On the surface, the news that BCBS and IOSCO have granted an extension to the final phase of the Uncleared Margin Rules (UMR) is likely to be welcomed by asset managers currently trading uncleared derivatives with a notional between $8 billion and $50 billion.
The extension pushes the initial margin compliance date out by exactly one year to September 2021 for an estimated 8000 firms. However, this additional year does not apply to the 1000+ firms that have a notional threshold between $50 billion and $750 billion. And to be honest, the truth is that much elbow grease is still needed in the coming months to prepare for what is essentially a major structural change, regardless of whether an asset manager falls under Phase 5 or Phase 6.
In addition to new documentation requirements, affected firms will also need to gain a new understanding of collateral optimisation, wherein each additional counterparty adds to the level of complexity and exacerbates the inability to realize netting benefits. Since FX is overwhelmingly an OTC market based on bilateral relationships, the challenges of collateral optimisation that large and medium-scale asset managers face across multiple counterparties is not an easy one to tackle. Finally, because the new UMR rules will result in much more exchange of margin than previously experienced, it will lead to more monitoring, reporting, reconciliation and operational burdens.
What asset managers are left with is a realization that they must now weigh the liquidity benefits of having several counterparties versus the costs of exchanging margin with each and every one on a bilateral basis.
More and more asset managers will begin to consider trading technologies that help unbundle liquidity benefits from credit restraints. Not only can separating liquidity from credit help solve the primary issue of reducing administrative burden, but it actually adds secondary benefits. These benefits include new access to all forms of liquidity previously out of reach including non-bank liquidity, as well as client-to-client matching models.
Asset managers pulled into the final two phases should have a roadmap for their respective deadlines. From shifting towards clearing certain instruments, to considering the use of prime brokerage, there are many things that the buy-side should think about and consider. As the burden of manging many more counterparties grows, we should expect to see a movement towards credit intermediation models and toward technology vendors that have a strong understanding and deep experience in facilitating credit intermediated trading. Those who place their technology spend on platforms that allow unbundling of liquidity from credit restrictions will undoubtably be better placed to weather the initial margin storm.