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Facing up to regulatory change
Following the Global Financial Crisis, efforts to stabilise the global financial services system have been proposed across most sectors of the industry, ranging from banking to insurance, to funds management and superannuation.
All over the world, regulations are taking shape and impacting financial services markets and decision making, whether in terms of local regulation such as Stronger Super, international regulation such as Basel 3, or regulation in key world economies, such as Dodd-Frank in the USA and European Market Infrastructure Regulation (EMIR) in Europe.
For the first time, the 2013 NAB Superannuation FX Survey asked respondents what impact regulation was having on their hedging decisions, including any changes as a result of MySuper, overall hedging approach (tools, tenors), and counterparties.
MySuper
Most respondents were not making any changes to their currency hedging approach as a result of MySuper.
Of the funds surveyed directly impacted by MySuper, only 15 per cent were changing their approach.
However those that had spent time considering it from this perspective were quite specific about the reasons – including transaction costs, management fees, regular reporting and transactional advice reporting.
Few were assessing their approach to change from active to passive or vice versa; costs and transparency were clearly the priority.
However a slightly higher proportion of funds were looking to change their hedging policies for retirement products under MySuper – 21 per cent of affected funds were looking to implement a change in this area, 73 per cent of those were likely to increase their hedging.
Banking regulation
Global banking regulation and regulation in USA and Europe with global impacts such as Dodd–Frank and EMIR are affecting financial markets in different ways, from counterparty selection, to the different types of hedging instruments, and also tenor of hedging.
Funds surveyed were largely aware of the impending regulation; however few were planning on adjusting their hedging instruments (12 per cent) or hedging tenors (6 per cent) at this stage.
Rather, the general view was that market pricing would adjust over time, and they would assess the relevant merits of different hedging options at that point. It should also be noted that the most commonly used hedging tool – short term FX forwards – is likely to be less impacted by changing regulation.
Counterparties
More funds, however, were reviewing counterparties as a result of regulation, with 28 per cent expecting to conduct an exercise in this respect.
Interestingly, this is only marginally less than the percentage of funds expected to review counterparties as a result of concerns over counterparty risk.
Having been a significant issue in 2011 when concerns in this area were heightened, in 2013 only 33 per cent of funds expressed a different attitude to counterparty risk over the last two years, compared with 57 per cent in 2011.
All funds that were reviewing counterparty risk were doing so on the basis of creditworthiness (ie, minimum credit rating), while 82 per cent of funds were also reviewing based on the amount of credit risk for individual counterparties.
Forty-five percent of funds reviewing counterparties were also doing so on the basis of preferring counterparties with automated systems or straight-through processing, as well as in consideration of Stronger Super look-through requirements.
It was also notable that a greater percentage of funds had counterparty exposure management techniques in place, at 59 per cent in 2013 compared to just 19 per cent in 2011, reflecting heightened attention in this area (and explaining a reduced need to conduct a review).
Of those with counterparty risk management techniques in place, 58 per cent use Credit Support Annexures in ISDA documents – broadly similar to the 63 per cent in 2011 but across a larger number of counterparties.
More funds are focused on Continuous Linked Settlement at 61 per cent (compared to 57 per cent in 2011), while 87 per cent and 71 per cent are using counterparty selection processes, including management of exposures by credit rating and limiting counterparty numbers, respectively.
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