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Warning of higher derivatives trading costs

Derivatives trading costs could nearly double as markets brace for increased volatility, caused by factors such as increased requirements to post upfront cash, suggests research by analytics firm OpenGamma.

The firm’s study concludes that this requirement could rise by up to 94%, based on calculations related to stress testing fixed income futures traded on US exchanges. 

Factors identified as causing volatility spikes include global trade tensions, a continuing rise in US rates, and growing debt. This will also have an impact on the eurobond futures market.

OpenGamma suggest that initial margin costs could rise by more than two-thirds “if an effective hedging strategy is not in place”.

Volatility ahead

“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,” commented Peter Rippon, CEO of OpenGamma.

“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. 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.”


This item appears in the following sections:
Risk Management
FX Hedging & Risk Management
Trade Finance

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