By Mike Duncan | December 2025
Structural Mistakes, Familiar Tools, and Deferred Regime Risk
Most rates hedges perform exactly as designed. They still fail economically.
Duration is neutralised. Sensitivities are reduced. Reports look clean. What the framework misses is what happens next – as carry compounds, collateral demands rise, and governance tolerance erodes across regimes that nobody anticipated at inception.
Rates hedging failures are rarely caused by rates moving the wrong way. They are caused by structural choices made when conditions were comfortable, whose consequences only surface when they can no longer be changed.
What this paper argues
Familiar instruments dominate not because they are robust, but because they are liquid, defensible in committees, and reversible on paper. That reversibility is the problem. It relocates risk into future environments rather than resolving it. Deferred discomfort is not avoided discomfort – it is discomfort magnified and encountered under worse conditions.
Collateral is now the primary transmission channel through which rates hedges fail. Margin requirements that scale pro-cyclically under stress, liquidity demands that appear only once buffers are exhausted, and governance intervention that arrives too late are not edge cases. They are the predictable consequences of designing hedges to look correct at inception rather than to behave correctly over time.
What it covers
- Why rates hedging is two distinct problems – short-term volatility management and long-term economic certainty – and why conflating them produces both
- What rates hedges actually do, and what they reliably fail to eliminate, regardless of instrument choice
- Why collateral is no longer plumbing – it is a primary risk channel that most hedging frameworks ignore until it binds
- Futures and swaps: why their apparent flexibility is often an illusion and what that costs over long horizons
- How governance incentives systematically favour deferral over resolution – and why that makes fragility structural
- Four failure modes that repeat across institutions and cycles: death by accumulation, forced re-hedging, liquidity-driven asset sales, and unforeseen events used as narrative cover
The central argument
A hedge behaves only if it delivers the intended economic outcome across regimes without forcing action at the wrong moment. Uncertainty can be resolved at inception or deferred into the future. It cannot be eliminated by clean reports, familiar instruments, or sensitivity metrics.
Read the practitioner paper
Why Rates Hedges Don’t Behave – Structural Mistakes, Familiar Tools, and Deferred Regime Risk