Major insurance companies across Europe face being blocked from using derivatives as financial institutions battle to meet new rules.
Derivatives, which were traditionally used to hedge against currency and interest rate moves, have been processed primarily through central clearing houses since the financial crisis of 2008 – a clearing house sits in the middle of a transaction between the buyer and seller in an effort to reduce risk.
According to new rules introduced since the crisis, many derivative users – including insurance firms – are expected to provide collateral, or margin, to protect against trades.
However, now The Financial Times is reporting that some investment banks that insurers rely on for clearing access are now saying they have little capacity on their balance sheets.
Speaking to the publication, Daniel Maguire, global head of rates and foreign exchange derivatives at LCH, a clearing house, commented that there are “pressures causing clearing members to think about capacity.”
Over in the USA, more than 70% of clearing trades are carried out by five major banks – however, two of these banks have reportedly told The Financial Times that they have set aside just 20% of capacity for European clearing because demand in the USA is so high. They have pointed the finger at capital rules – such as the so-called leverage ratio - which have made it extremely capital-intensive for banks to clear both insurers and pension funds.
According to the report, the problem becomes worse due to European rules with no exemptions from clearing for small banks. It states that European regulators are currently assessing the issue and looking at reviewing the rules with findings to be published next year.
