APG, the €336bn pensions provider and asset manager, is studying the possibility of using swap futures – a derivative instrument under development in the US – as a means of cutting the cost of initial margins in central clearing.

Speaking with IPE, Thijs Aaten, managing director of treasury and trading, said the central-clearing requirements set under EMIR, the new EU regulation for over-the-counter (OTC) derivatives, could lead to much higher initial-margin costs for end-user clients such as APG.

Aaten added that, even though it is still “cheaper” to continue trading OTC derivatives bilaterally due to the European Commission’s temporary exemption for pension funds, APG sees potential benefits in swap futures.

“At the moment,” he said, “swap futures are not an attractive alternative because of the exemption from clearing requirements, which means no initial margin requirements currently apply to bilateral OTC derivatives.

“However, looking forward, if pension funds no longer benefit from the clearing exemption, then it will all go down to an economic choice where you have an exposure you want to hedge, and you have to look at the different alternatives available in the market.”

Aaten said he was closely following product offerings at ERIS Exchange, a US derivatives start-up specialising in swap futures, as well as at other institutions such as CME and Eurex, to assess what alternative products were being offered to the investment community.

“ERIS does not currently offer a European rate-based swap future and only offers US dollar interest rates at the moment,” he said. “APG welcomes the opportunity to help define the specifics of these new instruments.”

Both ERIS and CME in the US are offering swap futures, arguing that using such derivatives instruments, as opposed to traditional interest rate swaps, would help market players cut initial-margin costs set under the central clearing system.

After CME unveiled its new offering in September last year, Sean Tully, managing director of interest rate products, said: “Our customers will now have a complementary, standardised product that provides the advantages offered by futures contracts, including pricing transparency, the automatic netting of positions and margin savings.”

Banks and end-user clients such as pension funds and asset managers have complained about the “unfavourable” initial-margin requirements set for swaps compared with futures under regulations in the US and Europe.
• In other news, APG has introduced a platform for tailor-made administration of defined contribution (DC) plans for the new pensions vehicle PPI, as well as company schemes and insurers.

APG said the “advanced” system, called Lifetime, offered a high degree of self-service.

Under the client’s name, the platform can carry out any type of DC plan transparently, efficiently and cheaply, it said. Inadmin, another offshoot of APG, is to manage the platform.

APG stressed that clients would be free to pick their own insurers or asset managers, and that they could also purchase Inadmin’s services in modules or phases.

It said that Pensional – APG’s own PPI, run in a joint venture with ABN Amro Asset Management – would be its first client.

Pensional entered the market last year. According to Floris Schilthuis, its director, the new PPI has acquired approximately 25 clients with a combined staff of almost 10,000 so far.
He said he expected considerable growth in the coming years, adding that the PPI was intending to expand its services to other EU countries, as part of contracts with Dutch multinationals.

APG pointed out that Inadmin supported an open model for additional life insurance products, and had been designed to deal with market value-based arrangements.
“Insurance products can be flexibly managed if the contribution depends on investments in the policy,” it added.