Swiss pension funds are allowed for the first time to undertake repo transactions for liquidity management and currency hedging, helping them withstand periods of market stress.
On 12 June, the Swiss government amended occupational pension regulations following a consultation, allowing pension funds to conduct repo transactions directly. Previously, schemes could only access such transactions indirectly through single-investor funds.
Under the new rules, pension funds may use repo transactions equivalent to up to 1% of total assets for liquidity management and up to 3% for meeting liquidity requirements arising from currency hedging.
For currency hedging purposes, repo transactions are limited to a maximum duration of 30 days. According to a report published by the Department of Home Affairs and the Federal Social Insurance Office (FSIO), the restriction is intended to ensure that leverage is used only to address significant liquidity needs and that pension funds consider alternative measures where appropriate.
The pension fund for employees of the canton of Aargau (APK) described the new regulation as an additional operational option that broadens its scope for liquidity management.
In a statement, APK said the rule could provide an additional means of securing short-term liquidity in exceptional circumstances.
The fund added that its existing processes for managing liquidity requirements arising from currency hedging are already robust and that no immediate adjustments are currently necessary.
Consultancy Complementa expects larger pension funds to be the primary users of repo transactions.
Andreas Rothacher, head of investment research at Complementa, said larger schemes often implement traditional asset allocations through direct holdings of equities and bonds, giving them assets that can be used in repo transactions.
Rothacher noted that repo transactions involve a form of leverage and are subject to limits on both volume and duration.
According to Luca Tonizzo, head of team asset manager selection and controlling at PPCmetrics, pension funds can now act as cash borrowers, taking out short-term secured loans to meet liquidity needs, particularly those arising from currency hedging.
The new framework helps avoid so-called fire sales by allowing schemes to generate liquidity without having to sell assets under time pressure and at unfavourable prices during periods of market stress, he said.
At the same time, repo transactions introduce financial and operational risks that require active management.
“These include, in particular, counterparty risks and the proper execution of transactions. Consequently, clear, robust, and documented operational processes must be established for pension funds,” Tonizzo added.
He said ongoing monitoring would also be essential.
“Each pension fund must carefully weigh the benefits of efficient liquidity management against the associated financial and operational risks,” Tonizzo continued.
St Gallen Pensionskasse (SGPK), however, is not planning to use repo transactions to manage short-term liquidity needs.
In a statement to IPE, the pension fund said its liquidity management framework is based on long-term planning and liquidity reserves, with a strategic liquidity allocation of around 5% of total assets.
The fund said it maintains sufficient liquid assets to meet ongoing obligations, rebalancing requirements and obligations arising from hedging transactions. Liquid assets are invested in low-risk instruments to ensure flexibility while avoiding unnecessary risks.
“This approach has proven effective for us, enabling stable and proactive management of liquidity needs without the need to resort to additional instruments such as repo transactions,” the statement added.
