Illiquidity worries UK insurers in forex hedging switch
Cross-currency swaps could become more expensive as firms' demand increases
A lack of liquidity in the cross-currency swaps market worries UK annuity firms as they are forced to stop using forex forwards in their matching adjustment (MA) portfolios to hedge foreign currency bond holdings.
Insurers fear they will face higher costs to swap cashflows on non-sterling assets back to sterling in order to comply with MA rules in Solvency II, and that derivatives contracts will prove hard to unwind during periods of market stress.
"To comply with matching adjustment rules, we
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