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What You Need to Know About Uncleared Margin Rules



Have you failed to price your offers correctly before publishing them? The unintended consequences of the uncleared margin rules can hit your bottom line if you’re not careful.

Make sure you crunch the numbers before you create and publish your offers. If you don’t price products correctly, your organization may need to destroy items that are returned. You can also be fined or charged storage fees.

Don’t let this happen to your business. Read on to learn about the uncleared margin rules and how to avoid these mistakes.

What Is UMR?

In September 2013, the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) jointly issued final rules to establish standards for clearing swaps between clearinghouses and clearing members. These standards are commonly known as the uncleared margin rules.

The uncleared margin rules require clearing members to collect and post initial and variation margins for non-cleared swaps with their counterparties. The rules also need clearing members to exchange collateral daily to reflect changes in the mark-to-market value of the non-cleared swaps.

The uncleared margin rules protect investors and promote fair dealing in the securities market. Under these rules, firms that hold securities on behalf of clients must segregate those securities from the firm’s proprietary account.

This segregation ensures that the client’s securities are not used to cover the firm’s losses in the market. In addition, the rules require firms to provide customers with information about the risks associated with uncleared securities and to obtain customer consent before entering into transactions in uncleared securities.

What Are the Key UMR Dates?

On July 21, 2010, the Dodd-Frank Act became law. This law set up the CFTC and gave them more power to regulate swaps and other over-the-counter derivatives.

The CFTC’s Uncleared Margin Rules went into effect on May 1, 2013. With these rules, parties must post and collect the initial margin and variation margin for swaps that are not clear.

The initial margin has to be paid on the date of the trade, and the variation margin has to be paid on the date of the value. There are some exceptions to these rules, but most uncleared swaps follow them.

Most financial firms will have to follow the Uncleared Margin Rules (UMR) starting September 1, 2020. These rules were set by the Commodity Futures Trading Commission (CFTC).

The UMR will require firms to put up an initial margin and variation margin for all non-cleared swaps with counterparties who are not subject to the Prudential Regulators’ banking regulations.

On December 1, 2019, firms regulated by the CFTC will have to start meeting the documentation requirements of the UMR.

On March 1, 2020, firms regulated by the CFTC must start exchanging variation margins with counterparties that are not subject to the Prudential Regulators’ banking regulations.

On September 1, 2020, firms regulated by the CFTC must start exchanging initial margins with counterparties that are not subject to the Prudential Regulators’ banking regulations. This is the start of Phase 5.

What Are the Requirements for UMR Compliance?

Firms will have to put up an initial margin and variation margin (IM and VM) for all derivatives contracts that are not cleared centrally, even if the total notional value is less than €8 billion.

The rules will also apply to FX forwards and swaps that are settled in cash. Unless an exemption exists, firms must get IM from their counterparties and send them VM.

UMR comes in two main types. Margin rules that aren’t clear for financial counterparties and margin rules that aren’t clear for counterparties that aren’t financial. Firms will have to follow both, but the requirements for each type of firm are different.

Under the new rules, all trades between unclear counterparties will require financial institutions to collect and post an initial margin. The initial margin will be calculated using a standard method, which will consider the risk of the trade. Also, financial institutions will have to collect and report variation margins daily.

Click here to learn more about these uncleared rules, their regulations, and how they should be approached.

What Are the Benefits of Complying With Uncleared Margin Rules?

Two types of benefits come from following the rules about uncleared margin. First, it eliminates the swap entity’s risk with the other party. Second, it makes swaps that have been cleared and swaps that have not been cleared play on the same level.

With the initial margin that the uncleared swap entity put up, the cleared swap entity will be able to get back its losses if it goes into default. This means that the market will be able to keep running smoothly in the future.

Also, the need for collateral helps ensure both parties have the money they need to pay for the transaction. This makes it less likely that one of the parties won’t be able to do what it needs to do.

What Happens if You Don’t Follow Uncleared Margin Rules

To trade stocks with a margin account, you must follow a set of rules called the Uncleared Margin Rules (UMR). The account could get a Margin Call if these rules aren’t followed.

A margin call is when a broker tells an account holder they need to deposit more money to cover losses or make the account more valuable. If the account owner doesn’t make the minimum deposit, the broker may close the account and use the money to compensate for their losses.

If the account has a negative balance, the person who has the account is responsible for making up for it.

Uncleared Margin Rules: Bottom Line

As a rule of thumb, always keep your uncleared margin rules in mind when trading in the stock market. Not only will this protect you from making mistakes, but it will also save you from incurring significant losses.

When in doubt, consult with a financial advisor to get clarification on anything you don’t fully understand.

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