Derivative trading costs to escalate amid market volatility fears

Derivative trading costs to escalate amid market volatility fears
21st February 2019 Maxime Jeanniard

Derivatives trading costs could double as markets brace themselves for increased bouts of volatility, according to our new research.

The findings show that during times of market stress, requirements to post upfront cash can jump by half on average, with initial margin rising by as much as 94%. This huge additional cost, 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 have to navigate themselves through unpredictable market movements in the months ahead.

This uncertainty adds mounting pressure to those firms trading euro-bond futures. Without an effective hedging strategy in place, the analysis also shows a rise of over two thirds in margin required for euro-bond futures.

In times of market stress initial margin can rise as much as 94% Click To Tweet

Commenting on the findings, our CEO, Peter Rippon, said: “With Brexit looming and ongoing Trump trade wars with China, the next few months present a daunting prospect for fund managers trying to combat inevitable volatility. This is why, during these periods of market turbulence, understanding which positions are likely to incur an increase in margin requirements is imperative in order to reduce costs. 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 reduce these costs will be key for firms maintaining liquidity for investors within their fund, as they may need sufficient cash to buffer against unpredictable market conditions.” Rippon concluded.

You can download the full research here >