In September of 2021 we published an article considering whether Phase 5 of the uncleared margin rules (“UMR”) would be “a real challenge for real money?”. We included analysis from OpenGamma to help illustrate the potential initial margin efficiencies of using CME listed FX options over holding those same positions bilaterally with margin calculated using the ISDA SIMM model (the efficiencies ranged from 39% to 86% on the positions calculated by OpenGamma).

These efficiencies can in part help to explain the all-time records we have seen in our listed FXO in recent weeks (e.g. all-time open interest records in AUD, CAD, and MXN FX options) along with strong overall growth for listed FX options in Q4 of 2021 (with FX options volumes up 18% year-on-year and average open interest up 34% year-on-year). However, it is worth noting that UMR is not the only tailwind for listed FX products, with banks citing capital efficiencies (be that SA-CCR, RWA, or CCAR) and customers also citing benefits including removal of counterparty credit risk and ease of access given no need for an ISDA.

During December, a new ISDA SIMM model came into force. ISDA SIMM 2.4 is now the governing model and has several fairly material changes that may impact the initial margin requirements clients affected by UMR have to post. The headline changes incorporated in to ISDA SIMM 2.4 for FX products includes the inclusion of COVID-19 related market volatility from Q1 2020, certain currencies being labelled as “high volatility” with higher associated risk weights (these include BRL, MXN, and ZAR), and the vega weighting component receiving a more than 50% increase (serving to increase the IM on FX options). Clarus provided a more detailed update on the changes included within ISDA SIMM 2.4 – their article can be found here. Based on their analysis of seven different portfolios, they concluded that the new model would result in a >10% increase in the regulatory IM required for most portfolios.

In December 2021, OpenGamma reran some FX options-centric analysis considering the IM that would be required for the position held as a listed FX option at CME versus a bilateral position margined using ISDA SIMM 2.4. The numbers below are a subset of that analysis and assume a non-delta hedged portfolio of EUR/USD FX options totalling $10 million notional, held across five counterparts for the bilateral scenario. Material efficiencies for the listed portfolio can be seen across all the four scenarios below, with the most stark difference being on the long call positions where the CME model for listed FX options uses the concept of “equity style premium”, meaning that the premium paid shows up as a “credit” that is offset against the margin required – which in these scenarios resulted in the long holder having to pay zero IM, whilst in the bilateral world they would have to pay both the premium to the short holder as well as the regulatory IM calculated by ISDA SIMM.

The one off/tactical impacts of UMR (e.g. setting up new ISDAs and custodial arrangements) combined with the ongoing tasks that require resourcing (e.g. daily calculation, reconciliation, and funding of IM) may well present real challenges to real money accounts and indeed to a wider variety of customers – especially as Phase 6 of UMR (with a $/EUR 8 billion threshold) comes in to effect in September of 2022. The use of listed FX products to remove the gross notional of those trade from the AANA calculation and to help optimize the initial margin requirements is one potential solution open to customers across all segments and is a marketplace already with significant liquidity and activity (customers were holding 1,262 large open interest positions in CME listed FX and with total open interest in CME listed FX of $259 billion as of January 11, 2022). If you would like to conduct any bespoke initial margin analysis on your FX portfolios, we welcome any enquiries. Please contact fxteam@cmegroup.com or visit cmegroup.com/fx. To find out more about OpenGamma, please visit https://opengamma.com/.

* This article and its themes are applicable to institutional investors in USA, UK, France, Netherlands, Spain, Italy, China, Hong Kong, India, Japan, Singapore, South Korea, Taiwan, and Australia.