The cost of using derivatives is set to climb by as much as 10 times current levels under new European rules, according to analysis firm OpenGamma – and pension funds should act soon.
Under the European Markets Infrastructure Regulation (EMIR), counterparties for a range of over-the-counter interest rate and credit default derivatives will be required to use clearing houses.
Pension funds have so far been exempt, but European regulators have yet to agree whether this exemption will be extended, or for how long.
OpenGamma said its research showed that new margin rules for uncleared over-the-counter (OTC) derivatives under EMIR could increase the cost of financing by up to 10 times.
Pension funds, many of which could be drawn into scope of the new rules from September 2019, could save 50% in initial margin costs by choosing to clear voluntarily before the rules come in, the firm said.
Peter Rippon, OpenGamma’s chief executive, said: “While a few market participants will be caught out this month, the real big bang for pension funds is still to come.”
He said “a monumental headache” awaited because many investment managers would be carrying out huge amounts of work all at the same time.
“Let’s face it, this is probably not what the rulemakers had in mind when they devised this phased-in approach,” he said.
The margin requirements – which mean derivatives investors must hold capital behind the derivatives they buy – are being phased in this September for entities with group notional amount above €2.25trn, and then for entities with successively lower notional amounts next September and the following two Septembers.
With no pension funds in scope in this month’s phase-in, OpenGamma said pension funds could save 0.7 basis points for a 10-year derivative trade, increasing to 1.8 basis points for a 30-year trade.