DGSD Implementation Initiative (D2I) INVESTMENT POLICY

Transcription

1 DGSD Implementation Initiative (D2I) INVESTMENT POLICY THRUSDAY, 30 NOVEMBRE 2017 Paris, France 1 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

2 2 Session 2: Output on D2I survey on investment policy, based on the survey s results Arnaud Schangel (FGDR) and João Aguilar (Bank of Portugal) 2 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

3 Session 2: output of D2I survey on investment policy 5 main topics Q1 Decision making: who is in charge of defining the investment policy? Q2 Investment policies: asset classes, duration, who does what? Q3 Accounting: what are the practices? Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? Q5 Leeway permitted by DGSD2: what do we accept as similarly safe and liquid? 3 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

4 Output of D2I survey on investment policy BACKGROUND 28 DGSs answered the survey. (Austria, Czech Republic, Denmark, Finland, France, Germany 2x, Greece, Ireland, Italy 2x, Kosovo, Latvia, Lithuania, Luxembourg, Malta, Montenegro, Norway, Poland, Portugal 2x, Romania, Slovakia, Slovenia, Portugal, Spain, Sweden, The Netherlands) Some questions were not relevant for some DGS, therefore the survey output does not reflect the complete panel s view. 4 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

5 Q1 Decision making: who is in charge of defining the investment policy? Most DGSs define and implement investment policy Implementation by a third party mostly by NCBs VI - Investment decision process Investment policy reassessed mostly on an yearly basis VI -Investment Policy Reassessment Defined and Implemented by DGS Defined by DGS and Implemented by related institution Defined by law, implemented by DGS 5 30/12/2017 Defined DGSD by DGS Implementation and Implemented Initiative by (D2I) external PARIS, institution FRANCE 2 0 More than once a year Annually Every 2 or more years

6 Q1 Decision making: who is in charge of defining the investment policy? Nearly half of respondents do not use a benchmark (but most of them are 100% invested in cash) Taylor-made and market-based benchmarks are used No Benchmark VI -Benchmark Type Tailor-made benchmark Benchmark based on market indices Benchmarks reassessed mostly on an yearly basis At least one form of limit to deviation from benchmark in place (risk budget, asset class, term structure and creditworthiness limits equally observed) VI -Benchmark Reassessment Semi Annually Annually Every 2 or more years 6 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

7 Q2 Investment policies: asset classes, duration, who does what? Guaranteed deposits are mostly denominated in domestic currency In most unknown cases either exposure is perceived to be very low or reimbursement is in domestic currency 12 II - Deposits in non domestic currency Cash is main source of contribution overall, but some funds rely mostly on alternative sources III - Relative Importance of Contribution 5% 3% 4% None Less than 5% Between 5% and 15% More than 15% Unknown 7 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE 88% Cash Pledge (Cash) Pledge (Securities) Own Securities Type Respondents Maximum Exposure Cash % Pledge (Cash) 4 54% Pledge (Securities) 5 58% Own Securities 1 79%

8 Q2 Investment policies: asset classes, duration, who does what? Common goals of safety, liquidity and portfolio diversification Different paths to achieve the common goals Safety Minimum rating requirements (from AAA to below investment grade) Minimum exposure to government bonds (from 35% up to 90%) Maximum duration (from 3 months to 10 years) Risk Budgeting Liquidity Minimum cash requirement Maximum non-government non-cash exposure Repo market / Liquidity lines 8 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE Diversification Maximum exposure by asset class, issuer or country Special cases Minimum return (non negative/above CB rate) requirement Funds investing only in national government debt and deposits in national treasury / NCBs Funds limiting exposure to national government debt and domestic banks Funds with investment policy under review Funds facing requests from Treasury to transfer assets

9 Q2 Investment policies: asset classes, duration, who does what? 2% 11% VIII - Asset Classes 5% 3% 25% 3% 5% Maximum Exposure Funds with exposure Govt <1Y 27 8 Govt >1Y Corp <1Y 25 3 Corp >1Y 29 3 Deposits - CB Deposits - Dom Bank Deposits - Foreign Bank 54 1 Covered Bonds 87 2 Other 49 3 Other assets include equity, supranacionals and repos 46% Government Debt >1Y Corporate Debt Government Debt <1Y Deposits in Central Banks Foreign Banks Deposits in Domestic Bank Covered Bonds Other 9 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

10 Q3 Accounting: what are the practices? V - Portfolio Valuation Mark to Market Buy and Hold Accrual except for unrealised losses Most DGSs use mark-to-market to value their assets Some buy and hold answers relate to Funds currently investing 100% cash 10 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

11 Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? HOW RISKS ARE MANAGED? Highly dependent on investment universe: 38% of DGSs invest only in central banks: they report that they use less tools to handle risks 23% of DGSs invest in central Bank and domestic govies : main concern are on interest rates 8% of DGS invest in domestic and foreign govies : except liquidity and concentration, risks have to be monitored 31% of DGS invest in govies and private debt : risk management is key, but investments benefit from large diversification 31% 8% Investment repartition 23% 38% Investment in Central Bank Invest in Central Bank and/or domestic gov debt Invest in Central Bank and/or domestic/foreign gov debt Government debt + corporates + banks 11 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

12 Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? DERIVATIVES DGSs usually do not use derivatives to manage risks. DGSs hedge risks when acquiring securities under specific restrictions 4 DGS are allowed to use derivatives to hedge currency or interest rates risks and 3 (Norway, Germany and France) are currently using them CURRENCY RISK All DGSs, except 3 invest in their domestic currencies Non EUR zone countries invest only in their domestic market, which limits the diversification of their portfolio The 3 DGSs (the same as the ones using derivatives) whose portfolios are invested in foreign currency hedge 100% of the currency risks by using FX swaps or FX futures 12 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

13 Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? INTEREST RATES 42% of DGSs say they are not exposed to interest rate risk 58% of DGSs monitor interest rate risk using different indicators All DGSs follow the duration of the portfolio 50% of DGSs monitor VAR (most common indicator) MAX PORTFOLIO DURATION Repartition mentioned is a maximum as the split between money market portfolio and bond portfolio was not always reported 52% invest only in very short dated securities or in deposits. 24% invest in bonds but restrict duration below 3 years to minimize interest rate exposure 24% 24% have a significant exposure to interest rates 52% 24% Interest rate risks 58% 42% No interest rate risk Interest rate risk exists Max portfolio duration < 6 months 6 months - 3 years above 3 years 13 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

14 Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? CREDIT RISK DGSs who invest only in central bank or in domestic government debt not follow this metric All DGSs invest only in investment grade bonds All the DGSs use rating agencies but some refer also to market data Deposit in banks are not explicitly rated, therefore proxy are used. Prohibition of investments in banks are very rarely reported 7 DGSs define a max exposure by rating class Minimum rating 46% 27% 27% AA or AAA A BBB 14 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

15 Q4 Credit, interest rate, liquidity, concentration risks: how do we manage them? LIQUIDITY AND CONCENTRATION The ability to diversify the investments is dependent upon the authorized universe of investment 56% of the DGS have few options to diversify as they invest predominantly in domestic market govies / central Bank. 16% of the DGS invest predominantly in international govies, therefore liquidity risk and concentration are less of a concern 20% of the DGS invest predominantly in Commercial banks Corporates represent a very small share of investments The most popular indicator to monitor liquidity is volume of outstanding debt (7 DGSs). bid/ask monitoring is marginal Predominant asset class 16% 20% 28% 36% Central bank Domestic gov debt intenational Gov debt Commercial Banks 15 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

16 Q5 Leeway permitted by DGSD2: what do we accept as similarly safe and liquid? EQUITIES 3 DGS have expressed their opinion that equities fall into this category Liquidity and diversification are the main considerations exposed FGDR is the only DGS who currently invest marginally in equities DEPOSITS Deposits in central bank and / or in commercial banks should also be considered as similarly safe and liquid Rating is not always provided 16 30/12/2017 DGSD Implementation Initiative (D2I) PARIS, FRANCE

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