Phases 5 and 6 of the Uncleared Margin Rules (UMR) – to be implemented in September 2021 and September 2022, respectively – will be bring into scope many asset managers who, thus far, have not been subject to initial margin (IM) rules. What makes 2021 a big year is the scale of the impact – according to the ISDA roughly 1,000 Asset Managers will be in scope over the next 2 years! We spoke to Rachna Mathur, Head of Equity & Index Sales, Americas at Eurex about the inevitable impact that this will have on equity index derivatives.
Rachna, how are equity derivatives as an asset class affected by UMR Phases 5 & 6?
For equity index derivatives, this will open-up a huge user base of asset managers. They may look to adjust their trading strategies and move away from pure bilateral exposure to centrally cleared swaps and exchange traded derivatives, or reduce their Average Aggregate Notional Amount (AANA) calculation by increasing their exchange traded derivatives exposure.
Our focus will be on educating these clients on Eurex’s equity ETD offering, and products that could fit well for managing both, their standardizedor customized, exposure.
Where do you see the biggest impact?
The biggest impact will be on the operational set up of the firms coming into scope. It will be a lot of work across the industry to set up these asset managers with the right know-how to manage their notional exposure; their collateral, margins, access to listed platforms, etc.
This will involve them having the right documentation via their clearing firms to not only trade and clear ETDs, but to also collateralize their exposure. Most of these asset managers have been subject to one-way IM, but now they must adopt their processes to support two-way IM and understand margin models and calculations.
What solutions does Eurex offer?
Eurex already has a well-developed and highly liquid exchange traded market that has proven to be highly responsive to client demand.
Where there has been a need for standardized products, Eurex’s flagship exchange traded and cleared contracts have proved to be a good fit. Eurex’s offering in the equity index segment, like the EURO STOXX products derivatives, Volatility Derivatives, Dividend Derivatives, MSCI Derivatives, Total Return Futures, and so on, have addressed these needs and offer a comprehensive solution.
Where there is a need for flexibility and customization which cannot be fulfilled by standardized contracts – and is currently offered by non-cleared OTC products – Eurex is listing new derivatives like Flex Options, Thematic Futures, ETRFs and BTRFs. These derivatives allow market participants to meet their unique, tailored hedging and investment needs.
What other benefits does clearing equity derivatives offer?
I believe it is fair to say that there is a whole range of benefits for our clients. First and foremost, there is the reduction of credit risk and counterparty risk as the products are centrally cleared on a CCP.
But there is more. You have clear and transparent margin calculations and netting benefits that allow for reduced margins and can make efficient use of collateral as CCPs tend to accept a wide range of collateral from sovereign bonds, securities, ETFs, to cash collateral. You also have robust default management protocols and waterfall mechanisms in place at the CCP level, which is important for many large asset managers. And of course, the operational burden of using a CCP is much lesser as most clearing brokers are already connected to the CCPs.