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24 October 2011

FN: Pension funds get to grips with swaps


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UK pension funds are more comfortable than ever with derivatives, an integral part of liability-driven investments and increasingly used in growth portfolios too. But market volatility and the prospect of new EU regulations are clouding the horizon.


Total asset allocation to derivatives among UK pension schemes this year stands at 7 per cent. According to the UK Office for National Statistics, a decade ago, that figure was close to zero. Much of the structural shift can be traced back to the closure to new members, since the early 2000s, of many defined-benefit pension schemes.

The persistent lack of clarity on swap regulation, however, has been a check on demand. The European Market Infrastructure Regulation, due to come into force next year, will see much of the swap market forcibly moved to central counterparty clearing. Under this model, a third party would sit between a fund and the bank providing the swap, holding a cash pile, known as collateral, from each, based on a percentage of a swap’s notional value, in case one side should default. Pension funds are less than pleased. Since swap values are enormous, the amount of variable margin that cash-strapped funds are required to post could be huge.

Full article (FN subscription required)



© Financial News


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