Dutch pension funds should prioritise setting up frameworks to manage liquidity risk, according to the country’s financial regulator.

In its newsletter, it said it had discovered that, in the event of a sharp increase in interest rates, a large number of pension funds would lack the funds to meet counterparty collateral requirements.

The watchdog, which examined the investment reports of all 300 pension funds, said it had assumed current swap portfolios would be fully cleared, as required by the European Market Infrastructure Regulation.

Pension funds have been exempt from the requirement to conclude their contracts with central counterparties until 16 August 2017.

They have opposed mandatory central clearing, as these clearinghouses usually demand cash as collateral.

The Dutch regulator warned that non-cleared swap transactions were coming with ever-higher collateral demands.

It also argued that currency hedges posed liquidity risk, as a consequence of the often short duration of the swaps and the fact they must also be paid in cash.

The regulator said pension funds should prepare for the expiration of the exemption of the central clearing requirements and the changes on the OTC market – by seeking alternatives for non-cleared derivatives, for example.