Post-financial crisis regulatory changes in derivatives trading have forced change on how UK pension funds and large asset managers conduct their business, according to Maxime Jeanniard du Dot, the COO of derivatives analytics firm OpenGamma.
The regulatory change means that many asset managers and pension funds will be posting initial margin for the first time. Financial institutions with a notional amount of non-centrally cleared derivatives greater than EUR1,500 billion will have to exchange initial margin this month.
OpenGamma estimates that a further 10 firms are expected to be pulled into this tranche, joining the big investment banks already in scope. Going forward, between 200 and 1,000 firms are likely to be pulled into the 2019 tranche, and between 200 to 3,000 in 2020.
Founded in 2009, OpenGamma is focused on helping firms reduce trading costs in the new post-crisis, regulatory world. Jeanniard du Dot (pictured) says: “New complex models have forced up margin levels, and made it much harder for firms to trade efficiently. We have helped hedge funds and banks overcome this issue, and we are now increasingly helping pension funds and asset managers address the problem.”
The firm has 25 clients on its platform, consisting of tier one banks, hedge funds and a few asset managers, and has been aggressively growing its business in Europe and the US. As Jeanniard du Dot puts it: “These topics have become critically important”.
The regulations staggered the requirement for firms to start exchanging margin over four years in five different phases, depending on the size of the institution’s portfolios.
Previously, the high credit ratings of pension funds meant that banks did not require initial margin. The final threshold by 2020 is USD8 billion and is acting as a catch-all threshold affecting a large number of pension funds and asset managers.
“These pension funds have an interesting situation,” Jeanniard du Dot says. “Most haven’t posted initial margin until now. However, by 2020 they will be captured under this rule, so will have no choice but to post initial margin.”
OpenGamma’s research reveals that the 2020 rules will increase the trading costs by a factor of 10.
“There is a silver lining,” Jeanniard du Dot says. “If firms can be proactive around the way they trade and decide to clear, they can halve that cost. The regulators made it more punitive not to clear from a margin perspective – 40 per cent more expensive – but people also want to clear because from a liquidity perspective it makes more sense.”
Jeanniard du Dot explains that these rules haven’t been mandated yet and there is an opportunity to pre-empt the increasing cost by starting clearing voluntarily.
“They have to change their trading practices and operations so that instead of doing bilateral trades, they will go through the executing brokers and clearing house or exchange route,” Jeanniard du Dot says.
