Even if long-end gilt yields stabilise this week, after more than three weeks of chaos, the volatility of the period will be baked into derivatives initial margin and market risk capital models for years, likely making sterling interest rate and cross-currency derivatives more expensive products to trade in future.
“A market shock doesn’t just happen and then immediately go away, with everyone forgetting about it,” says Stuart Smith, co-head of business development at Acadia.
“A market shock can stay in margin models for a very long time, depending on how people choose to calibrate such models. Given the scale of recent sterling moves, I expect they’ll be included within these models for years to come.”
Gilt yields have whipsawed since the UK government released its mini-budget on September 23. A rise in 30-year gilt yields created a feedback loop that saw UK pension funds face margin calls on their derivatives hedges, forcing…
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