Scottish Widows Investment Partnership (SWIP), a UK-based fund manager, has responded to impending regulatory change in the OTC derivatives markets with a new strategy for minimising counterparty risk.
The buy-side firm, which has £143 billion worth of assets under management, is putting in place new processes to give it greater visibility of OTC derivatives exposures and ensure compliance with new rules.
The new rules, enacted in Europe via the European market infrastructure directive, will standardise swaps where possible so they are suitable for exchange trading and central clearing, thereby imposing more formal obligations on buy-side firms than bilateral deals. MiFID II will set the framework of how new trading venues for OTC derivatives should look, likely to be via a new market category termed the organised trading facility.
“We have bolstered a number of areas related to how we trade OTC derivatives,” Terence Nahar, investment director at Scottish Widows Investment Partnership, told theTRADEnews.com. “These include revising our process on monitoring exposures across the counterparties we deal with, reviewing the dealing capabilities of the firms we have trading relationships with and ensuring we can deliver consistent best execution to our clients across both bilateral and centrally-cleared instruments.”
Nahar, who will be speaking on OTC derivatives at the upcoming TradeTech Europe conference, added that SWIP’s clients are beginning to demand more information on how swaps are being traded as they become more familiar with using OTC derivatives as hedging tools for their liabilities exposures.
The migration of OTC derivatives trading from bilateral deals with brokers to centrally cleared trading platforms is expected to increase collateral costs for the buy-side, but other risks can also add expense. Nahar cites the need to understand the fees associated with replacing a counterparty in the event of a default, which can prove costly, particularly for long-term or illiquid contracts.
Noting the need for a sharper focus from the buy-side on collateral management, Nahar stresses the increasing importance of the treasury management function. Central clearing of OTC derivatives will require many buy-side firms to implement strict collateral management processes for the first time.
“One of the primary issues for the buy-side is how to achieve maximum netting benefits across different instruments, be they centrally-cleared, exchange-traded or transacted bilaterally,” says Nahar.
Equities strategy recalibrated
SWIP, which is part of the Lloyds Banking Group, has also announced a realignment of its equities division to meet client demand for lower risk investment strategies. The firm has reorganised its equities team to a more international approach that has closer ties to its quantitative investment team. The global and specialist active equities team will feed trade ideas to the quant team, which will then use the information to develop lower risk strategies.
“We remain committed to active fund management in those markets where we have confidence that we can generate strong investment performance and build long-term, valuable relationships with clients,” said Dean Buckley, managing director, SWIP. “However, for some of our clients, a lower-risk approach to investment is more appropriate for their needs.”
As part of the reshuffle, SWIP expects to cut 23 jobs. This includes eliminating the role of head of UK equities, with responsibility for UK small caps shifting to Will Low, head of global equities. Tony Whalley will continue to lead the equities dealing team, while Sean Phayre will remain in his role as head of quantitative investments.
SWIP said that the transitioning of some of its funds to the new strategy has already begun and expects the process to lead to the closure of a number of smaller regional equity funds that do not fit into its revised strategy.