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Derivative Trading Costs to Escalate Amid Market Volatility Fears

Traders Magazine Online News, March 1, 2019

John D'Antona Jr.

The findings show that during times of market stress, requirements to post upfront cash jump by on average half, but could rise by as much as 94 per cent. This huge additional cost, which was calculated through stress testing fixed income futures traded on US exchanges, will be tough to absorb for fund managers under intense pressure from investors to deliver stronger returns.

With continued global trade tensions, rising US interest rates and growing debt, fund managers will be navigating unpredictable market movements in the months ahead. The mounting uncertainty adds pressure to firms trading eurobond futures. In this scenario, OpenGamma's analysis shows a rise in initial margin costs of over two thirds if an effective hedging strategy is not in place.

Commenting on the findings, Peter Rippon, CEO of OpenGamma said: “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. 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.” Rippon concluded.

About OpenGamma

OpenGamma is the analytics company dedicated to improving returns for derivatives users through capital efficiency. Regulation continues to increase the cost and capital required to trade derivatives, meaning that users now need to understand a complex web of models in order to trade effectively.

Since its founding in 2009, OpenGamma has provided unparalleled derivatives model expertise, building a client base of the world’s leading financial institutions across clearing houses, banks and buy-side firms.

Simple set-up means clients are up and running within hours, receiving actionable recommendations for immediate savings. With thousands of users depending on the derivatives analytics everyday, OpenGamma helps firms tackle the biggest issues in derivatives trading.

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