Pension funds and other institutional investors should have a communication link with financial market regulators and policymakers to serve as "an 'early warning' system on market developments that raise systemic risk and overall market stability" concerns, according to one of the five financial regulatory principles for reform unveiled March 10 by the $163.7 billion California Public Employees' Retirement System and eight other pension systems.
They also call for creation of an independent entity to oversee mitigation of systemic risk in the financial markets. It should have funding autonomy and enforceable data collection powers, among other muscle to access information of "any type of transactional, financial instrument, asset and liability data associated with any market participant," the principles state.
The principles also include:
• Allowing unlimited ability of fiduciaries to invest in an "unconstrained investment opportunity set," consistent with their responsibilities.
• Tailoring investor protections to the type of investor and type of investment product, rather than using a "one-size-fits-all" approach. "Protections for institutional investors may provide methods for sophisticated investors to protect themselves, in contrast to more general regulatory requirements to protect retail customers of standardized investment products."
• Restructuring the existing regulatory agencies to provide for the "application of similar rules to institutions performing similar marketplace functions and provision for the necessary flexibility for regulators to respond swiftly to new product innovations and evolving market practices."
• Having greater transparency of financial market trading activity, listed and over-the-counter; market participant accounting; credit-rating agency activity; and counterparty exposure. "Disclosure of this information must protect proprietary property while enabling sufficient access" for market participants, such as regulators and investors, to assess the risks attached to their activities.
The California State Teachers' Retirement System, Colorado Public Employees Retirement Association, Connecticut Retirement Plans and Trust Funds, Los Angeles City Employees Retirement System, Los Angeles County Employees Retirement Association, Los Angeles Fire and Police Pension System, New York State Common Retirement Fund, State Universities Retirement System of Illinois also endorsed the principles as well as Maryland State Treasurer Nancy K. Kopp.
The pension funds aim for the principles provide a framework for reform proposals being crafted in Congress and by the Obama administration and others to restore confidence in the global capital markets, according to a CalPERS statement issued in conjunction with the release of the principles.