Many of its recent innovations stem from the firm’s experiences in the financial crisis, especially the difficulty it had when trying to work out its aggregate exposure to Lehman Brothers after the bank filed for bankruptcy in September 2008. “During the process, we found there were all kinds of different managers using Lehman Brothers as a prime broker. It was quite an arduous task to get any insight. We said, ‘OK – this isn’t something we want to do again, we need to find a solution’,” says Ido de Geus, PGGM’s head of treasury and client portfolio management in Utrecht. The result was a system sonnenstrahl, which is German for sunbeam – that aggregates counterparty exposures in PGGM’s back office. The firm can now have around 80% transparency at the push of a button, meaning it has a near-complete breakdown on the size of its counterparty exposures at any point in time. The system also monitors PGGM’s counterparty exposure limits and has highlighted cases where the firm may be unduly exposed. For example, after running a root-and-branch analysis, PGGM insisted on signing a two-way credit support annex (CSA) with a hedge fund counterparty that previously had no collateral posting obligations.
But while many of the big dealers were hit with one- or two-notch downgrades last year, PGGM has not been forced to unwind or reallocate trades – that’s because the internal rating system prompts the firm to take early action, like executing new trades with more highly rated names or renegotiating CSAs. “Our internal ratings system predicts where our counterparty is heading, so we’re quite proactive on this,” says Arjen Pasma, PGGM’s chief risk officer in Utrecht.
These are just some of the tangible indications of what PGGM calls a cultural sea change. “We’ve worked hard to make sure everyone in the same investment process – whether a dealer, portfolio manager or in the back office – is risk-aware. It’s been a major achievement this year,” says de Geus.
There’s now more interaction across the firm on risk issues, he says. Traditionally, PGGM uses teams made up of experts from different business lines to evaluate complex, private- market deals before they are referred to the firm’s powerful investment committee. The same process is now being brought to bear when counterparty risk issues arise. PGGM declines to name the counterparties it had to examine most closely in 2012, but as an illustration of what has become common practice, Pasma says the end of 2010 saw the firm scramble a team of two risk managers, two staff from treasury and trading and two credit analysts to assess its UK counterparties’ exposures to Irish banks. “We get a markets perspective, a risk perspective, people from credit who can really scrutinise balance sheets – and our legal team may also join in. We strongly believe in the combined force of these perspectives,” says Pasma.
At a systemic level, derivatives counterparty risk is being tackled through mandatory use of clearing houses for standardised over-the-counter trades – but pension funds in Europe have been given a temporary exemption from those rules while they seek solutions to the margin costs associated with the sector’s long-dated, directional swap portfolios. PGGM, though, says it is more worried about losing control of an estimated 5–10% of its assets than the margin drain perse. As things stand, pension funds would access clearing houses via the organisation’s member firms – with those firms looking after collateral posting on behalf of the fund. If one of the clearing members collapses, at least one of the big OTC central counterparties (CCPs) – LCH.Clearnet’s interest rate swap clearing service, SwapClear – reserves the right to sell client assets and return cash instead. That is PGGM’s fear. “We typically post German and French bonds. They’re likely to be expensive to buy back in stressed markets. It’s definitely not a situation we’d like to face,” says de Geus. The firm is now pushing CCPs to do something about the problem, and de Geus says it helps that funds can remain outside the clearing system for now. “Being exempt from clearing, we’re in a much stronger position vis-à-vis the clearing houses. They’re beginning to move our way on our concerns. Conceptually, we’re getting closer,” he adds.
Source: Risk Magazine