top of page

Uncleared Margin Rules: to clear or not to clear?

From the desk of Jeroen Bakker

Benelux Consulting Lead, Pierpoint Financial Consulting

As a result of the financial crisis that began in 2007, the G20 agreed to introduce regulations to reduce systemic risk in the financial markets. In 2011 the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) were tasked to create a framework for margin requirements for non-centrally cleared derivatives. Under these globally agreed standards, all financial firms and non-financial entities that engage in non-cleared derivatives will have to exchange initial and variation margin to reduce counterparty risk. The general idea is that this will reduce risk as well as promote central clearing.

Products covered include FX Swaps/Forwards (physically settled), Interest Rate Swaps, Currency Swaps, Covered Bond Swaps and Equity Swaps. A full list of in-scope products can be found on the ISDA website.

These new standards will be rolled out in a phased approach based on Average Aggregate Notional Amount (AANA) of non-centrally cleared derivatives at group level:

  • Phase I Sept 2016 AANA > $3tn

  • Phase II Sept 2017 AANA > $2.25tn

  • Phase III Sept 2018 AANA > $1.5tn

  • Phase IV Sept 2019 AANA > $750bn

  • Phase V Sept 2020 AANA > $50bn

  • Phase VI Sept 2021 AANA > $8bn

Phase I-IV have been implemented however estimates are that this only applies to around 100 entities, the majority of the impact will be in phase V and VI which include over 1000 entities that will need to adhere to the new legislation.

As of the implementation date, firms will be required to calculate initial and variation margin on a daily basis as well as post and receive collateral in a bankruptcy-remote segregated account.

Prior to this, all firms will need to update and or negotiate new Credit Support Annexes to their ISDA Master Agreements (ISDAs) to comply with EMIR standards with each individual counterpart you have derivatives transactions with or want to deal derivatives with in the future.

Initial Margin Calculations

Firms have universally agreed to adopt the ISDA’s Standard Initial Margin Model (SIMM), whereby the first step is to determine if trades are in or out of scope and labelled with appropriate sensitivity. These sensitivities will then need to feed into the SIMM model to calculate the IM exposure amount for both collector and pledgor perspective.

Funding Requirements

These calculations will provide an understanding on your margin costs per counterpart as well as the overall impact on your funding.Assessments will need to be made as to whether the funding is sufficient taking into account the fact that received collateral cannot be reused or rehypothecated.

Dispute Resolution

Due to the complexity of the IM calculation which is based on sensitivities, many factors can result in IM disputes such as differences in market dataand constituencies of indices. A standardised pricing and data provider will reduce the disputes but a firm will need to agree on dispute resolutions with each counterparty.

Cleared vs. Non-cleared

The overall size of non-cleared (OTC) vs cleared is difficult to calculate, however, it is clear that OTC derivative transactions will always be a requirement for investors. In the meantime, market participants should assess the pros and cons of centrally clearing derivatives. Pros being reduced credit risk, netting potentials, standardisation and reduced margin requirements while cons are avoiding IM (until UMR), and avoidance of clearing costs. Part of this assessment should also include questioning the need for derivatives trading; should certain hedging strategies still be executed or can risk be managed in a different way via plain vanilla or reduced delta?

UMR - to outsource or not to outsource?

Where to start?

UMR leads to questions for firms that aren't yet captured

Market participants captured in Phase V and VI have a huge task ahead of themselves and ideally should have started the work already. In time-sensitive order: determine the scope, arrange documentation, custodial set up, agree on the calculation model, upgrade/update internal IT systems, enhance operational departments and calculate funding requirements.

One part of the assessment is to determine what can be done in-house and what can or has to be outsourced. Questions should be raised as to “do we have enough skilled staff?”, “are we able to manage the systems upgrade?”, “can we raise sufficient funding/how will we source the necessary collateral?”, “do we need to trade with our current set of counterparties?”, “can we operationally manage the increased transaction flow?”, and “-do we receive sufficient support from our current service providers?”

What to outsource?

Depending on the answers to the above-mentioned questions, certain parts of the process can, will or have to be outsourced to third-party service providers.

Legal and documentation updates

Updating your ISDAs with the required CSAs is time-consuming, however as long as you set the boundaries as to what the minimum requirements for your company are, you can outsource the negotiating itself to different law firms.

Pricing and data management

Ensuring your systems can calculate the correct initial margin requires a precise set of data points, obtaining these on your own could result in many disputes. Outsourcing could prevent time-consuming work in the future.

Collateral management

In order to minimise the operational burden and transaction volume for your bilateral collateral movements, one can decide to outsource - collateral management to a third-party collateral management provider. This will also capture the validations and valuation of collateral received and pledged as well as the segregation of accounts.

Funding requirements

Once you have calculated your funding requirements you might find that you have insufficient collateral or the incorrect type of collateral. Your Prime Broker or Bank can assist you via repo, SBL or collateral transformation transactions to get the right type required collateral.


The first four phases of UMR showed that the implementation of the new regulatory framework was cumbersome with even large institutions needing additional implementation time resulting in halting new OTC derivative transactions. Come September 2020, when Phase V will come into effect, we might see similar disruptive situations. Review your clearing requirements and check your need for outsourcing.

Do you want to discuss your collateral management solutions or funding requirements? Speak to one of our Pierpoint consultants.

130 views0 comments

Recent Posts

See All


bottom of page