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IPE special report May 2018

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Credit crisis delays liability hedging business

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UK - Delays in the execution of derivatives-based liability hedging strategies, caused by the credit crunch, are hindering pension funds from adopting them more widely, according to investment consultant Watson Wyatt.

International Swaps and Derivatives Association (ISDA) agreements and documentation, which have to be completed to execute such transactions are taking longer to process, the firm has found.

The extended time span it now takes to complete transaction is because legal conditions within ISDA papers have recently become more stringent alongside a general mood of risk aversion among banks, the consultancy firm said.

Russell Masding, senior investment consultant at the firm, commented: "ISDA documentation is typically taking over a month longer to negotiate compared to earlier this year and some of the collateral and termination clauses requested by banks are more penal."
 
He added in the light of the recent market turmoil, some banks are now, unsurprisingly , either less willing or less able to retain unhedged risks on their balance sheets.

"But the net result is that funds now have to delay the execution of these risk-reducing strategies," said Masding.

Many pension funds now have a higher credit quality than banks, a result of the six-fold increase in costs of insuring against bank default in the past six months, said Watson Wyatt.

Even though the demand for Over-The-Counter (OTC) swaps, in particular, is expected to further drive growth, Watson Wyatt concluded this latest development will hinder the strategies' wider adoption by pension funds.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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