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Ido de Geus, head of treasury and client portfolio management at the €120 billon PGGM, said that the EU's European Market Infrastructure Regulation (EMIR) – as well as the Volcker rule proposed as part of the Frank-Dodd Act in the US – would inevitably cause pension funds to revise their approach to hedging solutions over the coming years, as the cost imposed by central clearing under both laws would become a burden.
De Geus said he saw a "two-speed" market developing as a result of the regulation. "First, the liquid clearable market will grow, whereas the OTC tailored-made OTC market will shrink", he told delegates.
"That is precisely the kind of situation where you think that a number of counterparties might get together and decide to make a few changes to the terms of the contracts – with regard to the type of assets to accept as collaterals for instance – signed with end users under bilateral trades. This will lead to OTC tailor-made solutions."
According to de Geus, pension funds might also "stay away" from derivatives as those trades will be required to go into central clearing houses under both the European and the US rules, and instead use other hedging solutions such as the repo market for instance, for which such conditions do not apply.
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