Waves 5 and 6 of Uncleared Margin Rules

During the UMR panel at the 2025 CDB AG Collateral Conference in Brussels, panellists agreed that the custody, clearing and settlement industry is now facing a situation where a huge proportion of the work that is needed to be done will have to be completed over the next two years. And much of the burden will fall on smaller buy-side firms who lack the resources to do it.

The scope of what the industry is looking at can be seen in data prepared by the International Swaps and Derivatives Association (ISDA). During waves 1-3 of UMR, only some 34 global asset managers come under the scope of UMR. But waves 4 and 5 will see that expand to 1,200 firms, who between them will have some 9,500 counterparty relationships, each of which requires new sets of documentation.

During the UMR panel discussion, representatives from the custodian segment expressed concern that the scale of the challenge has yet to dawn on a lot of the buy side, especially in Europe.

One only has to look at the struggles experienced by firms in 2017 when they had to implement the then new variation margin rules to understand the enormity of the challenge facing firms in waves 4 and 5. The legal aspect of UMR will be several times more complex and generate several times more administrative workload – and not just for back-office staff.

So what precisely do asset managers need to do? According to several of the margin experts on the UMR panel at the CDB AG conference, the list of actions is extensive.

Firms need to set up segregated accounts both for what they are collecting and for what they are posting. They need new Credit Support Annexes (CSAs) covering Initial Margin (IM), in which firms need to agree how they will calculate IM, the eligible collateral, the haircuts, how Non-Transferrable Assets (NTAs) will be broken down, how thresholds will be split, and how they are going to separate regulatory and non-regulatory IM.

Furthermore, not all transactions will be subject to the rules. There is concern from within the industry that identifying in-scope transactions will be much more challenging than people anticipate. For instance, equity options are out of scope in the US and Singapore, but in scope in Japan, Canada, Australia and Brazil, while there are temporary exclusions on them in the EU, Hong Kong and Korea. The regional differences will certainly only add to what is already shaping up to be a very complex implementation.

While conceptually the rules are fairly simple, the two areas that will take the longest will be the legal necessity to negotiate and agree hundreds of new documents, and then the operational and IT changes to automate what is agreed. The clear examples of what happened in waves 1, 2 and 3 show that it is these practicalities of implementation that take the most time.

One of the UMR panellists referred to phase 1, back in September 2016, ‘as a fire drill’ for the upcoming waves. Indeed, all panellists agreed that, at a basic level, the exchange of margin is a fairly benign business and it happens all the time. But the 2016 Standard Initial Margin Model (SIMM) requirements asked for a lot more than just a standard variation margin exchange.

Waves 1 to 3 showed that firms needed new documentation, new customer selection, fresh understanding of collateral eligibility risk and collateral optimisation. The implementation of these waves also included a huge amount of tech and infrastructure changes for the IT and operational teams within firms. Firms needed to implement changes that allowed them to differentiate SIMM from non-SIMM requirements as well as how this information was fed into systems subsequently reported.

For the majority of the UMR panellists at the CDB AG conference, the work did not stop once the wave of implementation passed. Adhering to, reporting and managing the process also proved to be intense. With firms suddenly exchanging much more margin, many more disputes have arisen, which had to be monitored and managed through operations.