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Navigating uncleared margin rules in FX

Foreign exchange forwards do not fall within the scope of uncleared margin rules, but that does not mean those rules have no effect on the FX business. Firms are having to consider the pros and cons of switching to cleared trades to avoid being impacted.


The fifth and penultimate phase of uncleared margin rules (UMR) went live in September 2021 for firms with aggregate average notional amount (AANA) of in-scope derivatives greater than 50 billion in dollars or euros. In addition to the notional thresholds, initial margin is required to be posted between counterparties where there is a consolidated threshold of $/€50 million.

According to Phil Hermon, executive director FX products at CME Group, this is likely to impact a large number of real-money accounts, such as asset managers and pension funds, who typically run large, directional books.

James Pearson, ForexClear.jpg
James Pearson, ForexClear

Asset managers and pension funds subject to UMR have to post initial margin for their uncleared derivatives. This initial margin is also required to be segregated in bankruptcy-remote arrangements, such as tri-party or third-party models.

James Pearson, head of ForexClear, says that although foreign exchange forwards are not in-scope for UMR, they do still count towards AANA calculations.

“This means firms trading OTC FX forwards are not required to post initial margin on FX forwards trades with their counterparties, but the FX forwards notional counts towards the determination of UMR phases,” he says.


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