Hedge funds risk being caught in Phase 6 of the Uncleared Margin Rules (UMR) without adequate preparation owing to continued uncertainty over whether they are in scope, according to a report from Acuiti.
In the face of a “perfect storm” of increased margin requirements, funds are also being impacted by market volatility, which is forcing them to meet collateral demands through negative steps, such as holding back cash or assets or reducing margin-intensive strategies, that reduce fund performance.
The report, Margin Management for Hedge Funds: An Increasingly Complex Calculation, was commissioned by Cassini Systems, and based on a survey and series of interviews with senior executives from derivatives-focused hedge funds.
The report found that recent market volatility, combined with the upcoming final phase of UMR, has significantly increased initial margin requirements for firms trading all assets, from bilateral to listed and cleared instruments. More than two-thirds of respondents said that margin requirements had increased over the past three years, with a third saying that they had increased significantly.
Overall, the report found that hedge funds are becoming much more sophisticated in how they manage, calculate and process collateral because of the increased margin requirements. Margin is playing a significant role in trading decisions, with 78 per cent of respondents considering margin when deciding where to trade, and 30 per cent having a view of margin impact available at pre-trade.
However, there is still some way to go on the road to margin efficiency, with just 13 per cent aggregating and analysing margin requirements intraday.
This uncertainty of whether firms are in scope for UMR phase 6 or can get themselves under the threshold is creating a significant risk that funds will be caught out late if they do not act now to reduce uncleared exposures or more accurately model and manage their current portfolios.
These new regulations come at a time when margin requirements are rising across the board for hedge funds. The collapse of Archegos Capital Management in March 2021 has led to stricter enforcement of margin policies and, in some instances, increased margin requirements for hedge funds from prime brokers, the report found.
