Move Seen as Preparation for Fed Eventually Raising Interest Rates
Katy Burne
Aug. 6, 2014 1:21 p.m. ET
CME Group Inc. is raising margin requirements for most customers using its interest-rate swaps-clearing services, the latest sign of financial institutions girding for possible rate increases over the next year. The adjustments, which took effect Monday, mean that clients whose portfolios call for more margin under the new parameters will have to put up additional cash and securities to back their trades. Such shifts are routine but are closely watched in markets.
Umesh Gajria, executive director in global clearing services for CME’s clearing unit, said the Chicago firm wanted its margin model for swaps to be better prepared for when interest rates rise to more normal levels, after spending a protracted period near historic lows. Market participants are increasingly focused on when the Federal Reserve will end its monetary easing and allow interest rates to rise. When rates rise, bond prices fall.
“The change we have implemented accounts for a smooth transition from a lower-rate environment to a higher-rate environment,” said Mr. Gajria in an interview. According to a notice on CME’s website, the changes were aimed at establishing “a robust, long-term approach that yields more desirable outcomes in both low- and high-interest-rate regimes.” Interest-rate swaps allow users to hedge or bet on the cost of future interest payments, and totaled $461 trillion globally as of the last count by the Bank for International Settlements.
In 2013, a unit of LCH.Clearnet Group said it was making changes to an algorithm used to calculate its margin methodology for its interest-rate clearing services. At the time, the LCH unit known as SwapClear said the changes were “part of its ongoing review of its margin methodologies to ensure optimal performance under a variety of market conditions.”
