Addressing the Challenges of Post-G20 Interest Rate Hedging
Mon, 24 Mar 2014 05:00:00 GMT
In this article, Mike O’Hara – in conversation with Hirander Misra, Andrew Chart and Philip Simons - looks at how the new Constant Maturity Swap future from GMEX aims to help firms continue to hedge their interest rate exposures cost effectively in the post-G20 landscape.
The reforms instigated by the G20 in the wake of the Global Financial Crisis have resulted in a number of structural changes to the world’s interest rate derivatives markets, changes which are now starting to have a significant impact on market participants.
The G20’s stated objectives to reduce systemic risk and increase transparency across global financial markets were clear, in that all OTC derivatives contracts should be reported to trade repositories (TRs); all standardised contracts should be traded on electronic trading platforms where appropriate, and cleared through central counterparties (CCPs); and non-centrally cleared contracts should be subject to higher capital requirements.
It remains to be seen how successful these initiatives will be in the long term. However, it is clear that in the short term at least, the increased capital & margin requirements have placed a greater strain on the financial resources of many firms active in this space. Likewise operational changes are also making it more difficult for firms to accurately hedge their interest rate exposures. Buy-side firms in particular are facing a range of new challenges around duration hedging.