Uncleared margin rules: The traps, tricks and tools

Global uncleared margin rules require over-the-counter derivatives counterparties that breach set levels of outstanding notional to post initial margin against bilateral trades. As more banks and buy-side firms come into scope as the regulatory threshold drops, Risk.net surveyed more than 110 market participants to assess the potential impact on portfolios, profitability and resources. In this survey report, commissioned by CME Group, we reveal firms’ preparedness and strategic approaches to the complex challenges ahead.

Since the uncleared margin rules (UMR) went live in 2016, only a small number of market participants – mostly larger banks – have been required to exchange margin on their non-cleared derivatives.

But, by September 2021, it is estimated 1,000 firms – or possibly more – including increasing numbers of buy-side entities, will be subject to UMR for initial margin (IM) as the threshold on notional drops in the final phases five and six.

These firms must get ready to comply with new regulatory IM and reporting requirements on non-centrally cleared over-the-counter (OTC) derivatives, presenting significant challenges for market participants’ risk and collateral management operations and tech capabilities.

Time is running short for the swath of firms that are soon to be affected to begin establishing and adapting their posture. This includes game-planning, testing and ultimately prioritizing margin allocation.

It may also mean modified product selection and portfolio management to limit UMR related costs and swap positions as much as possible.

To read the full report, click here.