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Peter Rippon, OpenGamma

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Derivative trading costs to escalate amid market volatility fears

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Derivatives trading costs could double as markets brace themselves for increased bouts of volatility, according to research from analytics firm OpenGamma.

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 euro-bond 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.
 
Peter Rippon (pictured), CEO of OpenGamma, says: “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.”

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