Partner Content (CME Group) – New Year, another new phase for the uncleared margin rules (UMR) schedule, and this time with a materially lower notional threshold. For this next phase of UMR, the Average Aggregate Notional Amount (AANA) calculation begins this spring and will require the participation of a large number of both sell-side and buy-side firms.
The outcome of the AANA will determine whether an entity will be directly impacted by UMR in Phase 5, which is scheduled to commence in September 2020.
The calculation of the AANA is arguably ‘Step 1’ in preparing for UMR: to see if/when your firm is directly impacted by UMR. It should be a key area of focus for any entity not already directly impacted by Phases 1-4, but actively trading OTC derivatives today. In short, the outcome of the AANA will determine whether an entity will be directly impacted by the UMR in Phase 5, which is scheduled to commence in September 2020.
Feedback from market participants suggests that the next threshold for UMR compliance is now broadly understood – with Phase 5 being 50bn in 2020, and Phase 6 being 8bn in 2021. The understanding of what is included and when the AANA calculation is performed, however, appears to be far less well understood – as well as the potential tools to help mitigate the impacts of the process.
Our goal is to help market participants understand, navigate, and develop the best solution for their business. As such, we’ve put together this simple guide to recap and clarify the measurement rules and share our experience of how market participants are managing their commitment to compliance.
- The AANA is the sum of gross notional of all outstanding non-cleared derivatives, including trades intermediated with a prime broker. In terms of products:
- The AANA calculation includes, but isn’t limited to, bilateral Interest Rate swaps and swaptions, deliverable FX forwards, FX swaps, FX options, and NDFs.
- Even though deliverable FX forwards are not subject to the initial margin requirements of UMR, they do count towards the AANA calculation.
- The 50bn and 8bn thresholds are in USD for US entities and in EUR for European entities – there is no FX rate conversion for the different thresholds.
The notional of listed futures and options and OTC cleared trades are exempt from the AANA calculation (and are also exempt from any subsequent ISDA SIMM Initial Margin requirements).
- The calculation period is March, April, and May of 2020 (Phase 5) and 2021 (Phase 6):
- US firms must take an average of every business day during the calculation period.
- European firms must take an average of the last business day of each month in the calculation period.
- If your AANA is above USD/EUR 50bn in the March-May 2020 period, then you will be impacted by compliance with UMR Phase 5, which begins September 1, 2020.
- If your AANA is above USD/EUR 8bn in the March-May 2021 period, then you will be impacted by compliance with UMR Phase 6, which begins September 1, 2021.
Feedback suggests that FX forwards and swaps are likely to be large contributors to uncleared notional amounts, and as such, these may be products to:
- Compress – via services like TriOptima
- Clear – via listed FX futures and/or OTC clearing services
Accelerating client growth in both bilateral FX compression and the adoption of cleared FX products appears to support this feedback and suggests that a growing number of customers are taking pro-active steps to help optimise the impact of UMR on their trading activity.
Examples of this client growth include the following milestones, all achieved in the period Dec 2019 – Jan 2020:
- Record for FX forwards compression of $9.1 trillion via TriOptima in 2019
- A new single daily volume record in FX futures of $282 billion notional (2.7 million contracts) in January 2020
- Open interest in FX futures at a record high (2.3 million contracts) in December 2019
- Record 1,265 large open interest holders in FX futures in January 2020 (up 14.7% year on year)
- Continued volumes in OTC cleared FX across 24 pairs (all 11 NDFs and 23 forwards), with more than 70% of volume in the forwards
- FX Link (cleared proxy/alternative for FX swaps) all-time record contracts traded on January 2, 2020, equivalent to $4.1bn in a single day
If you would like to discuss any of the themes detailed here, or any of the ways market participants are managing and optimizing their UMR requirements, please contact: email@example.com or your CME Group account representative.
Visit cmegroup.com/umr for more information on UMR.