Industry Insight Series: Clearing Considerations for Bilateral Swaps

CloudMargin’s Industry Insight Series has been specifically created to shine a light on critical areas and themes within the financial services industry. Once a month, we will showcase expertise and viewpoints from industry figures who will highlight and discuss important areas in the market. The series has been designed to educate, inform and help you better understand complex issues within an ever-changing financial landscape.


Ricky Maloney, Business Manager, Absolute Return Government Bond Team, Old Mutual Global Investors

Ricky Maloney joined Old Mutual Global Investors in March 2016, as Business Manager for the Rates & Absolute Return trading desk. He joined from Eurex Clearing where, for two and a half years, he ran their Buy Side Sales & Relationship Management function. Prior to joining Eurex, Ricky spent six years working for Ignis Asset Management as Head of Treasury Processing. During his 20 years in the city, he has also worked for The Bank Of New York, BNP Paribas and Walker Cripps Weddle Beck . Ricky holds a Degree in Business Studies from The University of Sunderland.

Clearing Considerations for Bilateral Swaps

The Old Mutual Absolute Return Government Bond Fund, managed by Adam Purzitsky and Paul Shanta of Old Mutual Global Investors, is classified under European Market Infrastructure Regulation (EMIR) as a category 2 fund. The fund regularly trades in over the counter (OTC) derivatives, and as such, will be obliged by regulation to clear those trades in the four mandated currencies (EUR, GBP, JPY ,USD) from 21 December 2016, as well as ‘frontload’ trades executed bilaterally, under a frontloading additional termination event (ATE) which has been required since 21 May 2016.

The team also expresses its investment strategy in non-mandated products, and in addition has a significant portfolio of existing swaps, which will not need to be cleared for some time. As a result, we have been asking what the argument is for clearing those swaps, and which strategy the team might employ to optimise the portfolio in respect of risk and margin efficiency.

Optimisation is key in this capital constrained environment; the opportunity to reduce gross notional exposures, whether through netting or compressing derivative positions is vital, as is ensuring an optimal margin management strategy. Any bilateral positions that express a direct risk offset to a cleared trade within a given portfolio would seem a strong candidate to be cleared. The net effect would be to break up the bifurcation of providing margin to a Central Counterparty (CCP) clearing house as well as a bilateral counterparty and should translate to a lower margin requirement across both trades.

Risk correlation between listed and OTC derivatives also needs to be exploited to the extent that offsetting transactions are cleared within the same broker account at the same CCP. In the absence of such a tactic, the potential offset would not be realisable.

Inflation derivatives are not yet mandated but lend themselves to clearing given the correlation with interest rates swaps and risk. Therefore margin offsets have been demonstrated by most major CCP’s across both products, so it may make sense to consider clearing inflation well ahead of any mandate.

Finally, the CCP mantra ‘lower risk means lower margin’ (meaning lower capital requirements) rings true in all of the above cases. While products may or may not be mandated, it is in the interest of all industry participants to keep capital exposures and the associated costs to a minimum. It is here that efficiency and optimisation have a very large role to play within the asset management community.


Please remember that past performance is not a guide to future performance. Investment involves risks. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall.
This communication is issued by Old Mutual Global Investors (UK) Limited. Old Mutual Global Investors (UK) Limited is the appointed investment adviser for Old Mutual Investment Management Limited’s in-house funds. Old Mutual Global Investors is the trading name of Old Mutual Global Investors (UK) Limited and Old Mutual Investment Management Limited. Old Mutual Investment Management Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ.  Authorised and regulated by the Financial Conduct Authority. Old Mutual Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4P 4AJ. Authorised and regulated by the Financial Conduct Authority. A member of the IA.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Old Mutual Global Investors as a result of using different assumptions and criteria. 

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