Institutional investors and money managers say they are ready — more or less — for regulations on over-the-counter derivatives that become effective Sept. 9.
Officials at pension funds, for example, use swaps for several reasons, including to hedge against drops in interest rates that can increase pension liabilities and harm cash flow.
To make swaps more transparent to all parties involved in the transactions, the Dodd-Frank Wall Street Reform and Consumer Protection Act ordered the Commodity Futures Trading Commission to require that whenever possible, interest-rate and credit default swaps are cleared through registered derivatives clearing organizations.
Those clearing rules came with three deadlines: March for swap dealers and active private funds; June for other swaps customers like third-party investment managers; and Sept. 9 for all users, including institutional investors.
The new regulations also require asset owners to have liquid collateral to meet two types of margin requirements: initial margin to cover the fluctuation in a contract's value over a fixed period; and variation margin to offset the daily fluctuations in the swaps contract's market value.
For initial margin, calculated by the clearing counterparties, swaps users can post high-quality liquid assets such as U.S. Treasuries or corporate bonds. Variation margin is pledged in cash, which means that pension funds using long-duration swaps have to keep enough cash on hand to cover the margin.