Cash variation margin requirements worry pension funds

Many LDI pension funds use long-dated interest rate swaps – up to 50 years in tenor – to hedge their portfolios. But given the sensitivity of long-dated swaps to interest rate movements, collateral requirements are often large. For example, the 80-basis-point collapse in the 20- and 30-year euro swap rate in August triggered calls of 12% of swap notionals.

Ordinarily, these collateral calls are met without a hitch by pension funds, which have the ability to post bonds under current bilateral