When Basel Committee on Banking Supervision and the International Society of Security Commissions granted a one-year extension to meet the Uncleared Margin Rule’s Phase 5 deadline, estimated thousands of asset managers, hedge funds, and insurance companies received a second wind to meet the new September 1, 2021 deadline.

Markets Media caught up with Jack Callahan, executive director of OTC products and services at CME Group, to discuss what effects the extension has had for those firms with more than 50 billion in annual average aggregate notional held in their derivatives portfolios.

Should the industry prepare to see a change in the use of bilateral swaps?

UMR has been a clear driver of customers moving more of their trading activity out of the bilateral swap market and into cleared swaps and listed futures. There were several large buy-side firms who initially told us they would have been in Phase 4 because they’ve been over $750 billion in notional, but they were able to change their trading behavior in order to reduce their uncleared notional and get into Phase 5. We’ve seen this in clients who started using FX futures instead of forwards, Equity total return index futures instead of total return swaps, and clients who backloaded their entire portfolios of Chilean peso and Colombian peso interest rate swaps in order to get their uncleared notional below the threshold.

How much of a radical change will this be for portfolio managers?

Many portfolio managers are already using a mix of uncleared swaps, cleared swaps, and listed futures, so they’re already setup to trade across multiple product types and familiar with the pros and cons of each. UMR will almost certainly make the cost of trading and holding uncleared derivatives more expensive, and this increases the relative efficiencies that listed futures and cleared swaps have over the uncleared market.

Are most operations staff already prepared for the coming changes?

We’re working closely with our clients to ensure they’re doing all of the necessary work to prepare for all aspects of UMR. We’ve strived to make this transition as easy as possible for our clients with the end-to-end margin solution TriOptima has built for clients to calculate, communicate, and reconcile their margin amounts. Clients are working to get ahead of the game by already calculating what their ISDA SIMM margins would be and setting up Threshold Monitoring to ensure that once they are in scope for UMR that they can actively track how close they are to the 50 million euro margin threshold with each of their counterparty relationships.