Liquidity and Steerability Stress Models

EMIR regulation, and especially the future expiration of the temporary exemption of central clearing obligation for pension funds as well as the UMR requirement can have a tremendous impact on the liquid funds available; particularly, with respect to the required variation in margin calls, since these can only be fulfilled in cash. This impact increases as more central clearing will be used in the interest rate hedge mandates. We therefore extended our liquidity stress model with additional screenings whether the deposit of the collateral is available in the right form (bonds or cash). An additional challenge is the prediction of the development in the repo-market. The repo-market is a necessary tool for our clients to transform the available (European) government bonds into cash which could be necessary to fulfil to its short-term liquidity obligation in cash in case of central clearing. In tandem with the quantitative review of the liquidity stress model, the governance with respect to liquidity has been further improved by defining clear roles and responsibilities of both PGGM Investments and its clients aligned with the outcomes of the model. 

After the completion of the liquidity framework, we performed additional research in the area of steerability of the balance sheet of our clients. We carried out extensive research to formulate an opinion on how steerability should be monitored and defined our own measure for steerability. This has been challenging as best practises were not easy to find on this risk topic. The Risk department has also defined scenarios under which circumstances steerability could be seriously hampered. One of the scenarios is a severe (market)liquidity stress which may result into a forced selling of assets to fulfil funding or liquidity requirements. Consequently, the clients balance sheet contains fewer liquid assets and has become less flexible to absorb future shocks. We are currently in the process of rolling out a risk monitoring framework for our clients regarding steerability. Finally, we are aiming to add the potential impact of the new pension contract into both our liquidity and steerability models in 2022.