How to leverage UMR compliance to achieve genuine transformation

How to leverage UMR compliance to achieve genuine transformation

How to leverage UMR compliance to achieve genuine transformation

How to leverage UMR compliance to achieve genuine transformation

The regulatory push of the last decade has shaped the collateral space in a way that promoted the emergence of many service providers in collateral management in general and regulatory compliance in particular.

Typically, financial institutions in scope for UMR waves 5 & 6 need to define their collateral and liquidity strategy and assess the different options available to streamline the compliance journey as much as possible, in a context of insufficient internal resource capacity and the high volume of change required.


The journey begins by identifying when firms are in scope through the Aggregate Average Notional Amount calculation (AANA) and estimating the level of Initial Margin with each counterparty through ISDA SIMM or GRID methodology computation.

These calculations help firms to further explore possibilities to either drive down the AANA or reduce the IM level using techniques such as trade compression or moving trades to clearing through Central Counterparty Clearing (CCPs). The same calculations could, in certain cases, impact trading strategies when the cost of compliance is deemed too high.

At this stage, firms should know whether they will be breaching the 50M threshold or to what extent they will be close to it:

  • If the IM is substantially below the 50M threshold then firms need to monitor it by setting internal thresholds and an automated alerting mechanism to continuously track breaches over time.
  • If the IM is above or close to the 50M threshold, then firms need to define their strategy for the segregated IM custody accounts (Third Party Custodian or Triparty Agents) and establish the way they will reconcile sensitivities. They need also to negotiate the legal documentation with their custodian and counterparties.


With each step of this journey, the in-scope financial institutions will have to select the most suitable operating model to support requirements:  

  • Internal build: This option may be costly but could make sense if the firm would like to closely control certain functions such as inhouse analytics for sensitivities calculation.
  • Outsourcing to a Fund Administrator or Investor Servicer: In this case firms would completely externalize the operational and technical functions. It makes sense to leverage existing relations because most of those servicers have added UMR compliance to their offering.
  • Using a third-party software solution: This could be a natural extension of the solution already used for collateral management especially if the software provider has developed the features needed to comply with UMR.
  • Contracting a SaaS service: In this model the IT infrastructure, software solution and overall technical monitoring is outsourced to a SaaS provider, while operations are kept internally. This could be cost efficient; Although firms need to carefully assess data security and segregation with this option.


Looking to the landscape of financial institutions involved in UMR waves 5 & 6, there isn’t a unique model that fits all businesses and strategies. In certain cases, it makes sense to mix a combination of models.

Strategically, the model chosen should take into consideration a longer-term view because the journey of transformation will not end with compliance with UMR. Firms will still be pressurized to reduce the collateral cost and therefore will look to achieve more automation, higher operational efficiency and further standardization to reduce operational frictions and their associated risks.

The new IM requirements will further stress inventories and liquidity. Optimizing the utilization of the inventories is not a nice-to-have anymore but rather a must have once UMR wave 5 hits.


At VERMEG we think that it is possible to leverage UMR compliance to pave the way for future transformation. We can help in every level of the value chain. That’s why we launched Colline.Cloud, a cost-efficient end to end collateral management service via SaaS.

If you need more details on Colline.Cloud please reach out to us, we will explore how we can help in your UMR compliance journey and beyond.


Collateral Management Solutions Director

Wassel Dammak, Director, Collateral Management Solutions at VERMEG