The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) recently agreed on a one-year delay to the Uncleared Margin Rule (UMR) for swaps traders with an Aggregate Average Notional Amount (AANA) below $50 billion and above $8 billion. These firms will be part of a new UMR Phase 6, subject to compliance by September 2021.

Phase 5 organizations that must comply in September 2020 still account for the largest wave to date, with over 270+ organizations expected to comply. Meanwhile, the remaining organizations that now fall in the new Phase 6 category will need to keep a close eye on how Phase 5 is progressing. They should also begin or continue their implementation project and not waste this respite only to be caught in a crunch again in 6 to 12 months' time.

Shawn Paul, Managing Director, Asia Pacific & Japan of IHS Markit spoke earlier this year at the Risk Hong Kong Conference on 23 June 2019, ahead of the announced regulatory delay for Phase 5 firms. During the fireside chat with Blake Evans-Pritchard, Deputy Bureau Chief of Risk.net in Asia, Shawn shared new insights into four key trends and discussed major milestones in anticipation of the final phases of UMR – now slated for September of 2020 and 2021.*

1. Market readiness for the final phase-in

Blake: How far along do you feel the market is ready? What advice would you provide to people who just started looking at the issue?

Shawn: To start with, I think education remains key as there is still the need for market participants to understand what the regulation requires and how it impacts their respective organizations. Unlike other regulations in the past, Initial Margin does not confine itself to one department but impacts front, middle and back offices along with the legal and technology teams. It is a multilateral multi-departmental joint up project and requires a collaborative approach towards compliance.

For those who just started, there is still a fast-closing window of time to define what actions are critical for them.

I would say between now and September, organizations that are traditionally used to 12 to 24-month lead time in procuring and onboarding new services need to fast track the process. Also, let's not forget the queue for onboarding because there are more than 1100 organizations that need to act with only a handful of capable vendors to assist. If you are standing in September 2019 without a clear roadmap and project timeline, then you are cutting it fine for phase 5.

2. Lessons learned from previous phase-ins

Blake: What are the lessons drawn from major hurdles in previous waves of IM? What have been considered in the buy versus build debate?

Shawn: There were fewer partner companies to help in the early phases, so financial institutions built a significant amount of infrastructure themselves. Then, we saw the entrance of many vendors in this new marketplace. Today, there is some rationalization in the number of vendors providing solutions, and replacement of costly and less efficient in-house built solutions, which I think we shall continue to see well past 2020/21.

The three most challenging things are:

• Calculating the sensitivities
• Documentation
• Settlement

Using the first as an example, sensitivity analysis is a discipline <span/>deeply embedded in the way we calibrate market data, driven by modeling and pricing capabilities that only a few service providers and in-house functions with the right know-how have.<span/> Coupled with documentation and settlement issues, there is a need for organizations to reach out and define optimal solution partners.

As the cost of compliance skyrockets with heightened regulatory demands, the industry faces a constant balancing act to adopt agile technologies that are adaptable to changes in the market and regulatory space in a cost-effective manner.

The buy versus build question is widely debated. Theoretically, it is possible to calculate IM yourselves. My question would be, "But, why?" In a simple sense, IM is a regulatory-driven parametric value-at-risk (VAR), which many organizations calculate today. Yet, leveraging and force-fitting existing models into ISDA SIMM have proved to be more challenging than anticipated on the surface. I would suggest there is no reward to build an internal calculator.

For example, IHS Markit's Initial Margin monitoring service, powered by our industry-leading market data and analytics and using the standard ISDA Standard Initial Margin Model (ISDA SIMM^TM) provides an accurate and flexible way for firms to monitor their Initial Margin exposures. Customers will have full flexibility in selecting the frequency of the calculation and setting the thresholds. The service is designed to seamlessly evolve into a complete Initial Margin calculation service as thresholds are met.

3. Collateral eligibility, resourcing, and warehousing

Blake: What is your advice to Asian firms that might not naturally hold collateral considered eligible by their counterparts? How should they think about their collateral management practices?

Shawn: <span/>One of the challenges is multiple silos within an organization that does not present a <span/>single view of eligible collaterals. Having an enterprise view of<span/> collateral inventories is an important starting point to see your repo business, variation and initial margin in a collective manner. With both front office risk and operations seeing the full picture, you may then identify the optimal collateral management strategies. In some instances, organizations may <span/>set up a function to procure securities to post as collateral.

There are technology solutions that help monitor and manage collateral around eligibility, wrong-way risk, concentration and credit risk quality. New services in <span/>development include systems categorizing types of collaterals so that financial institutions can easily consume and pass them through the collateral process.

4. A forward view on regulatory implementation

Blake: Will reverberations be felt beyond the final phases of IM? What shape will the future debate take?

Shawn: I think there is going to be rationalization in the industry:

• The replacement of in-house solutions with industry standard solutions that provide cost and operational efficiencies
• A consolidation of solution providers with the volume of business supported by organizations that possess strong foundations in market data, pricing models, as well as leading technology.

In simple terms, IM and collateral management are driven off the back of trade, Credit Support Annex (CSA) and market data modeling. Now, if you look forward and past IM, this common denominator of data will feed into the next wave of regulations such as xVA, SA-CCR and more. So, I will end by encouraging all to look beyond regulations right at your doorstep, adopt a strategic outlook, and future-proofing your prudential and risk management agenda.

*Some changes to the original discussion have been made to reflect latest regulatory and market development between this interview and today.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.