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PGGM to start central clearing for repos [updated]

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The €215bn Dutch asset manager PGGM has confirmed that it will start carrying out part of its repurchase agreement (repos) transactions through central clearing.

It said that it had picked Eurex Clearing as central counterparty for its derivatives, providing it with an additional channel for cash as collateral for interest rate swaps.

Until now, PGGM – the asset manager and provider for the Dutch healthcare scheme PFZW – dealt directly with banks, but they have become increasingly reluctant regarding such deals due to financial buffers required by the European Markets Infrastructure Regulation (EMIR).

PGGM said it was the first pension fund manager to centrally clear its repos transactions.

EMIR rules mean pension funds must use central clearing for interest rate swaps, used for hedging interest risks on liabilities. Although pension funds have been temporarily exempted from the obligation, several schemes, including PFZW, have started experimenting with central clearing.

However, pension funds must hold much more cash as collateral – known as the variation margin – in case the value of the interest rate swap becomes negative.

In order to prevent a fire sale of investments to obtain collateral following a market shock, pension funds prefer to obtain cash through the repo market. The pension fund could, for example, sell government bonds to a counterparty for cash, while agreeing to repurchase the government paper as soon as possible.

PGGM said that the deal with Eurex, with its 140 affiliated counterparties, provided it with an alternative way of accessing liquidity. It added that the variation margin obligations for repos would be “many times lower” than for long-duration interest derivatives.

The asset manager also pointed out that, because of the short duration of the repos, fluctuations in market values would be limited.

Eurex’s partners not only comprise commercial banks, but also the European Central Bank (ECB), government-related credit banks and supranational organisations, including the European Investment Bank.

According to Max Verheijen, director of financial markets at risk manager Cardano, central clearing was particularly beneficial to providers who carry out multiple large transactions.

“Usually, central clearing is more expensive than a bilateral transaction with a bank,” he said. “In case of a low volume of repo trade, costs don’t outweigh the advantage of better access to cash.”

Societe Generale Prime Services is to act as a clearing agent for PGGM.

Eurex Clearing serves about 200 clients in 20 countries. It manages a collateral pool of €46bn, clearing monthly trades valued at €23trn.

Note: This article was updated on 28 January 2019 to amend references to Eurex’s partners.

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