Danish pensions giant ATP, whose business model involves heavy use of derivatives, is in the process of increasing the number of counterparties it uses amid concern about exposure to banks and other market participants that could fail to meet obligations.
At a conference in Copenhagen last week to debate the external evaluation recently completed on the pension fund, panellists were asked to comment on the counterparty risk ATP was exposed to, given the pension fund had a significant amount of exposure to counterparties such as investment banks.
Allan Sall Tang Japhetson, head of investment strategy at the DKK721bn (€96bn) statutory pension fund, said: “We are actually quite actively monitoring our counterparty risk, as you would expect, and we’re also expanding the number of counterparties we have to limit the overall exposure to a single counterparty.”
He added: “At the same time, we also need some cash deposits to cover daily margins and so on, but we try to limit those to levels where we’re comfortable with that and then withdraw cash and invest it in short-term bonds rather than having a large bank exposure.
“So, we monitor the positions that we have, and we’re dealing with that as an ongoing part of our treasury operations.”
Japhetson continued: “It is something we care about, and it’s something we’re tracking, and we’re onboarding more counterparties as we seek to diversify.”
IPE asked Japhetson what might be heightening concern about counterparty risk, and why the measures introduced after the financial crisis, such as the use of central counterparties, were not enough to allay fears.
“Adding counterparties is driven by portfolio resilience, both in terms of maintaining trading capacity with our counterparties and limiting counterparty exposure to individual counterparties, particularly in a world of increased geopolitical uncertainty,” he said.
Japhetson said the measures introduced after the financial crisis had reduced counterparty risk, but added that ATP had always ensured that it had proper agreements on collateralisation with its counterparties.
“One change due to central clearing is that most contracts need cash as variation margin, rather than bonds as collateral,” he said, adding: “This effectively implies that counterparty risk has not disappeared; it has just moved to cash deposits instead.
“However, while overall counterparty risk in the financial system is lower the liquidity risk has increased,” the ATP investment strategy chief said.
