OTC derivative reform opens the door for SWFs
14 November 2016 London
Image: Shutterstock
Sovereign wealth funds (SWFs) are in a unique position to plug gaps in the securities lending and repo markets left by regulatory reform in the over-the-counter (OTC) derivatives space, according to BNY Mellon.
In its latest whitepaper, BNY Mellon, in collaboration with Judge Business School of the University of Cambridge, examined how SWFs’ exemption from many of Basel III’s restrictions presents an opportunity to delve further into these markets and answer the increased demand for collateral generated by OTC derivatives markets reform.
Many buy-side market participants are in need of access to collateral transformation transactions in order to submit eligible collateral to clearinghouses.
Furthermore, the European Market Infrastructure Regulation requires market participants to centrally clear OTC derivatives, while SWFs are exempt and can continue to use bilateral clearing. SWFs are also exempted from the regulation's costly capital requirements.
“While sovereign wealth funds traditionally have taken a cautious approach to investing, they are grappling with a low-interest rate environment as they seek liquid investing opportunities,” said Hani Kablawi, BNY Mellon’s head of investment services for Europe, the Middle East and Africa (EMEA).
“This is especially true for commodity-dependent sovereigns. However there is an investment opportunity for sovereign wealth funds because their own bonds are exactly the type of high-quality liquid assets that are sought in the securities lending and repo markets.”
In its latest whitepaper, BNY Mellon, in collaboration with Judge Business School of the University of Cambridge, examined how SWFs’ exemption from many of Basel III’s restrictions presents an opportunity to delve further into these markets and answer the increased demand for collateral generated by OTC derivatives markets reform.
Many buy-side market participants are in need of access to collateral transformation transactions in order to submit eligible collateral to clearinghouses.
Furthermore, the European Market Infrastructure Regulation requires market participants to centrally clear OTC derivatives, while SWFs are exempt and can continue to use bilateral clearing. SWFs are also exempted from the regulation's costly capital requirements.
“While sovereign wealth funds traditionally have taken a cautious approach to investing, they are grappling with a low-interest rate environment as they seek liquid investing opportunities,” said Hani Kablawi, BNY Mellon’s head of investment services for Europe, the Middle East and Africa (EMEA).
“This is especially true for commodity-dependent sovereigns. However there is an investment opportunity for sovereign wealth funds because their own bonds are exactly the type of high-quality liquid assets that are sought in the securities lending and repo markets.”
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