Pension funds play an important role in the financial industry and the lives of European pensioners. Regulatory changes such as the mandatory clearing of over-the-counter financial instruments (OTC IRS) and the increase in capital requirements for banks pose major challenges for European pension funds.
Due to the long-term nature of their liabilities, pension funds must hedge against interest rate and inflation risks. Notably, the lack of long-dated bonds in Europe issued by high-quality issuers, such as governments, has led many pension funds to use standard interest rates and inflation swaps for hedging. However, historically these swaps were not centrally cleared, and pension funds were exposed to multiple counterparty and operational risks.
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