Engagement Summary
Since the first over-the-counter (OTC) derivatives margin rules rolled out in 2016, large broker-dealers and global banks have faced increasing compliance costs, all the while competing with central counterparty clearing houses. To stay relevant in the OTC business, our clients have invested significantly in technology solutions aimed at streamlining operations and client onboarding processes. With deep experience managing regulatory compliance programs, Monticello has been selected as the choice partner to maximize return on investment for upgrading collateral platforms to keep our clients in compliance with Unclear Margin Rules (UMR).
In 2020, buy-side firms such as asset managers, institutional investors, private equity firms, and hedge funds will become subject to UMR Initial Margin (IM) regulatory requirements. The number of counterparties coming into scope for Phase 5 of UMR will increase from the current count of a few dozen large banks and broker-dealers to thousands of trading counterparties by September 2020. To support this significant increase in counterparty inclusion in the regulation, global banks are upgrading their technology platforms and processes to support a monumental transition for their buy-side clients. Third-party solutions, aimed at streamlining the legal document negotiation process, are attempting to use UMR as an opportunity to digitize a historically manual negotiation process. Monticello has helped our clients identify viable third-party solutions, assess the technical and operational challenges associated with each solution, and facilitate a smooth integration with the selected vendor solution.
The table below shows threshold amounts that are gradually lowered, falling to $8 billion in notional amount in Phase 5 by September 2020. As the IM threshold is lowered, the number of counterparties that will be subject to UMR dramatically increases.
*Amounts reflect an aggregate average notional amount (AANA) for March, April and May of each phase-in year
Project Background
Since 2015, Monticello has partnered with large banks, broker-dealers, and asset managers subject to UMR for OTC derivatives. Monticello continues to support clients with program management and testing governance services while also leading operational improvements and enhancements to trading processes. Our expertise in testing governance includes client onboarding, legal documentation negotiation leveraging new cloud-based platforms, collateral processing for prime brokerage clients, portal-based integration with buy-side clients thus offering margin pricing tools, and access to a large network of third-party custodians.
Engagement Objectives
Program Management:
Raise program awareness across OTC derivatives sales and trading desks. Manage the execution of go-live activities detailed in a “runbook” that engages legal, operations, technology, and change teams. A runbook contains the go-live tasks and coordinates their execution across the many departments involved in the event over a defined time period. Typically, the time period begins several days or weeks prior to the go-live event and stretches past go-live to ensure the production environment is stable and clients are not negatively impacted by the large changes being introduced to the business processes and technology platforms.
Testing Governance:
Conduct multiple end-to-end trade and margin processing testing cycles, engage application owners within the UMR ecosystem. Obtain stakeholders’ signoffs to allow software releases to production and enable new operational processes.
Perform reference and trade data quality checks and track the collateral processing of initial margin calls within service level agreements. Operate a “control room” to gather critical issues and report service status to program stakeholders during the go-live period.
Service Introduction:
Business Value
Through a continuous partnership with our clients’ technology and operations teams, Monticello has been able to support the tangible business outcomes sought by our clients to achieve compliance within the new UMR regulations. Monticello’s rigorous program management and testing governance methodologies, understanding of end-to-end business processes, willingness to shoulder delivery risk, and timely execution has supported our clients’ strategic objectives. This partnership has enabled our clients to retain market share in the competitive landscape of OTC uncleared swaps trading.
