Avoid unwelcome surprises as you approach UMR go-live!

AcadiaSoft Head of Community Development Mark Demo shares his insights, knowledge, and experience working with firms throughout phases 1-4 of the uncleared margin rules ahead of Phase 5’s September 1, 2021 go-live. This includes a breakdown of the reconciliation process and the importance of adopting industry standard processes to ensure continued full compliance.

‍How is Phase 5 of UMR different from other phases?

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How has the IM compliance go-live experience evolved since Phase 1?

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What are some common misconceptions or mistakes to avoid?

• Firms that stopped working on their compliance projects when go-live was delayed are now behind the firms that never stopped working. This may limit their ability to ramp up counterparty testing.
• We recently encountered several firms working with other vendors that are under the false impression that they have satisfied their IM compliance requirement if they can calculate Reg IM using ISDA SIMM or Schedule and include these exposure figures in a Reg IM margin call. When it comes to solving a margin dispute with their dealer, they believe they can reconcile their trades internally with their dealer counterparties. This is inaccurate.
• What is true to say is it’s easy to identify trades causing a variation margin dispute because the Present Value (PV) of each trade sums to the total exposure amount of the portfolio.
• However, the inaccuracies lie in the number of different reconciliation issues unique to risk-based portfolio margining:
• Regulatory initial margin amounts calculated using ISDA SIMM are no longer uniquely tied to a trade, but rather they are a reflection of risks in the entire portfolio. New trades (with zero mark-to-market (MTM) difference in the Variation Margin (VM) reconciliation) may have a substantial impact on Initial Margin. Even if the product classes and trade counts match exactly, disputes could still occur if firm’s risk or tenor buckets are inconsistently mapped. The causes of initial margin disputes are now more difficult to determine because the inter-mingled effects of trades, sensitivities and risk mapping are more arduous than simply looking at unique PV on each paired trade to determine if they match.
• Ask your vendor how you will solve a Reg IM margin dispute when one occurs. Today, every firm in-scope for Reg IM uses AcadiaSoft’s IM Exposure Manager (IMEM). IMEM used in parallel with Margin Manager enables a full margin dispute and messaging service. If your firm or vendor is not connected to IMEM – it’s likely that your dealer will seek to limit your ability to dispute their margin call because there will be no way to resolve a regulatory IM margin dispute. Dealers do not share Common Risk Interchange Format (CRIF) files directly with their counterparties because of the sensitive nature of this information. At present they only share CRIF files via AcadiaSoft.
For more useful tips, join our free, no obligation Phase 5 or 6 working groups. One Phase 5 firm recently commented, “anyone that isn’t attending the Phase 5 working group is really missing out because it is an invaluable resource for Phase 5 participants.”

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About Mark Demo

Mark D. Demo is Head of Community Development at AcadiaSoft and an integral part of the Strategic Development organization. Mark has more than 20 years’ experience in the OTC Derivatives market and has served as a co-chair of the ISDA Collateral Steering Committee. He has participated on International Swaps and Derivatives Association (ISDA) working groups and has been involved in developing changes in collateral operations associated with financial regulations under Dodd Frank and EMIR. Mark is a collateral subject matter expert who is now focusing on new product development and overseeing client and prospect engagement programs across AcadiaSoft’s new and existing services.