[ T H O U G H T
L E A D E R S H I P
|
L C H ]
THE IMPACT
OF UNCLEARED
MARGIN RULES
As the buy-side continues to grapple with uncleared margin rules (UMR), Tamaryn Nuttall,
LCH ForexClear’s chief operating officer, stresses the importance of early preparation and
how clearing can be used to navigate the operational complexities of compliance.
How do the uncleared margin
rules affect the buy-side?
Tamaryn Nuttall: The UMR will
have a significant impact on
the buy-side. Asset managers
that are caught under the UMR
will be required to exchange
initial and variation margin with
each of their counterparties for
their derivative transactions.
Compliance brings with it
complexity, as each firm will
need to calculate the exact
amount of margin needed to pay
to each of those counterparties
on a daily basis.
There’s also an operational
impact of setting up new
processes to support compliance
with the UMR. The rules
require firms to set up new
documentation and new
company accounts. Asset
managers may also need to
implement new technologies
to manage funding where
margin is posted between two
14 // TheTrade // Fall 2019
counterparties.
More broadly, there is also a
wider industry impact of the
UMR implementation. These
rules have been rolled out in
phases since 2016, and since
then we’ve seen a significant
increase in cleared volume in
specific derivatives products.
For example, LCH has seen a
significant increase in clearing
volumes for FX non-deliverable
forwards (NDFs) over the last
three years, now averaging
$75bn per day. More recently,
clearing volumes of deliverable
FX Options have been steadily
building since the launch of our
service last year.
Beyond the risk management
and compliance benefits of
clearing, buy-side firms may
also begin to see some price
differentials between cleared
and non-cleared trading activity.
The financial cost of keeping
the transactions bilateral can be
Tamaryn Nuttall, chief operating
officer, LCH ForexClear