UMR Phases 5 and 6: A Prime Opportunity for APAC to Embrace Automation

‍By Takashi Nagai, Head of Business Development - APAC

‍Firms across the APAC region should now be well into their preparations for the final phases of the Uncleared Margin Rules (UMR), which come into effect in September 2021 and September 2022, respectively. Now is the time for everyone to get everything in order, regardless of whether they will be immediately required to calculate initial margin (IM) or not.

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‍Firms in-scope for Phases 5 and 6 of UMR will be required to perform initial margin calculation if their aggregated average notional amount (AANA) is above the stipulated threshold of US$50 billion/JPY 7 trillion (for Phase 5) and US$8 billion/JPY 1.1 trillion (for Phase 6).

Those under the threshold will still have to monitor their IM exposure to gauge when they have surpassed the threshold. Preparing for UMR compliance involves a number of multi-leveled steps, including:

• Setting up new legal agreements for IM exchanges

• Managing relationships with triparty agents or third parties

• Establishing processes for calculating, allocating, posting, collecting and settling collateral with counterparties and reconciling IM exposure calculations

Preparing for the UMR regulations is a significant undertaking in any scenario, but COVID-19 related uncertainty and the increasing amounts of employees working from home on a permanent or semi-permanent basis has exacerbated the challenges. At the same time, the shift to a largely remote workforce has also forced firms in the APAC region to embrace new technologies. A proactive approach to UMR compliance coupled with the integration of new technologies will allow firms to increase automation and improve overall risk management systems. The automation of the collateral management workflow is a game-changer. By automating collateral management workflows, firms will improve operations and reduce the cost of managing IM.

Automated collateral management systems handle the agreement between counterparties on the margin call and the amount of collateral to be posted or received, as well as attaching the agreed or matched margin call to the correct standing settlement instructions. Automating collateral management workflows makes it substantially easier to resolve disputes and calculate IM discrepancies as opposed to using bespoke collateral management solutions.

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‍Automation increases operational efficiency and reporting capabilities for a firm’s collateral management workflow, allowing it to focus resources on exception management or other areas of risk management.

‍APAC firms’ preparations can be complicated by fragmentation of regulation across the region. Some countries don’t even have UMR rules locally. However, these firms still need to comply with UMR to keep the trading relationships with their counterparties. Since these firms don’t have clear UMR go-live dates, it makes it hard for them to put together solid plans for compliance. However, vendors, such as AcadiaSoft, can provide a “one-size fits all” solution with low cost, quick implementation, to support those vague requirements. For example, AcadiaSoft offers a new bundle offering UMR Collateral Suite to support the end to end services required for UMR – firms can start from IM monitoring and eventually move to full straight-through processing of collateral management and UMR compliance, at their own pace.We have been steadily increasing AcadiaSoft’s presence in APAC to make it easier for firms to leverage our collateral management solutions. We’ve established APAC working groups and have expanded local language materials, making it easier for firms to access the AcadiaSoft community. We have also expanded functionality for key products in APAC, such as allowing firms to agree to IM Threshold Monitor terms using an industry-standard side letter per local regulatory requirements in APAC for those who want to agree to monitor conditions bilaterally.

APAC firms looking to automate their collateral management can choose to outsource their collateral management process or do it themselves. Those that choose to handle UMR compliance in-house can use solutions from vendors like AcadiaSoft to implement a standardized automated workflow for calculating initial margin. Alternatively, firms can choose to outsource their collateral management workflow to fund administrators. These fund administrators often have systems in place to offer high availability data and failover capabilities to ensure that performance is not disrupted during any unplanned event. AcadiaSoft has partnerships with many fund administrators in the APAC region and these fund administrators are often backed by a team of experts with experience in navigating UMR requirements.

Whether the choice is to outsource or to manage the collateral workflow in-house, AcadiaSoft is working with firms to navigate these strategic decisions – not only to cost effectively bring firms into compliance with the regulatory IM requirement but also to improve overall margin workflow for the next decade and beyond.

UMR is a prime opportunity for APAC firms to upgrade collateral management workflows to an automated system that is faster, reduces cost, and allows them to allocate resources elsewhere. Firms that embrace technology during this critical transition phase will not only successfully navigate the new regulations but will be better positioned to manage risk than ever before.

‍About Takashi Nagai

‍Takashi (Takk) Nagai joined AcadiaSoft in 2016 as the Head of Business Development for the Asia-Pacific region. Based in our Tokyo office, Takk has spent over 18 years working in the Financial IT industry mainly focused on platforms and services in the derivatives market. He has worked with major financial institutions in the region as well as a number of derivatives exchanges. Prior to joining AcadiaSoft, Takk spent over 5 years at the New York Stock Exchange (NYSE), where he was promoted to the Head of Infrastructure in APAC covering market data and trading services.

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