UMR: Solving the Anticipated Increase in Margin Disputes in Less than 100 Days

By Philip Slavin, CEO, Taskize  

Time waits for no one, as the old saying goes. Firms on the brink of the $8 billion average aggregate notional amount (AANA) threshold, particularly those with heavy commodity exposure, face an operational race against time over the next 100 days in preparing for the final phase of the Uncleared Margin Rules (UMR). 

Quickly solving disputes around margin is an uphill challenge in commodities right now. Significant price fluctuations in Brent Crude and Natural Gas markets have had a knock-on-effect on the level of initial margin (IM) required. This adds another headache for those fund managers trading the commodity markets, and their counterparties. 

A fundamental factor behind disputes in posting margin is the misalignment of margin calculation models. In many cases, hedge funds will either be using a custom risk model for margin calculation or one from an external provider if they are resource constrained, which will very often be different from the model being used by their counterparty. Even if the parties are using the standard SIMM or GRID models, amounts could still vary because of reconciliation errors or settlement breaks.

The fact that counterparties receive differing margin outcomes when commodity prices are up one day and down the next should come as no surprise. With this in mind, being able to work within thresholds and manage partials is vital. Even if both firms are using SIMM, the amounts could still be different because the underlying portfolios don’t reconcile meaning stale price data, trades incorrectly booked or failed settlement can all impact margin calculations. Irrespective of the root cause, the problem is the amount of time and effort it takes trying to solve these disputes especially when using traditional forms of communication – such as email or phone. 

Even the adoption of chat has not made any real impact on issue resolution times. For real efficiencies in inter-company resolution, there needs to be specific tailored workflows that are designed to help firms manage and accelerate collaboration across operations.  If price volatility in commodities hits anything like March levels prior to the UMR deadline in September, better control and oversight of the dispute process will also be a key requirement to ensure you are meeting your obligations. 

With 100 days to the regulation, it will be tempting to simply fallback to using email for getting to a resolution but for firms already overwhelmed this will just add to the post-trade operational headache.  Overlay the demand for better data loss controls and identity management and the fallback option of email for dispute resolution becomes even less attractive.

Those affected by this issue need to find a solution to resolve these disputes more efficiently and quickly, particularly if they are to harbour any hope of ensuring effective collaboration across global financial operations staff. Time is very much of the essence when it comes to UMR, but perhaps phase six is finally the excuse back-office staff have been looking for to resolve not just margin disputes, but the plethora of other post-trade operational headaches (like CSDR) that they face on a daily basis.