ECC: UMR waves cause ripples in Asia
18 November 2019 Brussels
Image: Shutterstock
There is a knock-on effect of the European Uncleared Margin Rules (UMR) in Asia, according to panellists at the Euroclear Collateral Conference.
The UMR initial margin (IM) requirements seek to establish international standards for non-centrally cleared derivatives.
Asset managers, pension funds and insurance companies are scheduled to come in-scope of UMR based on their volume thresholds either with phase five on 1 September 2020 or phase six on 1 September 2021.
“If you look at the Asia environment, they generally don’t deal in securities and even if they do it’s not the right type of security, they mainly deal in cash,” the speaker told delegates.
“So it starts to crawl into how can they get the triparty infrastructure to accept that Asian world into the European environment and more importantly how do you start to facilitate it in the portfolio of clients, which I think is going to be another interesting challenge. It will add an additional layer to the decision process over which structure to use.”
Panellists also highlighted challenges associated with UMR such as the fact that although there were "complications" for the first four phases, there was funding from the banks.
The speaker noted that there is likely to be much less funding available for posting margin future phases and this will create "a huge challenge".
The differences between the earlier phases, the panellists identified, is that banks and broker-dealers were quite used to triparty securities lending and triparty repo.
However, those in scope for phase five and six, are not as used to this kind of environment. Panellists stressed the need to conduct post-analysis on which model is best suited for their needs.
“This is a complex new infrastructure with lots of new counterparties. Looking at collateral eligibility schedules, decisions will have to be made as to whether they want to go for a so-called 'third-party model' or go inhouse or chose a triparty provider,” one panellist highlighted.
They added: “Lots of decisions need to be taken in a relatively short space of time in order to get ready. They need to analyse which model is best for their needs.”
It was noted that the triparty model can become "very complex" for those not used to it.
“There are some very significant differences and one of the myths is that everyone's using triparty, but a triparty is not for everyone," the speaker added.
“There is a lot of new developments out there but also you should go for something simple; you will have to live with this for a long time; no one will have the appetite to unpick it so give really careful thought to the model and what is going to be most efficient to you.”
The UMR initial margin (IM) requirements seek to establish international standards for non-centrally cleared derivatives.
Asset managers, pension funds and insurance companies are scheduled to come in-scope of UMR based on their volume thresholds either with phase five on 1 September 2020 or phase six on 1 September 2021.
“If you look at the Asia environment, they generally don’t deal in securities and even if they do it’s not the right type of security, they mainly deal in cash,” the speaker told delegates.
“So it starts to crawl into how can they get the triparty infrastructure to accept that Asian world into the European environment and more importantly how do you start to facilitate it in the portfolio of clients, which I think is going to be another interesting challenge. It will add an additional layer to the decision process over which structure to use.”
Panellists also highlighted challenges associated with UMR such as the fact that although there were "complications" for the first four phases, there was funding from the banks.
The speaker noted that there is likely to be much less funding available for posting margin future phases and this will create "a huge challenge".
The differences between the earlier phases, the panellists identified, is that banks and broker-dealers were quite used to triparty securities lending and triparty repo.
However, those in scope for phase five and six, are not as used to this kind of environment. Panellists stressed the need to conduct post-analysis on which model is best suited for their needs.
“This is a complex new infrastructure with lots of new counterparties. Looking at collateral eligibility schedules, decisions will have to be made as to whether they want to go for a so-called 'third-party model' or go inhouse or chose a triparty provider,” one panellist highlighted.
They added: “Lots of decisions need to be taken in a relatively short space of time in order to get ready. They need to analyse which model is best for their needs.”
It was noted that the triparty model can become "very complex" for those not used to it.
“There are some very significant differences and one of the myths is that everyone's using triparty, but a triparty is not for everyone," the speaker added.
“There is a lot of new developments out there but also you should go for something simple; you will have to live with this for a long time; no one will have the appetite to unpick it so give really careful thought to the model and what is going to be most efficient to you.”
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