-side entities, and commercial end-users with AANA of $750 billion and $8 billion, respectively, are gearing up to comply with the regulation.
We believe that the industry has learned a lot from the challenges of complying with UMR. We also see that most of these were due to lack of infrastructure for compliance. For example, lack of a centralized risk repository that can provide an aggregated view of all trades, risks and agreement data necessary for initial margin (IM) calculation.
Our discussions with clients reveal that entities in phases 1 to 3 are expected to face operational challenges in managing high volumes, while majority of them in phases 4 to 5 are underprepared on complying with UMR, which come into effect in 2019 and 2020.