UMR under a No-Deal Brexit
Ted Allen, vice president, Capital Markets, Collateral, FIS
June 27, 2019
What Happens to UMR under a No-Deal Brexit?
With Boris Johnson in place as British Prime Minister, the prospect of the United Kingdom (UK) leaving the EU with no withdrawal agreement in place (No-Deal Brexit) has become a realistic possibility. While there will clearly be huge impacts for the UK and other economies as a whole, there is a crumb of comfort being offered by the financial regulators.
Many firms will seek to novate some or all of those trades to a European entity as part of their response to a No-Deal Brexit, which would then give rise to the question of whether these should be treated as new trades and lose their legacy status. If so, these trades would be subject to the uncleared margin rules (UMR) and therefore come under the mandatory variation margin and potentially initial margin requirements. Margin would have to be exchanged and that does not come for free.
However, the Commodity Futures Trading Commission (CFTC) issued an interim rule effective from the original Brexit date of 1 April 2019 to clarify that any trades that are novated solely as part of a firm’s No-Deal Brexit strategy would retain their status as legacy trades. That’s a big relief. It does, of course, raise some operational questions about how these trades can stay in the legacy portfolios for risk and collateral management. This goes alongside the other exemption from UMR for deliverable FX derivatives and for trades that are amended due to benchmark reforms.
What happens, for example, if you have built your rules to allocate trades to the regulatory portfolio based on trade type and trade date? You would need a manual override to make sure these novated trades remain in the legacy portfolio and don’t add to the regulatory margin requirements and credit risk management.
FIS has built the solution into Apex Collateral to ensure that trades get correctly allocated for margining in line with the global regulations. FIS Apex Collateral clients can achieve full UMR compliance (including all market data, CRIF reconciliation, ISDA SIMM calculation, Margin Call communication, automated triparty workflow) from a single turnkey solution. The client doesn’t need to manage multiple vendor relationships and a complex technical integration, giving them the ability to focus on their core competency.