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The Uncleared Margin Rules (UMR) have significantly influenced clearing in several ways, primarily by making central clearing a more attractive and potentially cost-effective option for many market participants. Here’s how UMR changes clearing dynamics:
1. Increased Incentive for Central Clearing:
* Higher Costs for Uncleared Trades: UMR mandates the bilateral exchange of initial margin (IM) and variation margin (VM) for uncleared derivatives between counterparties exceeding certain thresholds. This introduces significant operational complexities and costs related to calculating, posting, and managing margin.
* Exemption from AANA Calculation: Centrally cleared transactions are excluded from the Average Aggregate Notional Amount (AANA) calculation used to determine if an entity falls under the scope of UMR. By clearing trades, firms can potentially stay below the UMR thresholds and avoid the associated margin requirements for uncleared trades.
* Margin Efficiencies in Clearing: CCPs offer multilateral netting, which allows firms to offset exposures across multiple trades and counterparties, resulting in potentially lower overall margin requirements compared to bilateral margining under UMR.
* Reduced Counterparty Risk: Clearing through a CCP replaces bilateral counterparty risk with the risk of the CCP, which is often perceived as lower due to the CCP’s robust risk management framework and default waterfall. While not directly a “cost,” this reduced risk is a significant benefit that becomes more appealing under the stricter UMR regime for uncleared trades.
2. Expansion of Client Clearing:
* As more buy-side firms (asset managers, hedge funds, etc.) came into scope under the later phases of UMR, many opted for client clearing arrangements. This allows them to access the benefits of central clearing without becoming direct clearing members, thereby outsourcing the operational burden of CCP membership.
* The final phases of UMR, which captured a large number of smaller entities, significantly drove the growth of client clearing volumes.
3. Impact on AANA Threshold Management:
* Firms close to the UMR thresholds might choose to voluntarily clear certain OTC derivatives to reduce their gross notional outstanding, thus lowering their AANA and potentially avoiding being subject to UMR altogether.
4. Increased Awareness of Clearing Benefits:
* UMR has heightened awareness among market participants regarding the advantages of central clearing beyond just risk reduction, including potential capital benefits and operational efficiencies.
In summary, while UMR doesn’t directly mandate clearing for entities below the mandatory clearing thresholds, it creates a strong economic and operational incentive to clear OTC derivatives. The increased costs and complexities associated with bilateral margining under UMR make central clearing a relatively more attractive option for a wider range of market participants.

Video courtesy of Escrow.com

Video courtesy of Escrow.com