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Thijs Aaten, head of treasury and trading at pension fund asset manager APG in Amsterdam, says an extension of the clearing requirement to 2018 would be fair, given pension funds still have problems posting any form of variation margin. "Variation margin can at the moment only be posted in cash, so if you are a fully invested investor like a pension fund, given the amount of margin you have to post when you run a large interest rate hedge, this could lead to a massive cash requirement", he says.
While pension funds could in theory use the repo market to transform assets into cash, many have expressed concerns about whether they would be able to rely on the repo market during times of market stress, especially given the volume of assets needing to be transformed into cash. Some large liability-driven investment (LDI) managers have swap portfolios with PV01s – the per-basis point sensitivity to rates – of up to £200 million, which means in the event rates rise by 100bps, they will be due to post £20 billion in collateral. "We all know from experience that you cannot rely on this, especially given the size of the transactions required. Guaranteed transformation is not in place and in my view, it should be in place before you start mandatory clearing", says Aaten.
EMIR requires the EC to prepare a report on the "progress and effort made by CCPs [central counterparties] in developing technical solutions for the transfer by pension scheme arrangements of non-cash collateral as variation margins, as well as the need for any measures to facilitate such solution" by August 17. This report was commissioned from London-based consultancy Europe Economics, which began researching the issue in late September 2013, and the group has already surveyed a large proportion of the European pension fund community.
But Ido de Geus, head of treasury and client portfolio management at pension provider PGGM in Zeist, the Netherlands, claims there is still no practical way to pay variation margin with non-cash products, and there is unlikely to be one in the near future, so an extra delay is necessary. "We made ourselves clear. From our point of view, CCPs have not yet developed suitable solutions for non-cash variation margin and will not probably be ready before August 2015, when the temporary exemption for pension funds is supposed to end. Therefore, a move into central clearing could be hugely detrimental for pension funds as they do not sit on large volumes of cash and won't be able to meet the variation margin calls", says De Geus.
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