A repurchase facility announced this month with access to cash from CalPERS to cover the cost of a counterparty default — the first such agreement involving an asset owner — is shining a light on potential roles for asset owners as sources of liquidity.
The one-year facility, created by the $301.7 billion California Public Employees' Retirement System, Sacramento — in collaboration with the Options Clearing Corp. and agency securities lending provider eSecLending LLC — would provide Options Clearing with the option of a cash draw from CalPERS, facilitated by eSecLending, if a counterparty defaults on a derivatives trade.
“It's not a pure securities lend,” said Greg Korte, principal and practice leader, trust, custody and securities lending for North America, at Mercer Sentinel, Chicago, a consultant on asset servicing and investment operations. “It's almost like a market-making deal. eSec Lending has an agreement with OCC, which sees the need to diversify the liquidity traditionally given by banks. Now you have a funding source with CalPERS.” Mr. Korte is not connected with the CalPERS deal.
Daniel E. Kiefer, portfolio manager and head of securities lending at CalPERS, said the facility arranged with Options Clearing and eSecLending was purely a repo facility. He said Options Clearing sought to increase its credit lines outside of clearing member firms to non-banks “in order to diversify and mitigate risks. ... OCC introduced the concept of the collateralized liquidity facility between a public pension fund and (central counterparty clearinghouse) to their regulators (the Commodity Futures Trading Commission). We're taking the cash collateral from our securities lending program. It's tough to find quality liquid investments. This also diversifies our counterparty arrangements with someone beyond the Street.
“This product enhances our cash return,” Mr. Kiefer said. “We have our cash in a floating-rate vehicle so the facility is built to account for a modest rise in rates.”
Neither Options Clearing nor Mr. Kiefer would comment on how much CalPERS will make through the facility, although Mr. Kiefer said, “CalPERS is paid a competitive risk-adjusted return for this transaction.” In the March 12 announcement of the facility, Curtis Ishii, senior investment officer for fixed income at CalPERS, said it “achieves incremental risk-adjusted returns for our pensioners” but didn't provide details.