Market News: Phase 6 margin call requirements are on the way.
Institutions under UMR who had not previously been affected by these specific margin requirements will be as of September 1st, 2022.
Uncleared Margin Rules (or UMR) were created to address the OTC derivatives market–and its participants– in the wake of the global financial crisis (GFC) of 2008-2009.
It implemented new margin requirements for non-centrally cleared derivatives to avoid further systemic risk.
For this reason, they were ‘phased in’, or broken down by phases.
Institutions affected by phase 6 margin call requirements could find themselves in a sticky situation and I’m going to discuss why down below.
Let’s get started!
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Preparing for margin calls
The requirement to exchange initial margin for over-the-counter (OTC) derivatives is one of the last remaining pillars of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that remains to be fully implemented.
The five-year implementation period began in 2016.
The chart above depicts the number of counterparties affected throughout each phase.
Phase 5 occurred in September of 2021 where 319 counterparties were affected.
We will be entering Phase 6 in September of 2022, where 775/990 counterparties with more than the $8 billion scope detailed on the graph, or gross amount across all uncleared OTC trades, will be affected.
Phase 5 of UMR touched a mix of sellside and buyside firms, especially medium-sized banks and larger buyside firms.
Institutions affected by Phase 6 margin call requirements may include asset managers, banks, hedge funds, and private family offices.
The entire process is extremely challenging according to Bloomberg.
But while it may seem complex in nature, it’s the results that truly matter.
How long will it take for margin calls to happen?
Although Phase 6 margin call requirements are going into effect on September 1st, 2022, it’s important to note that this is going to take some time.
The derivatives market is massive, now boasting approximately 1 quadrillion derivatives as of May 2022, per Investopedia.
The Senior Principal at BNY Mellon has said in the past that even after Phase 6 there will be margin calls that will still have to be processed.
That’s how massive this event will be.
Phase 6 margin call requirements will begin to margin a variety of sized banks, hedge funds, market makers, and family offices.
The bottom line, the markets need this reset, and its coming.
For a much greater and in-depth walkthrough of what this event means, check out AMCBIGGUM’s video below.