Clients with separately managed accounts (SMAs) that are engaged in derivatives trading pose several challenges for financial services firms.
This is especially true when it comes to sorting out client compliance levels in time for the onset of the uncleared margin rules (UMR) regime.
In mid-2019, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions made changes to the deadline structure for Phase 5 of the initial margin (IM) implementation of the UMR requirements. The regulators essentially split off a segment of Phase 5 — those firms with gross average notional amounts (AANA) of non-centrally cleared derivatives ranging from $8 billion to $49.9 billion — and gave this new Phase 6 group a deadline extension to Sept. 1, 2021.
At the same time, the regulators kept the IM go-live deadline of Sept. 1, 2020 for firms that have gross AANAs of non-centrally cleared derivatives that range from $50 billion to $749.9 billion. Previously, the AANA threshold for Phase 5 extended down to $8 billion.
Essentially, the firms with very large thresholds have to stick to the earlier deadline while the firms with smaller thresholds have more time to sort out their IM requirements under UMR, which is intended to reduce systemic risk and to move industry participants toward the central clearing of derivatives.
In the meantime, securities firms with clients that want SMAs have been moving quickly to determine how to serve their clients that are in scope for the UMR deadlines.
The process requires that first step of definitively determining that a client with SMAs is ultimately in scope for the UMR deadlines, says Jeffrey O. Himstreet, vice president and corporate counsel at PGIM Fixed Income, based in Newark, N.J.
“For clients that are in scope for initial margin, that really starts the process,” Himstreet says. The next step is to review a client’s documentation and determine if the client’s assets are being overseen by “a custodian that is independent from us as the manager as well as from any dealer that we’re trading with.”
Given the custodial requirements, the process “may require the amendment of existing custodial relationships,” Himstreet says. “It may require the engagement of a new custodian should the client’s existing custodian not be independent from either us [the manager] or from the dealer. So, there’s a lot of documentation that will become in effect for firms that are subject to the initial margin rules.”
Himstreet spoke to FTF News during the CMD Ops 2019 conference held this past November in New York City. Himstreet took part in the “When SMAs Are in Scope” panel.
Click on the YouTube image above to see the full interview.
Videographer and video Editor: Janene Knox
Interview conducted by Eugene Grygo, chief content officer, FTF News
Co-Producers: Sarah Hathaway, vice president, Financial Technologies Forum (FTF) and Eugene Grygo