Netting problems will restrict pension funds, FCMs warn

Netting is a cornerstone of the over-the-counter derivatives market, but legal uncertainties are making it harder to apply for cleared trades with pension funds. That threatens higher costs for dealers and could see tough limits placed on fund clients. Joe Rennison reports

David Felsenthal, Clifford Chance

Lawyers struggle to remember cases in which a pension fund has defaulted on its swaps, but this hypothetical question is taking on painfully practical significance for futures commission merchants (FCMs), which are looking for certainty on how an insolvent pension client would be treated.

"I am not actually aware of a pension plan defaulting on swaps because of bankruptcy. So it's hard to know how it would work," says David Felsenthal, a partner at Clifford Chance in New York.

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