Joe Midmore is Chief Commercial Officer, OpenGamma.
What are your expectations for 2023?
Capital efficiency and liquidity risk management are key themes that need to be on everybody’s radar when planning for 2023. Increasing interest rates and persistent market volatility will result in higher levels of margin being called at greater funding costs.
On the regulatory front, in-scope UMR phase 6 firms continue to use up their regulatory thresholds and some will find themselves needing to post initial margin for the first time fairly soon. The EU pension fund clearing exemption rules are also set to expire in June 2023 adding to the collateral liquidity challenges real money managers will need to find resolutions for.
In response to various market shaking events that have unfolded this year, we are also likely to see a big year for CCPs, with a greater emphasis on the role that clearing can play in the repo, FX and crypto derivative markets.
Ultimately, firms will need to have capital and liquidity risk management front of mind to build organisational resilience, while minimising the cost of trading.”
What surprised you in 2022?
2022 saw what was effectively a black swan event for pension funds. The now infamous mini budget caused a fire sale, as some funds relying on liability driven investment strategies were forced to sell highly liquid assets (such as gilts) in a ‘dash for cash’, exposing a glaring blind spot for the industry to ponder – how to efficiently risk manage liquidity mismatches.
What were the key theme(s) for your business in 2022?
The Russian invasion of Ukraine has had a significant impact on derivatives across all markets this year. However, it is the Energy market that has been affected the most because of the dependence on Russian oil and gas. Margins are now higher as a percentage of contract value, and with prices still being at record levels this is leading to a significant increase in margin requirements. Some firms are finding it difficult to fund their hedges and are consequently seeking assistance from unlikely sources such as private equity and central banks. The worry is there could be a default that would disrupt the market even further in 2023.
