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Abstract
In its proposed rules on over-the-counter derivatives published in September, the European Commission included language that will essentially exempt corporates from using central counterparties (CCP), so long as their derivatives are used to hedge commercial risk. No such exclusion exists for pension funds. For those pursuing liability-driven investment strategies, which typically involve long-dated, directional interest rate and inflation swaps, the result could be hundreds of millions of euros in initial and variation margin payments. One solution could be to repo non-eligible assets via the clearing member or directly with a repo desk -- which would enable the pension fund to exchange corporate bonds for cash. This would attract a haircut, meaning the cash amount would be lower than the value of the bonds, but could help solve the immediate problem of a lack of eligible assets for margin, say some participants.