HazelTree Looks to Get Ahead of UMR Phases 5 & 6 with AcadiaSoft Partnership

Phase five of the Uncleared Margin Rules (UMRs) for non-cleared derivatives, which applies to firms with an average aggregate notional amount (AANA) greater than $50 billion in their derivatives portfolio is set to go live September 1 of this year. As the threshold shrinks toward $8 billion next year, as part of the sixth and final phase, nearly all of the buy side will have taken on the cost of the new regulation—and the riskier they are, the more they’ll have to pay.

Prior to the rules, banks imposed collateral requirements known as independent amounts—the price of which were solely up the banks—on their riskiest counterparties, which were primarily hedge funds. Under UMR, banks are required to charge all their counterparties, and collateral will be bilaterally exchanged across the buy side and sell side. The price of that collateral will be prescribed by the regulation now, and will have to be in accordance with a standard initial margin model (SIMM) risk model or a standard schedule, which lays out a percentage of notional for each different trade type.

Asset managers will have to either develop a solution in-house, or outsource the calculations that come with UMR—a task that could pose even greater challenges to smaller players with fewer resources. Some vendors are stepping in to assist, such as HazelTree, a buy-side treasury and portfolio finance solutions provider.  

“Logically, you would assume that buy-side counterparties would want to reduce their total overall risk within their portfolio to reduce the amount of collateral that they’ll have to post, and there are ways they can do that through portfolio compression and additional clearing of trades,” says Joseph Spiro, director of product management at HazelTree. “I think it’s largely anticipated that you would see a move toward clearing. That being said, clearing has been mandatory for a long time, and there are certain positions that just cannot be cleared. So it’s unlikely that clearing is going to eliminate the non-cleared derivatives market.”

The SIMM calculation is complex, requiring parties to calculate all the risk sensitivities within their portfolio, and it’s a process that isn’t technically within the buy side’s core competency, Spiro says. To help ease this particular burden, the company has recently partnered with AcadiaSoft, a provider of risk and collateral management services for the non-cleared derivatives industry.

Under the partnership, HazelTree already has their clients’ trade data, which they format to make compatible with AcadiaSoft’s service, and deliver the data to them. AcadiaSoft performs the risk calculation and feeds the SIMM number back to HazelTree, which then takes over the margin call and collateral workflow, before finally moving both parties’ collateral to a third-party custodial account (another new requirement per UMR).

HazelTree, which bought ENSO Financial Analytics—a portfolio analytics provider for hedge funds and prime brokers, previously owned by CME Group—in October, is in the process of integrating those acquired solutions in order to ramp up its tech capabilities in portfolio finance.