Market stress could see derivatives trading costs double - OpenGamma
(22 February 2019 – Europe) Initial margins could more than double for derivatives portfolios during periods of high volatility according to new research released by OpenGamma this week.
OpenGamma investigated the impact of calculated stress on margin for a number of client portfolios using historical data for margin rates for listed futures contracts for the last decade. The research found that initial margin for one client portfolio, consisting of fixed income futures contracts traded on SPAN exchange CME, could surge by up to 94 percent at times of high volatility. Founded in 2009, OpenGamma provided open source libraries for derivative analytics. Over the next seven years the group built unparalleled expertise in OTC and ETD margin methodologies and been at the cutting edge of market structure changes since.
BNY Mellon recently confirmed its clients are already preparing for the new wave of initial margin requirements due to be enforced by September. 2019 Under the European Market Infrastructure Regulation (EMIR), authorities have been phasing in initial margining requirements for firms trading bilateral OTC derivatives.
OpenGamma CEO Peter Rippon stated hedging is an effective tool to combat the unexpected higher costs during market volatility. The research continued that after hedging, the CME futures portfolio saw margin increase at 14 percent rather than 94 percent, while the Eurex Eurobonds portfolio saw margin increase at 35 percent as opposed to 70 percent respectively.
“By using an efficient hedging overlay, firms can soften the spike if the right strategy is implemented. No fund manager wants to be posting more margin than they need to. Understanding how to control initial margin costs will be key for firms to maintain liquidity, as they may need sufficient cash to buffer against unpredictable market conditions.”
“With Brexit looming and Trump’s ongoing trade war with China, the next few months present a daunting prospect for fund managers trying to combat the inevitable volatility. This is why, during these periods of market turbulence, understanding which positions are likely to incur a larger increase in margin requirements is imperative in order to reduce costs” Mr Rippon said.