State Street Survey Finds Firms Unprepared to Comply with Uncleared Margin Rules Despite Deadline Extension
Survey reveals that 81% of firms lag in preparations to comply
“UMR signifies a major change in the industry that aims to bring greater stability and transparency to the OTC derivatives market,” said
The survey found that roughly a year away from the next deadline, which was extended due to COVID-19, firms remain primarily unprepared for the different aspects of the regulation. Key findings include:
Institutions are in different stages of compliance preparedness by both phase and function:
- The vast majority (86%) are preparing for Phases V or VI, representing the significant proportion of buy-side firms coming under the purview of UMR in the next two years. These institutions face a steep learning curve as many are unfamiliar with Initial Margin (IM) rules and operations.
- For those in the preparation stage, only 19% say they are fully prepared for compliance. 42% are preparing in all relevant functions, while the remaining 39% have begun preparations in just a few areas.
- Nearly 8 in 10 have not agreed on how to approach settling segregated collateral with counterparties. As it stands, third-party custody with account control agreements remains the favored approach amongst respondents. Many firms underestimate the difficulty associated with compliance with UMR. While 68% of those preparing for compliance are very confident in their ability to handle the new workflows, 80% of those in compliance said they faced challenges in incorporating them.
As institutions continue toward the compliance stage, half expect these requirements will ultimately have a positive impact on overall operations. 40% of the smaller firms surveyed anticipate a negative impact, compared to just 20% of larger firms. Public pensions were most likely to expect a positive impact, while corporate pensions were most likely to anticipate a negative impact.
Institutions are using mitigation strategies and have turned to third parties to ease the burden of complying with UMR:
- 80% of those in compliance functions have indicated that they have faced some degree of challenge in incorporating new workflows. To ensure on-time compliance, the majority of firms are employing a mix of in-house capabilities and outsourcing to third parties with operational expertise.
- 56% of firms are planning to adjust strategies by reducing OTC contracts to limit the impact of UMR. For those already in compliance, 80% reported a reduction. The majority are using compression strategies to limit UMR’s impact. Firms will seek various optimization strategies with third parties.
“The key to any regulatory compliance is to look at all the requirements and objectives holistically,” said
Oxford Economics fielded the survey on behalf of State Street in
*Assets under management as of
iState Street engaged Oxford Economics to field a global survey of 300 industry executives from 16 countries during
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