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IPE special report May 2018

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Pension funds 'lack discipline' in derivatives, says Euroclear

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  • Pension funds 'lack discipline' in derivatives, says Euroclear

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EUROPE – Euroclear has warned that new rules in Europe will force pension funds and assets managers to be more disciplined with their derivatives trades in future.

Speaking at the annual International Capital Market Association (ICMA) conference in Copenhagen, Jo van de Velde, managing director and head of product development at Euroclear, said the new rules set by Brussels in the European Market Infrastructure Regulation (EMIR) would not necessarily lead to a shortage of collateral, contrary to what a number of market players have argued recently.

"I don't believe there will be a crunch of collateral in the future," he said. "There is enough collateral, with €1trn of quality collateral currently available to be lent. But it is simply a question of ensuring you have the right collateral at the right time and at the right place."

According to him, the best way to keep track of the collateral is to "optimise and organise" it across markets and locations.

He went on to say that the real issue lied in the operational process, as a large number of new parties would now be involved in derivatives trades, ultimately requiring greater discipline from market participants.

"Today, the sell side is very well organised, but the collateral margins that are called on the buy side, such as asset management firms and pension funds, is not as straight," he said.

"It sometimes takes them one day or even two days to collect the collateral. But as soon as they have a central counterparty involved in the deal, this will be clock-work."

Van de Velde pointed out that the clearing house – also called a central counterparty (CCP), standing in the middle of the derivatives trade between the bank and the pension funds or asset manager – will often require initial margins within the day, with mark-to-market valuation calls.

He added that some CCPs required intra-day calls.

Under EMIR, which came into force earlier this year, derivatives market participants will be required to process their trades through a clearing house, as opposed to bilaterally, as is currently the case.

One of the requirements set in EMIR focuses on risk-mitigation techniques, which mean pension funds must put in place processes to ensure timely confirmations of transactions by electronic means, as well as introduce processes for robust, resilient and auditable portfolios.

Pension funds will also have to mark-to-market outstanding contracts on a daily basis while segregating their collateral, and have sufficient amounts of capital to ensure their collateral exchange.

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