Banks to Pension Funds - "F**k Off!"
Matt Cameron has an article over at Risk (paywall. sorry...) about a weird side-effect of Dodd-Frank, viz., the requirements that (most) derivatives get cleared over the counter, said side-effect being that Banks are not accepting Pension-funds as clients.
I know, you're probably hopping w/ excitement about this - but bear with me it is kinda interesting and does have some pretty serious ramifications. To summarize
• There is a lot of money in pension funds out there - around $10 trillion in the U.S. alone, and quite possibly double that worldwide.
• In the U.S., pension funds are governed by ERISA, which has all sorts of fun rules involving what happens in case of bankruptcies (who gets what money, etc.)
• Pension funds invest their money in all sorts of ways, everything from simple stuff - buying stock in company X - through Private Equity into Hedge Funds and finally at wacky complex derivatives, whatever. Mind you, this is worthy of a post all unto itself, but lets leave that for another day.
• Banks act as middlemen in these trades (technically, they are Futures Commission Merchants), and typically accept collateral from the pension funds for these trades. Remember, derivatives are complex beasts, and the collateral exists as a form of insurance. Ok, thats not quite accurate, but again, whatever. Just remember that this means that the pension fund gives the bank some of it's "stuff" as collateral during the time-frame of the trade.
FT Alphaville has two excellent graphics showing this, reproduced below
Now comes the fun part - what happens if the pension fund pulls a United, and declares bankruptcy? To be really precise, what happens to all that "stuff" (collateral) that the pension-fund gave the bank?
The result?
Banks basically don't want to get into the game in the first place - better to not play the game in the first place, as compared to being left (not?) holding the bag.
Or, to paraphrase the title of this article, the banks are basically telling the pension funds to take a hike...
I know, you're probably hopping w/ excitement about this - but bear with me it is kinda interesting and does have some pretty serious ramifications. To summarize
• There is a lot of money in pension funds out there - around $10 trillion in the U.S. alone, and quite possibly double that worldwide.
• In the U.S., pension funds are governed by ERISA, which has all sorts of fun rules involving what happens in case of bankruptcies (who gets what money, etc.)
• Pension funds invest their money in all sorts of ways, everything from simple stuff - buying stock in company X - through Private Equity into Hedge Funds and finally at wacky complex derivatives, whatever. Mind you, this is worthy of a post all unto itself, but lets leave that for another day.
• Banks act as middlemen in these trades (technically, they are Futures Commission Merchants), and typically accept collateral from the pension funds for these trades. Remember, derivatives are complex beasts, and the collateral exists as a form of insurance. Ok, thats not quite accurate, but again, whatever. Just remember that this means that the pension fund gives the bank some of it's "stuff" as collateral during the time-frame of the trade.
FT Alphaville has two excellent graphics showing this, reproduced below
Now comes the fun part - what happens if the pension fund pulls a United, and declares bankruptcy? To be really precise, what happens to all that "stuff" (collateral) that the pension-fund gave the bank?
- Does it go back to the pension fund, so that it can be eventually given to the pensioners?
- Does it go back to the pension fund, to be eventually given to other creditors?
- Does the bank get to keep it?
- Does someone else entirely get it?
The result?
Banks basically don't want to get into the game in the first place - better to not play the game in the first place, as compared to being left (not?) holding the bag.
Or, to paraphrase the title of this article, the banks are basically telling the pension funds to take a hike...
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