It’s Not Fair

As you may have realised from some of our past analogies, we love anything transport related. So you can imagine our excitement at a corporate karting event. That was last night; this morning I find myself very grumpy having not made it through to the final after being “unfairly” rammed off the track (not to mention the ludicrous warning I then received for causing the incident).
To be honest I was lucky to get through to the semi-final after suffering a similar incident (and warning) in the first race but I was saved by a bit of cunning, gaining positions as others crashed. What I soon realised was that it was pointless whinging to the marshalls who were clearly set in their ways and, instead, I should just get on with it and make the most of any opportunities – making up spaces off the start, waiting for others to crash and so on.
The title of this blog and my current sentiment also reminds me of an underlying feeling amongst LDIers at the moment when it doesn’t seem a day goes by without discussion of regulation and the impact on pricing or collateral or something else.
Pension schemes are probably right to feel disgruntled – anyone with LDI came through the Lehman bankruptcy relatively unscathed and actually in a significantly better position than those without LDI, yet it feels like pension schemes – prudent users of derivatives – are paying the price for others’ mistakes.
All derivatives must be cleared in order to manage counterparty risk, more collateral is going to be required and that collateral can only be cash. All three of these requirements could have a significant impact on some pension schemes depending on their strategy which is why the industry has lobbied (and continues to do so) for exemptions from various components of the regulation.
The way a scheme’s strategy is implemented with derivatives could have a significant impact on the returns that a scheme can target and its costs, meaning that the construction of a strategy is going to become increasingly important.
It is not just about looking at what is cheaper to trade. One of the key challenges for schemes today is how to earn a return whilst maintaining a collateral pool and the new regulations are only making that harder. So schemes may need to be cleverer in putting together return-seeking and hedging components to minimise this impact.
After all, as time goes on it looks increasingly likely, as with the marshalls last night, that the regulators too may be stuck in their ways.

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