Rising rates and margin needs hit trade funding costs, new research finds
Tuesday, 5th July, 2022 - The combined force of increasing margin requirements and rising interest rates are having a significant impact on the cost of funding for trading, according to new findings from derivatives analytics firm OpenGamma.
Margin, upfront cash or collateral firms need to post before entering into a trade, now stands at £927.5 for one month Sterling Overnight Index Average (Sonia) futures – a 30% increase in margin in just two months. Meanwhile, the margin requirements on the one-month Euro Overnight Index Average (Eonia) contract have risen by over 100% since the start of the year.
In addition to margin going up, interest rates have also risen for many currencies over the past few months. With the UK base rate has moving rapidly from an historic low of 0.1% to 1.25%, coupled with a tenfold increase in the Fedfunds rate from 0.08% to 0.83%, rates on US Dollar and Sterling are already 10 times higher than they were at the beginning of the year.
“If market participants are using a flat rate, or just considering the spread funding cost calculations, then the main impact will be any increase in requirements,” according to Jo Burnham, risk and margining expert at OpenGamma. “However, as interest rates continue to rise, then it is likely that the flat rate applied, or appropriate spreads will also need to rise. The spread applied to a rate of 0.5% is going to be lower than the spread you would apply if the rate increases to 3% for example.”