Of all the trade disputes around Initial Margin (IM) that have happened since UMR phase 1, the majority have been because of differences in FX end-of-day snap timing, according to one industry expert.
Industry experts debate UMR phases five and six at TradeTech FX virtual summit
Speaking on Wednesday, 10 February, at the TradeTech FX virtual panel session on the Uncleared Margin Rules (UMR), Basu Choudhury, Head of Strategic Initiatives at OSTTRA, said: “Right now you have different banks taking FX snaps at different times for end-of-day UMR calculations. This is causing a lot of issues already. What will happen when you introduce fund managers’ activity in the UMR processing? Take a couple of UK and Asia-based firms that all of a sudden find out their FX rates do not match, where do you start? Trying to agree and reconcile large amounts of initial margin in dollars without matching FX rates has to be a catalyst for increased use of data and analytics.”
Also on the panel was Van Luu, Global Head of Currency at Russell Investments, who questioned whether there was an alternative solution to enforcing a uniform snap time in FX. Basu responded, “If you have a bi-lateral agreement and your counterparty agrees on a fixing source, then ultimately that is what you end up using, but you may still have issues day to day, so tools will be crucial. An alternative option is to say: let’s just clear the trade, or just rely on a single prime broker where NDF margin can offset against the remaining deliverable FX.”
FX NDFs and FX Options are currently in scope for Initial Margin (IM) and Variation Margin (VM) exchange under UMR. Although the much larger deliverable FX Forwards and Swaps are excluded from IM (and VM in most cases) they need to be included in the Average Aggregate Notional Amount (AANA) calculations. When phase five kicks in this autumn, numerous hedge funds, asset managers and even non-bank liquidity providers are likely to be pulled in, but they will need tools to actively calculate AANA starting in March 2021.
AANA starts in March 2021
“With prime brokers and execution brokers understandably fixated on their balance sheet, this creates a liquidity gap in the market. This is why we are seeing a number of non-bank liquidity providers and Prime of Primes stepping in to plug this gap between execution and credit intermediation,” Basu went on to say.
The issue around how the buy-side should go about assessing where they need to manage inventory was also discussed. Due to the fact that UMR is unlikely to directly affect all of the funds that an asset manager runs, the area of allocation level clearing came into question.
Basu concluded: “Fund managers may not want to clear every single allocation or to worry about the workflow. No two funds have the same exposures so they will need to assess each fund on its own individual merit before deciding whether or not clearing is the best option. Understanding workflows at an allocation level is imperative and can be achieved through solutions currently available on the market. The selective clearing of allocation(s) is a natural extension of the existing bilateral or tri-party allocations models available today.”
Basu and Lu were joined on the 40-minute virtual panel discussion by Vinod Jain (Senior Analyst, Aite Group), Ben Tobin (Global Head of Sales, Capitolis) and Victoria Cumings (Managing Director, Americas, Global FX Division, GFMA).
Access the UMR panel recording
If you wish to access the recorded presentations these are now available on the TradeTech FX USA Jujama platform. You will be able to login with your TradeTech FX credentials that you used for the event and you will find all recordings saved under the “Presentations” tab on the main dashboard as below.