September 1, 2021 marked a significant milestone for market participants as UMR Phase 5 finally went live. With headlines now turning attention to Phase 6, there are still many operational challenges brought to light during Phase 5 that have yet to be resolved. Learning from these challenges will help firms better prepare for Phase 6 and beyond.
The implementation of UMR Phases 5 and 6 have increased the network of global participants required to post IM collateral. Many of the recent additions, including small broker-dealers and asset managers, are new to pledging securities as collateral and managing segregated custody accounts. As a result, there has been a learning curve for these firms as they try to develop the operational processes to meet requirements efficiently and effectively.
UMR has certainly increased operational complexity as firms look to integrate workflows with a now broadened set of global tri-party and third-party custodians, central utilities, fund administrators and outsourcers. While the market has been quick to develop and adopt solutions that calculate and reconcile margin requirements in order to streamline the workflow between this growing network of participants, significant operational challenges remain within firms internally due to manual processes and legacy technology and infrastructures.
Firstly, many firms struggle to validate whether collateral received or pledged is in-line with counterparty agreements. Because these agreements are often handled manually and, in a silo, it is difficult to efficiently cross reference collateral eligibility. As a result, it is painfully manual process for firms to validate collateral against agreements.
Furthermore, recent market volatility and the resulting increase in margin call frequency has caused firms to struggle to identify optimal collateral, let alone eligible collateral. With collateral obligations, inventory, reference data, and eligibility spread across disparate systems and functions, determining which collateral satisfies margin calls in the most economically efficient way is often far too complex for firms to operationalize.
Lastly, because it is already difficult to validate and optimize collateral, it is nearly impossible for firms to achieve straight-through-processing comply with UMR without sacrificing operational efficiency. Moving the right collateral to the correct place at the right time often requires a sophisticated data and connectivity framework. Collateral must first be tagged and monitored properly to ensure it is available for use. Firms must also have the appropriate systems in place to identify the eligible and optimal collateral. Finally, firms must be seamlessly connected to booking systems or their counterparties in order to automatically instruct the movement of collateral to its final destination.
It is becoming increasingly important for firms to select the right technology partners to support the margin and collateral ecosystem in the most efficient way. Without adequate technology systems and a holistic data infrastructure, the new meaning of UMR could be “Undertaking a Massive Rebuild” rather than “Uncleared Margin Rules.”
Transcend is proud to help clients seamlessly and successfully comply with UMR requirements. Our end-to-end capabilities and unique data framework provide firms with the tools to achieve straight-through-processing for margin workflows. Learn more about our Collateral Validation, Optimization, and Booking Service solutions.