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Average aggregate notional amount calculation window for UMR opens in March

Average aggregate notional amount calculation window for UMR opens in March

By Phil Hermon, CME Group

The countdown has begun

New Year, another new phase for the uncleared margin rules (“UMR”) scheduled, and this time with a materially lower notional threshold. In preparation for this next phase of UMR, the process of the Average Aggregate Notional Amount (“AANA”) calculation begins this Spring and will require the participation of a large number of both sell-side and buy-side firms.

The calculation of the AANA is arguably ‘Step 1’ in preparing for the UMR; it is the calculation to see if and when your firm is directly impacted by UMR and as such should be a key area of focus for any entity not already directly impacted by Phases 1-4, but who are actively trading OTC derivatives today. In short, the outcome of the AANA will determine whether or not an entity will be directly impacted by the UMR in Phase 5, which is scheduled to commence in September 2020.

Feedback from market participants suggests that the next threshold for UMR compliance is now broadly understood – with Phase 5 being 50bn in 2020 and Phase 6 being 8bn in 2021. However, the understanding of what, and when the AANA calculation is performed appears to be far less well understood, and as such, so do the potential tools to help mitigate the impacts of the process.

Our goal is to help market participants understand, navigate and develop the best solution for their business. As such, we’ve put together this simple guide to recap and clarify the measurement rules and share our experience of how market participants are managing their commitment to compliance.

 

The Facts: What

  • The AANA is the sum total of gross notional of all outstanding non-cleared derivatives, including trades intermediated with a prime broker
    • In terms of products, the AANA calculation includes, but isn’t limited to, bilateral Interest Rate Swaps & Swaptions, Deliverable FX FWDs, FX Swaps, FX options and NDFs
    • Note that even though Deliverable FX FWDs are not subject to the Initial Margin requirements as part of UMR, they do count towards the AANA calculation
  • The thresholds mentioned above (50bn & 8bn) are in USD for US entities and in EUR for European entities - there is no FX rate conversion for the different thresholds

The notional of listed futures & options as well as OTC cleared trades are exempt from the AANA calculation (and are also exempt from any subsequent ISDA SIMM Initial Margin requirements).

 

The Facts: When

  • The calculation period is March, April and May of 2020 & 2021
    • For US firms, they must take an average of every business day during the calculation period
    • For European firms, they must take an average of the last business day of each month in the calculation period
  • If your AANA is above USD/EUR 50bn in the period March-May of 2020 then you are impacted by compliance with UMR Phase 5 which begins September 1st 2020
  • If your AANA is above USD/EUR 8bn in March, April and May of 2021 then you will be impacted by compliance with UMR Phase 6 which begins September 1st 2021

 

Managing the Measurement: What we’ve learnt

Feedback suggests that FX FWDs and Swaps are likely to be large contributors to uncleared notional amounts and as such these may be products to:

  • Compress – via services like TriOptima
  • Clear – via Listed FX Futures and/or OTC clearing services.

Accelerating client growth in the use of both bilateral FX compression and the adoption of cleared FX products appears to support this feedback and suggests that there is a growing number of customers taking pro-active steps to help optimise the impact of UMR on their trading activity.

 

Managing the Measurement: What we’ve seen in our markets

Examples of this client growth include the following milestones, all achieved in the period Dec 2019 – Jan 2020:

  • New record for FX FWDs compression of $9.1 trillion during 2019 via TriOptima
  • A new single daily volume record in FX Futures of $282 billion notional (2.7 million contracts) in January 2020
  • Open Interest in FX Futures at a record high (2.3 million contracts) in December 2019
  • Record number of Large Open Interest Holders in FX Futures at 1,265 in January 2020 (up 14.7% year on year)
  • Continued volumes in OTC cleared FX across 24 pairs (all 11 NDFs and 23 FWDs) – and with >70% of volume in the FWDs
  • FX Link (cleared proxy / alternative for FX Swaps) all-time record contracts traded on January 2nd 2020, equivalent to $4.1bn in a single day

If you would like to discuss any of the themes detailed here, or any of the ways market participants are managing and optimizing their UMR requirements, please contact: [email protected] or your CME account representative.

Or, for more information on UMR, visit cmegroup.com/umr.

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