Cash variation margin requirements worry pension funds
Having to post cash as variation margin to central counterparties (CCPs) will cause substantial yield losses for pension funds that conduct liability-driven investment (LDI) strategies, according to fund managers.
Many LDI pension funds use long-dated interest rate swaps – up to 50 years in tenor – to hedge their portfolios. But given the sensitivity of long-dated swaps to interest rate movements, collateral requirements are often large. For example, the 80-basis-point collapse in the 20- and 30-year euro swap rate in August triggered calls of 12% of swap notionals.
Ordinarily, these collateral calls are met without a hitch by pension funds, which have the ability to post bonds under current bilateral
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