CalPERS has joined a fully committed repo facility with derivatives clearinghouse Options Clearing Corp. and securities lending agent eSecLending to provide contingency liquidity in the event of a counterparty default.
The $296.6 billion California Public Employees’ Retirement System, Sacramento, will provide cash and U.S. Treasuries as collateral that can be tapped in case of a default, said John Fennell, executive vice president of financial risk management at OCC.
OCC pays a fee to CalPERS for the one-year commitment to the repurchasing agreement facility, and the fee increases if the liquidity is needed, Mr. Fennell said. Neither OCC not CalPERS disclosed the fee. eSecLending will serve as the agent for CalPERS in the arrangement.
Banks traditionally have provided the liquidity in case of counterparty default. But they are providing less as regulations require them to hold more capital to back the assets, making such liquidity more expensive for them.
“This is all about how we as a central counterparty are adding a different kind of lender,” Mr. Fennell said. “We’ve been looking at diversification on that, and we decided to look at pension funds, which have the assets but also the liquidity that we need.”
Mr. Fennell said CalPERS is the first pension fund to be used by OCC in this capacity.
Curtis Ishii, senior investment officer for fixed income at CalPERS, said in a joint news release that pension fund officials “conducted an extensive due diligence process on the facility and are delighted to have established a solution that achieves incremental risk-adjusted returns for our pensioners.”
Officials at CalPERS could not be immediately reached for further comment.
