State Street Survey Finds Firms Unprepared to Comply with Uncleared Margin Rules Despite Deadline Extension
September 15 2020 - 7:30AM
Business Wire
Survey reveals that 81% of firms lag in preparations to
comply
State Street Corporation (NYSE:STT) today released survey
results that measured the perceptions, plans and readiness of 300
asset managers and asset allocators in 16 countries around the
Uncleared Margin Rules (UMR), which were set in motion in 2008 to
reform the over-the-counter (OTC) derivatives market following the
global financial crisis. The survey revealed that 81% of
institutions with a September 2021 (Phase V) or September 2022
(Phase VI) deadline are unprepared to comply with all facets of
UMR.
“UMR signifies a major change in the industry that aims to bring
greater stability and transparency to the OTC derivatives market,”
said Nadine Chakar, head of State Street Global Markets. “As we
approach the deadline for the next phase, it is critical for
buy-side firms of all sizes to be aware of the pending requirements
and to not only effectively manage, but optimize, their liquidity
and collateral needs with the right solutions and technology in
place.”
The survey found that roughly a year away from the next
deadline, which was extended due to COVID-19, firms remain
primarily unprepared for the different aspects of the regulation.
Key findings include:
Institutions are in different stages of compliance preparedness
by both phase and function:
- The vast majority (86%) are preparing for Phases V or VI,
representing the significant proportion of buy-side firms coming
under the purview of UMR in the next two years. These institutions
face a steep learning curve as many are unfamiliar with Initial
Margin (IM) rules and operations.
- For those in the preparation stage, only 19% say they are fully
prepared for compliance. 42% are preparing in all relevant
functions, while the remaining 39% have begun preparations in just
a few areas.
- Nearly 8 in 10 have not agreed on how to approach settling
segregated collateral with counterparties. As it stands,
third-party custody with account control agreements remains the
favored approach amongst respondents. Many firms underestimate the
difficulty associated with compliance with UMR. While 68% of those
preparing for compliance are very confident in their ability to
handle the new workflows, 80% of those in compliance said they
faced challenges in incorporating them.
As institutions continue toward the compliance stage, half
expect these requirements will ultimately have a positive impact on
overall operations. 40% of the smaller firms surveyed anticipate a
negative impact, compared to just 20% of larger firms. Public
pensions were most likely to expect a positive impact, while
corporate pensions were most likely to anticipate a negative
impact.
Institutions are using mitigation strategies and have turned to
third parties to ease the burden of complying with UMR:
- 80% of those in compliance functions have indicated that they
have faced some degree of challenge in incorporating new workflows.
To ensure on-time compliance, the majority of firms are employing a
mix of in-house capabilities and outsourcing to third parties with
operational expertise.
- 56% of firms are planning to adjust strategies by reducing OTC
contracts to limit the impact of UMR. For those already in
compliance, 80% reported a reduction. The majority are using
compression strategies to limit UMR’s impact. Firms will seek
various optimization strategies with third parties.
“The key to any regulatory compliance is to look at all the
requirements and objectives holistically,” said Gino Timperio, head
of Funding and Collateral Transformation at State Street. “While
it’s tempting to circumvent the complexity of UMR by simply
reducing the volume of in-scope contracts, I’d argue this approach
is short-sighted. Recent market volatility underscores the need to
consider collateral, funding and liquidity at a firm-wide level,
and buy-side firms should adopt a strategic approach to UMR
compliance, with the right external support to manage some or all
components of the process.”
Oxford Economics fielded the survey on behalf of State Street in
June 2020. To learn more about the report and how to best prepare
for these transitions, please click here.
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors
including investment servicing, investment management and
investment research and trading. With $33.52 trillion in assets
under custody and/or administration and $3.05 trillion* in assets
under management as of June 30, 2020, State Street operates
globally in more than 100 geographic markets and employs
approximately 39,000 worldwide. For more information, visit State
Street's website at www.statestreet.com.
*Assets under management as of June 30, 2020 includes
approximately $67 billion of assets with respect to which State
Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as
marketing agent; SSGA FD and State Street Global Advisors are
affiliated.
iState Street engaged Oxford Economics to field a global survey
of 300 industry executives from 16 countries during June 2020.
© 2020 State Street Corporation - All Rights Reserved
Expiration Date: September 30, 2021
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Brendan Paul Bpaul2@statestreet.com +1 401 644 9182
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