Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Canadian Pension Risk Strategies
    • 2023 Retirement Income
Breadcrumb
  1. Home
  2. REGULATION AND LEGISLATION
December 26, 2011 12:00 AM

New swaps rules put pension execs between rock, hard place

MF Global controversy prompting new rules for swaps market

Hazel Bradford
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Understanding: Eric Baggesen said leverage is behind the CFTC rule.

    The missing-money controversy surrounding MF Global Holdings Ltd. is leaving large corporate and public pension plan executives feeling pulled in two directions when it comes to using swaps.

    While plan executives wonder if the next case of disappearing cash could involve them, they also are keeping a nervous eye on federal regulators who are finalizing new rules for derivatives trading, including swaps, that could sacrifice the collateral protection they now enjoy for greater transparency.

    Pension plans use swaps for several reasons, including to hedge against drops in interest rates that can increase pension liabilities and harm cash flow. “Hedging is one of the very few things people can do to manage the volatility,” said an industry source who did not want to be identified. “Even plans that don't use it, feel strongly that they want to preserve that strategy.”

    To make swaps more transparent to all parties involved in the transactions, the Dodd-Frank Wall Street Reform and Consumer Protection Act ordered the Commodity Futures Trading Commission to require that whenever possible, swaps go through registered derivatives clearing organizations. These organizations, while they practice legal segregation of customers' money, do not physically separate funds. That could become a big problem if the clearinghouses encounter financial problems like bankruptcy and cannot readily sort out commingled funds. Unless the clearinghouse has kept scrupulous records, another customer's losses could jeopardize all customers' assets.

    That has alarmed institutional investors, who feel strongly that their current practice of using physically segregated accounts, where the third party — usually custodians or brokers — holding the swaps knows whose money is whose, is the safest.

    By contrast, the CFTC's proposed rule simply stipulates the legal separation of collateral and does not explicitly allow for physical segregation, out of concern that it would contradict bankruptcy laws.

    Disclosure over safety

    “You've gained some transparency but you've lost some protection,” argued Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md., which represents more than 100 of the largest U.S. corporate pension plans with a combined $1.5 trillion in defined benefit and defined contribution plan assets. “There is no reason that you can't have both.”

    While CIEBA and groups representing other plan sponsors continue to press that point with the CFTC, the political reality is that the agency, under the gun to produce a slew of Dodd-Frank-mandated rules, is well along in the rule-making process on this issue, and is scheduled to vote on it Jan. 11.

    Ironically, the MF Global crisis might have boosted the argument for physical segregation. Once futures broker MF Global filed for Chapter 11 bankruptcy protection in late October, the ability to detect where customers assets were, and which were even recoverable, became a longer term legal problem that left investors wondering if they would ever see their money again. It also raised questions about what federal regulators could have done to prevent it.

    “We have an opportunity to learn a huge lesson from MF Global,” argued Kent Mason, an attorney with the Washington law firm Davis & Harman LLP, which represents several corporate pension plans. “Unless the proposed rules are changed, we're not going to have the option of protecting our collateral from the risk of dealer bankruptcy. Dodd-Frank was about decreasing risk; requiring clearing without collateral protection increases risk substantially. Why not allow us to continue to protect our collateral at our own cost?”

    Pension plans already pay modest fees to third-party custodians handling their swaps; those costs would only go up if the CFTC mandates the use of clearing organizations.

    Ms. Forbes of CIEBA said pension executives are particularly worried because “they are fiduciaries, and they take it very seriously to protect those assets.” If the CFTC rule becomes final as is, plan sponsors “are between a rock and a hard place. Each plan is going to have to decide if the reward is worth the risk. Some will stay in and hedge a lot less, and some will get out.”

    Big public funds

    Swaps are less common with public pension systems, where it takes a big fund like the $225.5 billion California Public Employees' Retirement System, Sacramento, to control the risks. Eric Baggesen, senior investment officer for CalPERS' $130 billion global equity portfolio, said in a telephone interview that they use futures contracts for listed derivatives that are “by nature” cleared transactions, as well as some over-the-counter swap agreements that are typically “plain vanilla.”

    Mr. Baggesen understands why the CFTC wants greater transparency of futures contracts. “They are trying to understand how much leverage is in the system,” he said. “What became evident in 2008 and 2009 was that there was a tremendous amount of leverage in the financial markets. If the bets were big and if people couldn't perform, who makes up the losses? With cleared swaps, you avoid the build-up of liabilities.” Having transactions cleared also tends to decrease price spreads, he said. “You can see what's going on in the marketplace.”

    Still, Mr. Baggesen said CalPERS “would prefer to have a tri-party custody agreement” or least new rules that do not diminish collateral security. The absence of that protection in the CFTC's proposed rules “does make us concerned,” he said.

    That concern is starting to be understood on Capitol Hill as well as at the CFTC. On Dec. 15, Bart Chilton, CFTC commissioner, asked House Agriculture Committee Chairman Frank D. Lucas, R-Okla., to suggest yet another approach to how customer money in swaps is treated. To make sure something like MF Global “never happens again,” Mr. Chilton suggested in a letter “an overall revamping of how we treat segregated funds.”

    In a Dec. 20 letter to CFTC Chairman Gary Gensler, ranking Agriculture Committee member Rep. Collin Peterson, D-Minn., echoed industry concerns that with the swaps market “vastly larger than the regulated market. ... It is critically important that counterparty collateral or margin will not become lost or tied up in the event of a dealer bankruptcy.” Absent the protections now in place, “confidence in the Dodd-Frank Act's system of swap clearing will be undermined before it gets started,” Mr. Peterson wrote.

    Lawmakers and regulators “are recognizing that there is a legitimate concern on the part of pension plans” about segregated swaps, said Lynn Dudley, senior vice president for policy at the American Benefits Council, Washington. “They don't want to be in a situation where there is potentially less protection after Dodd-Frank than there was before.”

    Related Articles
    CFTC issues 'no-action' guidance for swaps rules
    CFTC finalizes swaps, anti-manipulation rules
    Fidelity, Och-Ziff seek stiffer collateral rule before CFTC vote
    Asset owners, managers are sort of ready for new swaps rules
    Recommended for You
    Standards-of-conduct rules approved along party lines
    Standards-of-conduct rules approved along party lines
    Investors hail SEC guidelines on exchanges
    Investors hail SEC guidelines on exchanges
    SEC passes Reg BI package by 3-1 vote
    SEC passes Reg BI package by 3-1 vote
    Global Macro as a Much-Needed Diversifier
    Sponsored Content: Global Macro as a Much-Needed Diversifier

    Reader Poll

    May 1, 2023
     
    SEE MORE POLLS >
    Sponsored
    White Papers
    Middle market credit: We’re gonna need a bigger boat
    Alternative Credit: Differences and Opportunities in CLOs and Credit Risk Shari…
    Fixed Income is Attractive, but Beware of "Fake" Yield
    Counting on a Crisis: A Catalyst for Investment Innovation?
    A Strategic Allocator's Guide to Productivity and Profits
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Canadian Pension Risk Strategies
      • 2023 Retirement Income