ISDA Warns “Little Time” to Prepare for UMR Phase Six

Although implementation of phase five of the Uncleared Margin Rules last September went off largely without hitch, the International Swaps and Derivatives Association (ISDA) is warning the larger number of firms likely to come ‘in scope’ of phase six in September 2022, to “get the ball rolling on implementation” now.

Phase six encompasses firms that exceed EUR 8 billion in aggregated average notional amount (AANA) in uncleared derivatives, down from EUR 50 billion in phase five.

In written remarks, ISDA chief executive Scott O’Malia highlights a key lesson from phase five implementation – “that compliance takes much longer than most people anticipate”, adding, “It’s critical this lesson is learned.”

ISDA estimates that 775 entities will come into UMR scope for the first time with phase six, more than double the number in phase five – a transition that put pressure on institutions to achieve compliance within the framework (in spite of phase five being delayed by a year). O’Malia notes in his remarks that many firms coming in scope for the first time in 2021 were unable to achieve compliance with all their trading partners in time and had to focus their trading on fewer counterparties. “It’s by no means certain that phase six will run as smoothly, because the challenges faced during phase five will be exponentially greater this time round,” he says.

The estimated 775 entities translate into roughly 5,400 counterparty relationships, ISDA says, putting a huge strain on the ability of firms to complete document negotiation and custodian onboarding processes in time. “The entities caught by phase six also have fewer resources available to them than the bigger institutions captured by earlier phases, as well as less extensive automation of margin processes,” O’Malia writes.

Adding complication to the next phase is that pension funds and investors often have their derivatives portfolios managed by different asset managers through managed accounts, meaning, O’Malia says, preparations are reliant on each entity calculating its swaps exposures across all its separately managed accounts and disclosing to its asset managers if it expects to breach the threshold for compliance. “If these calculations and disclosures are submitted late, the asset managers cannot begin preparations, leading to delays,” he warns.

While ISDA estimates that the majority of newly in-scope firms (up to 85%) will not breach the EUR 50 billion threshold – and therefore will not have to exchange collateral and will not be subject to documentation and custodial requirements for each relationship until it is passed, O’Malia stresses, “This does not mean firms cannot afford to act,” pointing out that the official three-month calculation period began on March 1 under most regulatory regimes, meaning in-scope entities will have to notify counterparties of their final status in May.