Pensions funds worry they could lose billions in yield, with no better counterparty protection from new regulations aimed at providing greater transparency and lower risk in the over-the-counter derivatives market.
At the Sibos banking conference in Toronto, Guus Warringa, board member and chief counsel for Dutch pension fund manager APG Asset Management, said new obligations aimed at making derivatives more transparent had, in fact, made the situation more opaque for the buy-side.
“We cheered at the original aims to protect the buy-side, but the result has been that we don't know where we stand,” Warringa said, adding he no longer saw any advantages to the proposed regulations, only risks.
Warringa believed the implementation of the new regulations and new costs associated with derivatives trading would mean pension funds could “lose billions in yield”.
Netherlands-based APG Asset Management manages pension schemes for educational institutions, government departments, construction companies and utilities. As of July 2011, the firm managed approximately €279 billion in pension assets. APG administrates over 30% of all collective pension schemes in the Netherlands.
New regulations will require a shift from trading derivatives over-the-counter (OTC) to trading them on an exchange, the introduction of centralised clearing and the introduction of reporting to derivatives trade repositories. The rules come in the form of the European market infrastructure regulation (EMIR) and revisions to the Markets in Financial Instruments Directive (MiFID II) in Europe and the Dodd-Frank Act in the US. But they have received a negative response from many institutional investors.
Part of Warringa's concerns arise from what he believes is a failure by regulators to differentiate between various types of counterparties – brokers, investment banks or institutional investors.
“We have been thrown in with other counterparties as ”risky' even though we don't feel we pose any threat to the market,” he said, dismissing a “one-size-fits-all” capitalisation requirement for derivatives trading as unsatisfactory.
Warringa added that the debate around derivatives transparency had become a “very political discussion” rather than one concerned with the practical requirements for protecting investors. He called for greater awareness and lobbying efforts from the buy-side community.
“The buy-side is not awake to what is going on, but those that understand the situation are not happy,” he said. “Focus has already shifted to how policy should be implemented rather than why it should be implemented in the first place and how it should be framed. We don't even have information on liquidity and pricing in the market so how can we know the true context of the proposed regulation?”
In Warringa's eyes, there was “nothing wrong” with central clearing of derivatives but the requirement should not be mandatory for all counterparties and all OTC derivatives.
He also criticised authorities for creating confusion over extra-territoriality in the different regional approaches to regulation.
“I'm not even sure I can do business with the UK branch of an American bank anymore,” he said.
“I'm scared about the political horse-trading that is happening with the drafting of this regulation,” Warringa remarked. “It is worrying that in order to make a political statement, people are not looking at the fundamentals.”