[ctrlmeta]

> 4) As the value of these bonds fall, these institutions are asked to post more collateral.

Why do the pension funds (and other institutional investors) need to post collateral? Where do the pension funds post their collateral to?

I guess I will understand why collateral is required if you can explain me what would go wrong if the pension funds were not made to post collateral.

[presioneaqui]

Fundamentally, pensions are a FUTURE liability on CURRENT assets. So the primary goal of the fund managers at these pension funds is to ensure that size and mix of current assets can meet future liabilities. One of the biggest risks to this objective is inflation which will eat away at the value of current assets. To hedge against this risk, a fund may purchase inflation/interest rate risk protection (usually complex swap products from derivatives desks at big banks) and pay for this protection with some combination of cash or collateral.

Now it looks like while these products work in a low interest rate - low inflation environment, in this environment this "protection" is pretty worthless at best and actually harmful even.

That's why the current UK gov is under fire, because their tax-cut proposal has been perceived to have precipitated this crisis.

[JumpCrisscross]

> why collateral is required if you can explain me what would go wrong if the pension funds were not made to post collateral

They're trading something everyone has to post collateral (a/k/a margin) on. This usually involves leverage, e.g. if they're buying futures [1].

The collateral is there for the broker and clearinghouse to sell if the pension fails to hold up its end of the deal. When the value of the collateral falls, the broker demands more to ensure they're covered.

[1] https://www.cmegroup.com/education/courses/introduction-to-f...

[mamonster]

Big banks. A bank lending any sort of investment vehicle money to essentially purchase assets on leverage is called a prime broker.

[mamonster]

They need to post collateral because they have leverage. And they need to have leverage because secure products like bonds don't earn a big enough return to meet pensions obligations. Yields were below 5% for the past I don't know how many years.