Precision Over Drag: Transitioning to Bond Forward Hedging

Precision Over Drag: Transitioning to Bond Forward Hedging

Client Type: Insurance
Sector: Life Insurance
Location: Asia

Challenge:
The client’s duration hedging strategy relied heavily on cleared interest rate swaps. Over time, this approach caused operational and performance challenges:

  • Clearing broker exposure and margin requirements grew excessively
  • Floating rate resets created uncertainty in hedge cash flows
  • Cash margining strained liquidity and reduced capital efficiency

Solution:
Para Bellum re-architected the client’s derivatives infrastructure to accommodate bilateral OTC derivatives. Key actions included:

  • Transitioned from swaps to bond forward hedging
  • Enabled the use of securities collateral via bilateral CSAs
  • Reduced dependency on floating rate exposures and clearing brokers

Result:

  • Improved precision in duration matching without floating rate risk
  • Lowered margin requirements through smarter collateral structures
  • Reduced cash drag and operational friction
  • Expanded the client’s derivative toolkit and hedge flexibility

Value Delivered:
Enabled a shift to capital-efficient hedging, reduced trading and liquidity costs, and freed up cash for reinvestment into higher-return assets.

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