Asset owners, managers are sort of ready for new swaps rules
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Deborah Pederson and David J. Rothenberg
      Arena hires 3 to boost global marketing of private credit strategies
      BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • Senate Majority Leader Chuck Schumer, D-N.Y., wears a protective mask while departing the U.S. Capitol
      Senate virus relief bill drops retirement plan COLA freeze
      A pharmacist administers a dose of the COVID-19 vaccine in Mountain Brook, Ala., on Feb. 21, 2021
      Business optimism grows as vaccinations spread – Fed
      watch video
      0:59
      Coronavirus and the S&P 500: February 2021
      Multiemployer pension measures cleared for relief bill vote
    • Desktop with document showing pie chart with investment types along with a calculator
      OECD proposes revision of its DC ‘good design’ roadmap
      Dominic Scriven, director and portfolio manger of Dragon Capital, speaks during an interview in Ho Chi Minh City, Vietnam in 2006
      Vietnam gets its first private defined contribution plan
      DCALTA releases daily valuation tool for alts in DC plans
      PSCA: Employee participation in non-qualified deferred comp plans rising
    • The tower of Stockholm City Hall rise above the city's skyline on Aug. 6, 2020
      Swedish funds managing $250 billion get slammed for ESG record
      Vapor rises from a petrochemical plant
      New York State Common inks more climate pacts
      Michael Herskovich
      BNP Paribas Asset Management names global head of stewardship
      TPT Retirement taps into low-carbon strategies
    • 2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
      Spirit winners
      Prudential honors young people who are helping out
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • The tower of Stockholm City Hall rise above the city's skyline on Aug. 6, 2020
      Swedish funds managing $250 billion get slammed for ESG record
      Louisiana Teachers rehires Mondrian as small-cap manager
      CalSTRS adds alts investments to ESG-themed portfolio
      Vapor rises from a petrochemical plant
      New York State Common inks more climate pacts
    • Manulife taps UBS veteran to oversee its China business
      Herman Bril
      Arabesque Asset Management chooses first CEO
      Railpen hires head trader in preparation for in-house trading
      Andy Moniz
      Acadian picks responsible investing director
    • CalSTRS adds alts investments to ESG-themed portfolio
      District of Columbia Retirement Board executive director to retire
      Police car in the city of San Antonio
      San Antonio fund terminates Lazard from emerging markets strategy
      Fresno County Employees moves $22 million between Eaton Vance funds
    • District of Columbia Retirement Board executive director to retire
      Deborah Pederson and David J. Rothenberg
      Arena hires 3 to boost global marketing of private credit strategies
      Manulife taps UBS veteran to oversee its China business
      Herman Bril
      Arabesque Asset Management chooses first CEO
    • The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
      Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
    • AEW chooses head of fund operations and debt finance
      Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Louisiana Teachers rehires Mondrian as small-cap manager
      University of Louisville taps Cammack as DC plans consultant
      Cook County allocates $50 million to Mesirow funds
      South Carolina earmarks up to $355 million to 6 funds
    • Louisiana Teachers rehires Mondrian as small-cap manager
      University of Louisville taps Cammack as DC plans consultant
      Cook County allocates $50 million to Mesirow funds
      South Carolina earmarks up to $355 million to 6 funds
    • Independent Investment Consulting Services
      Financial Auditing Services
      Actuarial Services
      Emerging Market Equity Manager Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Investment Trends: Looking Ahead Across Equity Sectors
      Rethinking Market and Reference Data Management
      China is embarking on a new stage of growth
      Gold Outlook 2021
    • Sameer Shalaby
      Commentary: Why should investors care about treasury management?
      David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      ESG Capabilities and Climate Impact Investing
      Technology is the New Oil: The Changing Nature of Emerging Markets
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Domestic Limited-Duration Fixed Income, 4th Quarter 2020
      Top Performing Managers of Domestic Value Equity, 4th Quarter 2020
      Top Performing Managers of Global Balanced, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      ESG Capabilities and Climate Impact Investing
      Technology is the New Oil: The Changing Nature of Emerging Markets
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
September 02, 2013 01:00 AM

Asset owners, managers are sort of ready for new swaps rules

New clearing guidelines take effect Sept. 9

Hazel Bradford
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bella Sanevich says those who value LDI will likely stick with swaps.

    Institutional investors and money managers say they are ready — more or less — for regulations on over-the-counter derivatives that become effective Sept. 9.

    Officials at pension funds, for example, use swaps for several reasons, including to hedge against drops in interest rates that can increase pension liabilities and harm cash flow.

    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, interest-rate and credit default swaps are cleared through registered derivatives clearing organizations.

    Those clearing rules came with three deadlines: March for swap dealers and active private funds; June for other swaps customers like third-party investment managers; and Sept. 9 for all users, including institutional investors.

    The new regulations also require asset owners to have liquid collateral to meet two types of margin requirements: initial margin to cover the fluctuation in a contract's value over a fixed period; and variation margin to offset the daily fluctuations in the swaps contract's market value.

    For initial margin, calculated by the clearing counterparties, swaps users can post high-quality liquid assets such as U.S. Treasuries or corporate bonds. Variation margin is pledged in cash, which means that pension funds using long-duration swaps have to keep enough cash on hand to cover the margin.

    'Allergic reaction'

    “It's a new world,” said Bella Sanevich, general counsel of NISA Investment Advisors LLC in St. Louis, which manages $60 billion for defined benefit plans. “I think the vast majority of our clients will be ready.”

    Ms. Sanevich said “some people may have an allergic reaction” to the increased regulation, and stop using swaps due to a perceived burden and clearing cost.

    Charles Van Vleet, assistant treasurer and chief investment officer of Textron Inc., which has $5.6 billion in U.S. defined benefit plan assets, is one who already has switched to futures from swaps as a hedging mechanism “until the dust settles” on the new swaps regulations. With the new margin requirements, “the benefit of swaps over futures is diminished,” he said.

    But Ms. Sanevich thinks that among clients for whom interest-rate swaps are a component of their liability-driven investing strategy, “anyone who values LDI as a strategy will likely not be swayed” as a result of the new regulatory environment. In fact, she and others expect to see more hedging activity with derivatives as interest rates rise and more pension executives consider swaps to manage their liabilities.

    Pension executives using swaps can thank money managers for test-driving the new regulatory regime.

    Michael O'Brien, vice president and director of global trading for Eaton Vance Management in Boston, was concerned that money managers were unprepared for their June deadline, “but it was a smooth transition. The big asset managers were prepared.”

    “We tested the ropes in March with large hedge funds (and) the June deadline was very telling,” agreed Charley Cooper, New York-based head of exchange-traded derivatives and OTC clearing, Americas, for State Street Global Exchange, a group within State Street Corp. that provides proprietary data, insights, analytics and trading solutions. “There were no major bumps. I am hoping there is light at the end of the tunnel.”

    Said Jack Callahan, executive director and OTC product specialist with the CME Group, Chicago: “Much of the swap activity from (pension funds) occurs through external asset managers, who have been clearing for quite some time.”

    Mr. Callahan said the CME has worked closely with executives at pension funds that trade swaps through internally managed accounts to help ensure “a seamless transition to clearing.”

    BlackRock prepared early

    BlackRock Inc. has spent the past three years preparing for clearing through clearinghouses, and has operated under the new rules voluntarily for over a year “because it was such a big change in the way we trade, and clearing did offer a counterparty risk management tool,” said Supurna VedBrat, co-head of the market structure and electronic trading team in BlackRock's trading and liquidity strategies group in New York.

    “It was an interesting exercise because there is so much interoperability,” with as many as seven parties involved for a single trade. While the clearing process added operational risk, “we understand that regulators wanted a lot more transparency that will ultimately help in managing systemic risk,” said Ms. VedBrat.

    NISA's Ms. Sanevich and others expect to see increased administrative costs from the margin requirements and clearing demands, but “if there are substantial extra costs built in, that's going to be a different conversation” involving negotiations to lower the costs, she said.

    In addition to fees for the new swaps clearing and margin demands, Ms. VedBrat is concerned about liquidity becoming more fragmented as more clearinghouses enter the market. There is also the question posed by many swaps market participants about whether swap execution facilities will be ready by their October general compliance deadline to allow for quality testing and review of rule books and participation agreements by clients.

    “We are working with a lot of pieces,” said Ms. VedBrat, “but at the end of the day, everybody has to be ready.”

    Judson Baker is product manager for derivatives and collateral management at Northern Trust Co., Chicago, a global custodian that provides swaps custody and collateral management for clients. He said concern over pension funds' ability to post collateral “is a non-event. If they continue to do what they have been doing, they can absorb that. In the pension fund space, there is no shortage” of collateral, said Mr. Baker.

    Plenty of collateral

    To get a sense of the impact, Northern Trust identified the initial margin requirements of more than 200 pension fund clients holding eligible interest-rates swaps products and found that those with margin requirements above $1 million had ample eligible collateral in the form of high-grade government or corporate bonds. The average initial margin requirement was $5.3 million, which represented only 1.5% of the average pension fund's assets.

    So far, the margin requirements require some effort to figure out which assets to post and when, “but conceptually it's very workable,” said NISA's Ms. Sanevich, who anticipates NISA will work with several clearinghouses for a while to see how it goes. “We're going to keep recalibrating and re-evaluating the process, because that's what we do.”

    Another unknown is how new rules for swap execution facilities will affect pricing of swaps, transaction risk and market practices. And the rules out so far don't make swaps trading foolproof, say some pension fund executives and asset managers concerned about the safety of their collateral.

    On both collateral management and valuation, “there's a lot of work going on behind the scenes,” said Northern Trust's Mr. Baker. “People will continue trading swaps; they will just have to change their behavior a bit.” One change could be more outsourcing all or part of swaps activity. But with outsourcing, “you have to make a bet on who is going to be around in two years,” said Mr. O'Brien of Eaton Vance.

    As the true costs of clearing become better known through practice — along with the final costs of building the infrastructure to handle the new swaps rules — the OTC market might lose market share to futures and custom swap products that don't have to clear, “but I don't think it is going away,” said Mr. Baker. “There are too many specific needs that it fills.”

    Related Articles
    Execs caught between rock, hard place
    Investors adapting portfolios to volatile environment
    Communication key to OTC derivatives rules changes, report states
    Swaps exchange's new COO was co-CEO of eSecLending
    BNY Mellon closes U.S. derivatives clearing business
    Greenwich: Swaps clearing to become more expensive, more efficient in 2014
    Collateral management gets spotlight
    SEC proposes additional requirements for swaps dealers
    Pact raises caution flag on swaps
    Chicago teachers' fund sues investment banks over interest-rate swaps
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Rethinking Market and Reference Data Management
    Investment Trends: Looking Ahead Across Equity Sectors
    China is embarking on a new stage of growth
    Gold Outlook 2021
    Shifting DC Times - Winter 2021
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    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

    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.

    pilogo-NEW
    About Us

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

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • 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 © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center