Did you know the new post-trade processing system for non-cleared derivatives is called UMR? It’s been around since 2020, and it’s not going away. Your firm will need to get up to speed on the changes to comply with all the new rules.
In this article, we’ll go over what exactly UMR is. Then we’ll explore how it will impact your buy-side business—including some solutions for solving your post-trade processing needs along the way!
Let’s dive into it.
What is UMR?
First, let’s take a look at UMR. UMR is the acronym for Uncleared Margin Rules. It’s a set of rules that require buy-side firms to post collateral for uncleared derivatives trades.
In simple terms, this means that if you’re trading in the futures market with your broker, you now have to put up money (collateral) before every trade. The idea behind this is that if there’s any risk at all—either from default or from just changing prices—then the firm will be able to cover its losses by using that collateral.
Key Dates and Phases of UMR
There are three phases of UMR. These are reporting, collection, and clearing. Each step is based on the type of trade and counterparty involved.
Reporting Phase
This first stage occurs when a buy-side firm enters into an uncleared derivative transaction with a sell-side firm. Reporting has been required for all uncleared derivatives transactions entered into after July 1, 2019.
The FCA has provided comprehensive guidance on how best to report uncleared derivatives.
Collection Phase
Once reporting has been carried out, firms must collect collateral from their counterparties. This is only if they do not already have it in place prior to entering into the transaction.
If this collateral does not exist at the time of entry, then it should be collected as soon as possible after entering into such an agreement. Posting or delivery occurs when either party becomes legally bound under original terms by an order being given or received.
Clearing Phase
If requirements have already been met during this process, then clearing can occur between two trading counterparties who meet certain criteria outlined by regulators.
This includes legal certainty around ownership rights over assets held as collateral against risk exposure during coursework execution.
How Does UMR Impact You?
The new rules are being implemented in stages, with phase 6 being the latest phase. UMR will have a direct impact on your ability to trade, hedge, and manage risk.
UMR impacts buy-side firms, clearing members, and their trading desks. This includes buy-side traders who trade for a living as well as internal hedge fund managers who use derivatives to manage risk in their portfolios.
Your post-trade process may change due to UMR because of requirements such as CCP bookkeeping (for OTC products), position marking (for T+1), or reporting of trades through DVPs (DVPs).
A Solution to Solve Your Post-Trade Processing Needs
You will be required to post margin for uncleared derivatives trades, either in the form of cash or collateral. The amount you are required to post will depend on the type of transaction, your counterparty’s creditworthiness, and other market risk factors.
If you have questions about the margin requirements for your specific situation, please contact us.
The new margin requirements were phased in over a two-year period. For uncleared swaps, they took effect on September 1, 2017, and this took effect on September 1, 2018, for all other counterparties.
Post-trade Processing, Uncleared Margin Rules, Derivatives, Buy-side
The UMR rules, which are the result of the Dodd-Frank Act, require you to post collateral against uncleared trades with your counterparties.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in 2010. The act is designed to protect consumers and prevent financial institutions from engaging in risky activities that might hurt consumers.
The UMR, or Unlawful Mortgage Origination and Loan Fraud, was passed as part of the Dodd-Frank Act. It bans mortgage brokers from offering loans that would now not be approved.
The rules of these Acts are complex; they impact not only your trading desk and operation but also your order management systems and risk management processes.
UMR is a set of rules that require you to post collateral against uncleared trades or uncleared margin trades (deals where there’s no immediate exchange of cash). These are common in certain asset classes such as equities, FX, and commodities where there is a need for speed.
This is because these markets tend to be highly volatile — especially during periods of market stress. It can be difficult for banks that trade them on behalf of clients to know whether they will end up on the winning or losing side when clearing takes place days later.
Remember that new phase 6 rules will come into play during September 2022. Thankfully, Hazel Tree can help you navigate and understand these new rules regarding UMR.
Be sure to check out the following website:
https://hazeltree.com/hazeltree-and-umr/
Here you will find more details about how Hazel Tree can assist you.
UMR Can Change Your Business For The Better
UMR is a game changer, and it’s time to get on board. Using a post-trade processing solution can help you manage your transition into UMR. It provides an integrated platform for all your post-trade data needs, from clearing and settlement to collateral management, trade reporting, and risk analytics.
For more on UMR, be sure to check out the rest of our site.
