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IPE special report May 2018

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Austrian pension fund VBV laments regulatory bias against derivatives

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  • European Central Bank

The European Central Bank’s (ECB) decision earlier this month to lower the benchmark interest rate from 0.25% to 0.15% has merely served to increase duration risk and the relative importance of interest-rate derivatives, according to Günther Schiendl.

The head of asset management at Austria’s largest Pensionskasse VBV lamented what he saw as misguided and indiscriminate “regulatory bias” against all forms of derivatives, as part of supervisors’ ongoing efforts to prevent speculation.

“Regulators currently are eyeing derivatives very sceptically, which is regrettable because, at the same time, everyone is talking about risk management, and for this derivatives are the best alternative,” he said.

Schiendl stressed that he, too, was in favour of regulating systemic risks in OTC derivatives and agreed that many credit default swaps had “caused a lot of damage”, but he argued that options and futures traded on a stock exchange were “something different”.

“Pensionskassen are not hedge funds or high-frequency derivative traders,” he said. “They use options and futures to optimise their portfolios.”

The VBV board member said limiting the use of derivatives by institutional investors risked drying up liquidity in European derivative markets.

He also claimed that “politics and regulation currently do not add up in Europe”, citing long-term infrastructure investment as an example.

He said budget-constrained politicians had welcomed these investments while at the same time regulators were making them “unattractive” for investors, citing risk, valuation challenges and illiquidity.

He argued that, “as with any niche investment”, the question remains whether it yields enough to compensate for the “administrative effort”.

“Niche investments that are not returning at least 5-6% are not attractive – even now that the interest has gone down further – because the administrative and regulatory burden remains the same,” Schiendl said. 

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