Reearch from analytics firm OpenGamma suggests that derivatives trading costs could double as markets braace for increased volatility - because of factors such as increased requirements to post upfront cash.
The research suggests that this requirement could rise by up to 94%; the finding was achieved bny calculations related to stress testing fixed income futures traded on US exchanges.
Factors identified as causing volatility spikes include global trade tensions, rising US rates, and growing debt. This will also have an impact on the eurobond futures market. OpenGamma suggest that initial margin costs could rise by more than two-thirds "if an effective hedging strategy is not in place".
Peter Rippon, CEO of OpenGamma said: "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."
Charts source: OpenGamma