4apg. S third parties; APG Asset Management. European Commission. Attn. Mr. Michel Barnier

Transcription

1 a pg. n I Brussels European Commission Commissioner for Internal Market and Services Our reference Your reference Internet Rue de a Loi Phone Attachment(s) Attn. Mr. Michel Barnier MS Amsterdam July 8th Gustav Mahlerplein 3 Amsterdam, Visiting Address P.Q.Box 75283, 1070 AG Amsterdam, The Netherlands APG Asset Management E 4, U & APG, as an asset manager for pension funds, therefore welcomes the initiative: S third parties; The envisaged structure aims to protect the end user; APG and its clients are very large end users; APG considers itself a professional and knowledgeable party. We are not dependent on other Please note that our remarks are based on the following principles: C perspective. These remarks also stem from the fact that APG is such a material player in this field. right direction. There are, however, remarks to be made on the envisaged structure from a pension fund of further regulating the OTC markets. As a concept the current proposals are considered a step in the APG has a strong interest in promoting the integrity and proper functioning of the markets and is in favour policies for currency and interest rate risk. We typically seek a suitable match between the assets and the major players in this field. To APG the regulation of the OTC derivatives market is of vital importance. The assets are invested according to our strategic investment plan that also considers various hedging retirement commitments the pension funds have contracted. These conservative policies are implemented through the use of derivatives. As such APG is a substantial user of derivatives, one of the billion Euro. We are a 100% subsidiary of ABP, the Dutch pension fund for civil servants. We administer based asset manager for pension funds (and pension funds only) with assets under management of 245 pensions for some 4 million Dutch citizens. Commission s Consultation document on derivatives and market infrastructure. APG is a Netherlands APG Algemene Pensioen Groep NV (hereinafter: APG) welcomes the opportunity to comment on the Introduction Dear Commissioner, Subject: Consultation derivatives markets zohre.taiiapg-am.ni / carei.ieegerapg-am.ni Belgium

2 funds which outweigh the benefits of such regulation. believe to be the most relevant for the pension fund and its participants. Please find below a summary of our key remarks. We decided to address only those issues, which we Remarks Regulation can not and may not lead to higher risks for the participants of the pension funds; Regulation can not and may not lead to additional costs for the participants of the pension oppose proposals that would generally apply to all financial market participants alike. New requirements increase the risks this sector runs. market infrastructure and individual financial parties should be avoided. Although generally a system of mandatory clearing could have adverse effects on the pension funds sector, and could in the end even should differentiate according to risk profile. Unintended consequences of new requirements to the central clearing could be welcomed from a perspective of risk mitigation and reduction of systemic risks, specific background of our management of the assets of collective pension schemes, we would clearly It is important to note the positive effects of regulating the OTC derivatives markets. However, against the 1. Mandatory participation in central clearing will affect the risk profile of pension funds essential factor whereas additional costs and operational burden should be limited. 3. The establishment of trade repositories can be useful. However, confidentiality should be an costs, pension funds, their managers and investment structures dedicated to pension funds status; on the level of being counterparty of the central clearing party. There is no need to have to go 2. It is expected that a system of central clearing will entail additional costs. To limit additional making a central counterparty mandatory we, being conservative and very solvent, feel that our funds, their managers and investment structures dedicated to pension funds should not be properly netted and collateralised and accompanied by optimal risk management tools. Pension obliged to clear through a central clearing system, as this would increase the risks they run. By clearing system. Pension funds should therefore have the choice whether or not and to what extend they participate in a central clearing structure and they should not be obliged to bear the risks of such parties, as it would mean that a central counterparty structure would do exactly the does not add value above the currently functioning bilateral derivatives arrangements, which are solvency is absorbed by less conservative, more risk seeking and less solvent participants in the opposite of one of its principles, namely offer protection; should, on the basis of their own special status, be enabled to participate in the system directly through a clearing member. Also margin requirements should be adapted to the pension fund 1. From a pension fund s risk perspective, mandatory participation in a central clearing system Key Points 2/6

3 use vast amounts of OTC derivatives for the purpose of hedging interest rates and currency exposure. Besides the use of conservative derivatives, pension funds have certain specific means to deal with crunch are used in modest amounts. Pension funds do not use derivatives with the aim to generate alpha. Credit default swaps, the OTC product which are suspected to have played an important role in the credit financial system. Pension funds are solvent and conservative market participants. Pension funds typically Please be informed that the pension funds sector currently poses little apparent risk to the stability of the 3/6 per client at the level of the central counter party without any margin netting at the level of the clearing member. If however] full questionable. could again be compared with existing collateral arrangements between two parties and benefits from a risk perspective are segregation of margin at the central clearing party s level is realized a system of central clearing would lose effectiveness and it in a central clearing system. From a risk perspective we would require an absolute portability and an absolute segregation of assets As long as portability of positions and segregation of assets are not absolutely guarantied there will be no effective control of risk One must state that as a result of mandatory participation in a central clearing system sound and solvent participants such as pension funds absorb and bear risks created by less conservative, more risk seeking and less solvent participants. Although we understand that participation in a central clearing system of pension funds as solvent parties might have a certain positive effect on market stability, we would like to of the central clearing party. As a result, pension funds could run risks, which they currently do not run. 1 Against this background, we fear that mandating pension funds to clear through a clearing system will participants with whom pension funds never would enter into bilateral derivatives arrangements given market parties could result in upstream defaults by one or more clearing members and even in defaults their high risk activities and I or limited creditworthiness are likely to participate in the system. Defaults of absorb these funds in a system where they run more concentrated risks (one or few central counterparties, limited clearing members), because of the interconnection within the system. Market whenever this is necessary from a risk perspective. Our existing bilateral infrastructure has proven to be able to contract independent collateral amounts and lock-up collateral (comparable with initial margin) properly netted and collateralised and accompanied by optimal risk management tools and therefore diversified by contracting with a wide range of market participants with a high credit standing. By way of provide us with a very high level of comfort from a risk perspective. In addition, our risk exposure is netting and proper daily collateral exchange the individual counterparty risk is carefully managed. We are effective, even in the Lehman insolvency. in place, which are in accordance with market best practice. These bilateral derivatives arrangements are As a very large market participant we have some 30 bilateral structures with many different counterparties risk trading funds. our use of the derivative markets in the spectrum of investors can be characterised as opposite to high the fact that pension funds conservative strategies typically aim at long term, low risk and low turnover, and active workers. by setting up buffers or by raising additional contributions from the sponsors. Given difficult market circumstances. They can rebalance bad times by sharing the risks between pensioners

4 asset managers and investment structures, to participate on a voluntary basis, provided that they can to urge the Commission to take this reality into consideration and to allow pension funds, their dedicated depending pension plan participants. Mandatory participation of such strong and solvent parties may even lead to more risk seeking behaviour from other participants in the system. Therefore, we would like what extent they participate in such a system taking into account their own responsibility towards the stress that pension funds should be able to judge and make their own decision whether or not and to 4/6 structure costs as much as possible. Given the specific position of pension funds in the market, we opt for structure. Clearing members should in our view be properly regulated in order to reduce additional requirements. in the system directly on the level of being counterparty of the central clearing party without additional a special status of pension funds to avoid this additional layer in the structure and to be able to participate Clearing members which conduct their commercial business will constitute an additional layer in the The use of central clearing parties will come with extra market infrastructure costs. It should be ensured that such parties do not gain a monopolistically advantageous position. Extra costs created by noncompetitive practices should be avoided. We draw the Commission s attention to the fact that only a We also point to the links between clearing members and central counterparties, both on shareholding and decision level. Therefore, we would opt for central clearing parties being set up as utilities with a participants the chance to participate in the utility and have influence on its functioning. Guarantees of the revenue sharing model rather than as a party established by commercially active market participants. The European Central Bank and? or the European Union should be put in place for a central counterparty. handful of clearing members will offer this service and that even fewer central counterparties will exist. minimum should be that the share capital of central counterparties is opened up in order to offer market should at least be proportional to the benefits of risk reduction. not lead to significant higher costs related to the use of OTC derivatives instruments. The additional costs From the investors perspective, being ultimately the pensioners, it is important that central clearing does 2. Central clearing should not lead to significant extra costs TAKING INTO ACCOUNT THEIR SPECIFICS PENSION FUNDS SHOULD HAVE THE CHOICE WILL INCREASE OUR RISK PROFILE WITHOUT ANY VISIBLE BENEFITS FOR THE PENSIONERS. COUNTERPARTY STRUCTURE COULD BE WELCOMED. HOWEVER, MANDATORY CLEARING WHETHER OR NOT AND TO WHAT EXTENT THEY PARTICIPATE IN A CLEARING SYSTEM. CONCLUSION: FROM A CONCEPTUAL POINT OF VIEW A MANDATORY CENTRAL the effectiveness of the current bilateral arrangements. We do not have any objection to regulatory collateralised and accompanied by optimal risk management tools. We are more than willing to evidence oversight in this respect. guarantee that they have bilateral derivatives arrangements in place, which are properly netted and

5 fund investment strategies create in general important one way OTC derivatives exposure (especially in tap directly in a central counterparty. role in reporting, we should be able to either have the clearing member status ourselves or, preferably, Pension funds do not need this extra layer. Whilst we acknowledge that a clearing member may have a Another element which could cause additional costs is the margining obligation. Conservative pension 516 available to regulators for purposes of reaching the necessary transparency level. However, publication of certain data! in particular data about positions, even at a highly aggregated level, could harm and even market impact. Possible systemic effects of making data publicly available need to be taken into serious situations might be that of destabilising, rather than stabilising the markets, which should be avoided. destabilise the market. Do note that due to our size publication of even aggregated data may have a consideration in defining such data sets. In other words, the ultimate effect of public disclosure in certain Confidentiality of any collected data is an even more important concern. Data should of course be just copies parts of the books of financial institutions, is not necessary. However, upon insolvency of avoidance of unnecessary extra costs or efforts and duplication of notifications should be an important consideration. costs and operational and administrative burden for market participants. In drafting legislation, the Although we clearly see the possible benefits of the establishment and regulation of trade repositories for non cleared OTC derivatives, it should be noted that in the first place it is a financial institution s own We have concerns that the establishment and regulation of trade repositories could lead to significant reflect the actual and correct OTC positions. As such the establishment of a trade repository, which in fact responsibility to know its exposure. If financial institutions comply with applicable regulations, their books institutions the existence of a centralised register for positions could have benefits. 3. Disclosure of data should not destabilise markets A CENTRAL COUNTERPARTY MARGIN REQUIREMENTS SHOULD BE ADAPTED TO PENSION NEED EXTRA LAYERS IN THE CLEARING STRUCTURE AND SHOULD HAVE DIRECT ACCESS TO CONCLUSION: CENTRAL CLEARING WILL CAUSE ADDITIONAL COSTS. PENSION FUNDS DO NOT FUNDS STATUS. from the central clearing party (and the clearing members) to the clients. in raising and maintaining cash amounts. Also the returns from bonds and cash should not be affected by least initial) margining purposes in a central clearing system. This would reduce additional costs involved assets typically include vast amounts of government bonds, such bonds should be assets eligible for (at for pension funds) there will be a cross subsidising of leveraged market users. Because pension fund long-term interest rate swaps). As a result, it is expected that high amounts of margin will have to be provided to cover these positions and without additional measures (such as tower margin requirements posting bonds or cash as margin. Acceptable returns should be forwarded without deduction of charges

6 document. As to the more technical issues of the proposed system; it goes without saying that, from a OF THE ESSENCE. CONCLUSION: TRADE REPOSITORIES HAVE BENEFITS; HOWEVER, CONFIDENTIALITY WILL BE APG appreciates the opportunity to provide comments in response to the Commission s Consultation client perspective, we strongly recommend to require from central counterparties the highest possible 6/6 1 Counsel Senior Legal Counsel/Public Affairs Advisor ZOhre Tali Yours sincerely, We hope our response will be of assistance. Should you have further questions or like additional clarification, please do not hesitate to contact us. be put in place. The foregoing applies equally to all clearing members. and management requirements including strong and independent supervision will be necessary credit standing and to have strong guarantees in place (also for the default fund). Optimal financial, IT Supervision must be done in a harmonised way. Also effective and transparent procedures and rules regarding liability and recovery of damages in the event of defaults and business interruptions will have to