FAQs and Podcasts

The UMR requirements are implemented on a phase-in basis determined by Aggregate Average Notional Amount ("AANA") according to the relevant applicable regime. The AANA calculation is determined at group level and calculated over a 3 month period in each year, as provided under the relevant applicable regime. Note a distinct difference between the US and EMIR rules with the US rules requiring a daily average over the 3 month period and the EMIR rules requiring an average of month ends only.

The bilateral margin rules are not only imposed on dealers but also have a direct impact on a wide range of financial counterparties (including, for example, investment firms, credit institutions, insurance companies, pension schemes, collective investment schemes, alternative investment funds or equivalent fund entities) and non-financial counterparties who trade derivatives other than primarily for hedging purposes.

Accordingly, it is your responsibility to consider the rules which apply to you (or the funds you manage) based on your classification and the jurisdiction in which you are established and the swap dealer counterparties with which you are undertaking OTC derivative trading activity.

You may disclose your in-scope status by directly notifying UBS using the “Contact Us” section above or via the ISDA and/or Acadia self-disclosure service (see the Useful Links section).

Phase 1 to 5 of UMR have already been implemented according to the relevant AANA thresholds as below:

Phase 5 came into effect September 1, 2021 for entities whose AANA exceeds the following thresholds in an applicable regime:

Phase 6 comes into effect September 1, 2022 for entities whose AANA exceeds the following thresholds in an applicable regime:

How is AANA Calculated?

In order to determine whether you are subject to IM under the UMR requirements, you need to determine if at a group level your consolidated notional non-cleared derivative balance exceeds the compliance threshold.
It is important to note that currently the AANA calculation under the EU and US rules (at a minimum), is calculated without regards to the exemptions provided for products that may be described as out of scope. This includes the notional amount of outstanding physically settled FX forwards and FX Swaps.

However, given the rules apply at counterparty level, for investment management firms the AANA calculation will be determined for each individual fund separately where they are legally segregated from each other, rather than looking across all funds that share the same Investment Manager / Adviser. Please note that consolidated seed funds may need to take into account the activity of the group to which they belong.

You will need to perform annual tests each year using the same Thresholds, measured over a 3 month period effective from the following 1st January. If you would like to discuss the options on testing, even prior to the required regulatory deadline, please contact us via the details in the contact us section.

The regulations stipulate that regulatory initial margin needs to be segregated with an entity independent from the posting party (or, for some regimes, segregated by other legally effective means). This custodian must operate a control account type structure which recognizes the security interest of the counterparty whose benefit you are posting on behalf of.

When selecting a custodian it is important to consider their service offering versus your specific requirements. Can they instruct movement of collateral? Can they provide optimization of collateral services if you require this? Can they monitor eligibility requirements? Can they provide monitoring and reporting?

You will also need to factor in the lead time to complete custodial set up. Documentation, including KYC, can take up to 3 months depending on the provider you selected. There are several third party custodians and tri-party agents who can support UMR collateral requirements for IM.

UBS uses tri-party custodians for our pledge and we can support BNYM Global, Clearstream or Euroclear, and would seek to align with you where possible for ease of negotiation and onboarding.

We are able to support your posting of Initial Margin (UBS as secured party) across all tri-party custodians (Euroclear, Clearstream, BONY and JP Morgan).

We can also support your posting via multiple 3rd party custodians.

The IM required to be posted or collected may be calculated using a margin model or using the regulatory prescribed schedule methodology (also known as Grid). The most commonly used and industry recognized margin model is the ISDA Standard Initial Margin Model (SIMM). You can choose to calculate IM based on either of these two approaches or outsource the service to a third party service provider.

SIMM Vs. Grid – What are the differences?

Grid serves as a fallback to SIMM or any other margin model. Although simple to implement, scheduled initial margin amounts would typically be 11 times higher than under a model-based initial margin regime, although this may depend on the directional nature of the portfolio. The calculation is based on a table (see below) assigning a trade-level initial margin based on a % of notional. Buckets for choosing margin rates are determined according to the asset class and its maturity. Long-dated Credit, Equity, Commodities and 'Other' carry the most punitive add-on factors.

The SIMM model was proposed by ISDA and the key inputs are the risk sensitivities (Deltas and Vegas). SIMM is a portfolio model allowing netting of offsetting risks. The overall SIMM margin requirement is the sum of the margin of the product classes:

SIMM = SIMMRatesFX + SIMMCredit + SIMMEquity + SIMMCommodity

The SIMM for each product class is calculated using the 6 risk classes and the correlation between them. The six risk classes are: IR, Credit (Qualifying), Credit (Non-Qualifying), Equity, Commodity and FX. The margin for each risk class is given by:

IM = DeltaMargin + VegaMargin + CurvatureMargin

These margins are calculated using risk weights and correlations supplied by ISDA. The model is recalibrated (on historical data including a period of stress) and then back tested annually by the industry.

Collateral must consist of regulatory prescribed eligible collateral subject to criteria designed to ensure that such collateral is of sufficiently high quality, is adequately diversified and that wrong-way risk concerns are mitigated. Eligible collateral requirements vary by jurisdiction. Generally a broad set of collateral is acceptable including but not limited to Government Securities, Government guaranteed securities, Corporate bonds, and Equities. ISDA has developed a set of standard collateral schedules which if used will improve the lead time in agreeing with your counterparties

As part of your eligible collateral schedule and asset selection when posting collateral, you will need to ensure collateral posted to your account is in compliance with regulatory requirements. Depending upon your selection of custodial services or tri-party agent, this service may be operated by them on your behalf.

Prescribed haircuts must be applied to eligible collateral depending on their credit quality, and as a minimum must meet the most restrictive regulatory haircuts based on the regulators that govern the relationship. In addition an 8% FX haircut will apply where the collateral currency differs from the termination currency.

The contractual framework for meeting IM requirements is time consuming as account control agreements between both parties' custodians need to be in place as well as bilateral IM credit support agreements. It is suggested to start repapering negotiations with dealers and setting-up custodians' accounts at least 6 months before the expected implementation date. Past experience shows though that late comers might get caught in delays and operational burdens therefore an As Soon As You Can approach is advised, particularly in view of the number of entities potentially in-scope for Phase 6.

Documentation architecture will vary depending on the type of custodian (central securities depository or third party bank custodian) chosen by the posting party:

** Bank Custodian CTA has been developed for use where parties are choosing a Custodian located outside the U.S. or U.K.
*** Further Security Agreements are being drafted based on location of disclosed custodians

Post trade monitoring and portfolio reconciliations will be required. If SIMM is the calculation model selected between the parties then additional ‘trade sensitivities’ will need to be reconciled along with the pre-existing trade reconciliations that take place today.

Considerations should also be given to the support model for IM dispute resolution. Depending on a firm’s current internal organisation, a more specific quantitative skill set may be required to enhance the process.

As part of your eligible collateral schedule and asset selection when posting collateral, you will need to ensure collateral posted to your account is in compliance with regulatory requirements. Depending upon your selection of custodial services or tri-party agent, this service may be operated by them on your behalf.