Understanding and monitoring the Average Aggregate Notional Amount (AANA) calculations as early as possible can provide firms caught by the Uncleared Margin Rules (UMR), with an opportunity to reduce business costs and optimise trading exposure, according to Cassini’s CEO and founder, Liam Huxley.
"Effective AANA management provides an opportunity for Phase 5 firms to take steps to move themselves into Phase 6, and the opportunity for Phase 6 firms to review or modify trading behaviour , to get themselves out of scope of UMR,”, Huxley says.
“It’s not a trading opportunity, but what AANA does is act as a trigger to bring you into scope for the UMR rules, which means that on all bilateral OTC trades you have to calculate SIMM Initial Margin and then operationally support two-way margining on those agreements. That is a significant operational overhead and also a material business cost due to the added carry cost of collateral required to meet the SIMM margin requirements.”
AANA is the amount of a fund manager’s total outstanding notional amount of in-scope, non-cleared derivative positions during a specified period on a gross notional basis. The AANA value is consistently used to determine whether a firm is in-scope for UMR, although the way in which it is calculated differs between regulators and jurisdictions.
The UMR have been introduced to the market in phases since 2016 based on the AANA exposure of firms starting with the largest firms and slowly widening in scope. The first four phases were initiated each year from 2016 to 2019.
In 2020, due to the disruption caused by the coronavirus pandemic, Phase 5 and 6 were delayed by one year, with the fifth phase beginning September 1, 2021, while sixth will commence September 1, 2022. These last two phases are expected to bring about 1200 firms into scope.
For Phase 5 firms, this is now an opportunity to review their AANA levels and determine if they can push back their compliance phase into Phase 6, says Huxley. And for firms who have already established that they fall into Phase 6 there is time to review and modify trading behaviour, as well as balancing exposure across counterparty agreements to maximise the benefit of the SIMM margin posting thresholds. This aspect of the UMR means that firms don’t have to post collateral on agreements where the calculated initial margin is below $50m or equivalent. Firms utilising their counterparty relationships to maximise this ‘collateral free’ trading level can produce very significant savings in funding costs.
“The opportunity with AANA is to understand and monitor your AANA as early as possible and then use that information to look at how you can optimise your trading book to reduce your exposure,” adds Huxley.
“If you know what your AANA is before the official observation period, you can then look at taking trading steps to optimise the portfolio and reduce the AANA. The most obvious area to look at is which trades in your portfolio might be clearable, but not mandatory.”
Huxley stresses that calculating AANA should not be an annual event but a continuous monitoring process. Doing so allows those affected to manage risk effectively while simultaneously focusing on potential optimisation opportunities, he says.
“At Cassini, we help by providing a very clean, low cost, easy to use AANA monitoring tool. If you want a one-off AANA run, we don’t even charge you for it. We take the portfolio; we’ll tell you what your AANA exposure is and we’ll tell you what your potential for optimisation and savings are.
“The key thing is to monitor it as early as possible and then look at optimisation opportunities on the portfolio to adjust and bring that AANA below the UMR thresholds. We recommend that this should be an ongoing monitoring (at least monthly); it shouldn’t be just once a year that you run the calculation.
“That is so you always know what your overall exposure is and also where the components of that exposure sit. Clarity on the components and drivers of your AANA exposure allow you to make the right portfolio decisions.”
While Huxley calls AANA a “fairly coarse” calculation which creates a simple estimate of risk, it is made more complicated by the responsibility for calculating AANA falling on the shoulders of the overall beneficial owner who may use multiple fund managers. On the face of it, calculating and managing AANA should be very simple but it can be a burdensome process which uses up significant internal resources to correctly marshal and aggregate the data and produce the optimisation analysis.
“One big challenge we’re seeing in some firms is with data collection and communication between the overall beneficial owner and the actual fund manager managing the portfolios. That’s something that again, Cassini can help with by acting as the central aggregator for the various external portfolio information and applying the jurisdictional logic to ensure accurate reporting of AANA.”