OpenGamma: uncleared margin rules could increase cost of financing margin
20 September 2018 London
Image: Shutterstock
New uncleared margin rules that are due to take effect in September 2019 and 2020 could increase the cost of financing margin by up to 10 times, according to findings released by OpenGamma, an analytics company.
Peter Rippon, CEO at OpenGamma, said clearing sooner rather than later is essential to avoid the impact of new unclear margin rules.
Rippon said: “Pension fund managers already under cost pressures could save a staggering 50 percent in initial margin costs. These firms need to work out how to not only post margin, but how to optimise it across their counterparties.”
Euro derivatives trading costs are set to spiral out of control with clearing soon to become a reality for thousands of pension funds, said OpenGamma.
The firm’s findings show a tenfold increase in the cost of financing margin for 30-year euro swaps ranging between 5.7 basis points (bps) and 8.4 bps.
With average bid-offer spreads for euro swaps around 0.8bps currently, OpenGamma described this as a major blow to pension fund managers already under significant operational cost pressures.
OpenGamma noted that the uncleared margin rules, which force all financial institutions with a notional amount of non-centrally cleared derivatives greater than €1.5 trillion to exchange margin, are phased in every September.
A further 10 firms are expected to included, joining the big investment banks already clearing.
This latest batch is just the tip of the iceberg, however, it added. Between 100 and 250 buy-side firms, including pension funds, are set to be dragged in next year and 1,000 to 2,000 firms pulled into the 2020 tranche.
Rippon said: “While a few market participants will be caught out this month, the real big bang for pension funds is still to come. A monumental headache awaits, as numerous investment managers will be carrying out huge amounts of work all at the same time.”
He added: “Let’s face it, this is probably not what the rule makers had in mind when they devised this phased in approach.”
Rippon concluded: “Even in the unlikely event that the European Securities and Markets Authority extends the mandatory clearing deadline, pension funds still have to post uncleared margin. But no pension fund wants to be posting two to three times more margin than they need to.”
Peter Rippon, CEO at OpenGamma, said clearing sooner rather than later is essential to avoid the impact of new unclear margin rules.
Rippon said: “Pension fund managers already under cost pressures could save a staggering 50 percent in initial margin costs. These firms need to work out how to not only post margin, but how to optimise it across their counterparties.”
Euro derivatives trading costs are set to spiral out of control with clearing soon to become a reality for thousands of pension funds, said OpenGamma.
The firm’s findings show a tenfold increase in the cost of financing margin for 30-year euro swaps ranging between 5.7 basis points (bps) and 8.4 bps.
With average bid-offer spreads for euro swaps around 0.8bps currently, OpenGamma described this as a major blow to pension fund managers already under significant operational cost pressures.
OpenGamma noted that the uncleared margin rules, which force all financial institutions with a notional amount of non-centrally cleared derivatives greater than €1.5 trillion to exchange margin, are phased in every September.
A further 10 firms are expected to included, joining the big investment banks already clearing.
This latest batch is just the tip of the iceberg, however, it added. Between 100 and 250 buy-side firms, including pension funds, are set to be dragged in next year and 1,000 to 2,000 firms pulled into the 2020 tranche.
Rippon said: “While a few market participants will be caught out this month, the real big bang for pension funds is still to come. A monumental headache awaits, as numerous investment managers will be carrying out huge amounts of work all at the same time.”
He added: “Let’s face it, this is probably not what the rule makers had in mind when they devised this phased in approach.”
Rippon concluded: “Even in the unlikely event that the European Securities and Markets Authority extends the mandatory clearing deadline, pension funds still have to post uncleared margin. But no pension fund wants to be posting two to three times more margin than they need to.”
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