European pension fund managers are facing rising margin costs thanks to the increased cost of financing additional collateral payments just as the EU’s clearing exemption deadline looms.
That is according to data from OpenGamma, a derivatives analytics firm, which said that the 18 June deadline for exemption clearing will leave pension funds facing a rise in funding costs, driven by the need to clear their transactions within mandatory clearing rules under the European Market Infrastructure Regulation (EMIR).
The firm said that as centrally cleared interest rate derivatives are liable to variation margin, pension funds will now need to access additional cash to pay this extra funding cost. Additionally, the rising interest rate environment across the eurozone is driving heightened margin calls to those holding interest rate derivatives. Interest rates set by the European Central Bank (ECB) on marginal lending currently stand at 3.75% which means financing additional collateral payments is now ten times costlier than it was in 2012 (from 0.4% to 3.75%).
OpenGamma chief commercial officer (CCO) Joe Midmore said that although interest rate derivatives will always play a key role in pension fund portfolios, “it is more important than ever that pension funds have clear oversight of their collateral obligations and remain well placed to optimise the manner in which they meet them”.
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