Firms Lagging in Preparations for UMR Compliance: Survey

State Street found that 19% of Phase 5 and 6 firms are fully prepared for UMR compliance. Hedge funds are said to be the least prepared for compliance.

Only a small number of firms coming into scope in the remaining phases of UMR (Uncleared Margin Rules) are so far already prepared to comply with all facets of the incoming rules, according to a new survey from State Street.

The survey, fielded by Oxford Economics in June 2020 on behalf of State Street, measured the perceptions, plans and readiness of 300 asset managers and asset allocators in 16 countries around UMR, which was set in motion after 2008 financial crisis to reduce risk in the OTC derivatives market.

An estimated 1,200 counterparties are expected to come into scope under Phase 5 (September 2021) and Phase 6 (September 2022) of UMR.

Among the 300 firms surveyed, 19% of those that are preparing to comply with Phases 5 and 6 said they are fully prepared for compliance, while 42% said they are undergoing preparations in all relevant functions. The remaining 39% have begun preparations in just a few of the relevant areas.

In APAC, just 11% of institutions are prepared for compliance in all relevant functions. Hedge funds in particular are said to be the least prepared for compliance.

The survey found that Phase 5 and 6 firms are more likely to perceive the process of renegotiating derivatives contracts as difficult, contrasting with firms already in compliance from previous UMR phases, who said contract renegotiation was not very difficult.

Most Phase 5 and 6 firms (58%) are ‘very confident’ about being able to manage new workflows. This reflects findings that most firms already in compliance (56%) found it only ‘slightly challenging’ to incorporate the new workflows.

While 79% of respondents have not yet agreed on an approach to settling segregated collateral with counterparties, the use of third-party custody with account control agreements was the preferred option among respondents.

For IM calculation, the majority (57%) of respondents plan to use the Standard Initial Margin Model (SIMM), while 15% plan to use Standard Schedule/Grid methods. The rest (27%) plan to us a blend of the two approaches.

To limit the impact of UMR, the majority of firms are planning to adjust their trading strategies to reduce OTC contracts, including by trading only in cleared products and reducing exposure to OTC products. This trend is more pronounced amount Phase 6 firms, and among firms that perceive the contract renegotiation process as more difficult.

The majority of firms (51%) are also planning to use compression strategies to limit UMR’s impact. Indeed, 61% of firms already in compliance have adopted this strategy.

To ensure compliance, most firms are employing a mix of in-house and outsourced capabilities. Very few firms have opted to outsource entire workflows. Larger institutions are more likely to handle workflows entirely in-house.


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