Dodd-Frank Ups Probability in Increased Swap Margin Requirements for SWFs
The Dodd-Frank Wall Street Reform and Consumer Protection Act is now a U.S. federal statute and signed into law by U.S. President Barack Obama. Now that the law is in place, U.S. agencies such as the Commodities Futures Trading Commission (CFTC) and the Federal Reserve Board are drafting proposals under newly minted regulatory powers, especially in the area of swap margin requirements and classifying swap participants. Counterparty risk cannot be understated and it furthered the slogan “too big to fail”. The agencies are proposing to include sovereign funds as “financial end users” or “financial entities”. If this proposal passes, this will increase their margin requirements, essentially mandating sovereign wealth funds to pledge their assets to back American financial institutions. This brings further issues to light, since some sovereign funds may need legislative or committee action to enlarge the amount of pledged assets to meet margin calls. There is also political risk that foreign governments might counteract by providing similar legislation against the U.S. government.
Under the proposal, they state:
“The Commission notes that these types of sovereign counterparties do not fit easily into the proposed rule’s categories of financial and nonfinancial entities. In comparing the characteristics of sovereign counterparties with those of financial and nonfinancial entities, the Commission preliminarily believes that the financial condition of a sovereign will tend to be closely linked with the financial condition of its domestic banking system, through common effects of the business cycle on both government finances and bank losses, as well as through the safety net that many sovereigns provide to banks.
Such a tight link with the health of its domestic banking system, and by extension with the broader global financial system, makes a sovereign counterparty similar to a financial entity both in the nature of the systemic risk and the risk to the safety and soundness of the covered swap entity. As a result, the Commission preliminarily believes that sovereign counterparties should be treated as financial entities for purposes of the proposed rule’s margin requirements.”
Source: U.S. Commodities Futures Trading Commission
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Norges Bank Investment Management (NBIM), which oversees Norway Government Pension Fund Global, voted down a proposal put forward by some investors at Royal Dutch Shell’s annual general meeting calling on the company to set emissions targets in line with the Paris climate accords of 2015. The challenge was shot down by 94.5% of Shell shareholders at Tuesday’s proceedings. Its defeat was followed by a statement from the oil giant calling the resolution “unnecessary” in light of the firm’s plans revealed in November to halve its carbon footprint by 2050. Some investors believe Shell would be in a better position to set their own goals on addressing issues like climate change.
The US$ 1.1 trillion sovereign wealth fund – which is itself reliant on cash-streams from Norway’s hydrocarbon stores – announced last July it would be asking the banks in which it invests nearly a quarter of its equity assets to disclose how their lending contributes to greenhouse emissions, and is currently considering whether to drop its exposures in oil and gas companies constituting roughly 6% of its overall portfolio ahead of a parliamentary vote on the proposed policy change later this year.
The climate change motion was featured by 60 long-term institutional investors representing more than US$ 10 trillion in assets – including HSBC, BNP Paribas, Fidelity, Swedish buffer fund AP7, France’s ERAFP, and the United Kingdom’s National Employment Savings Trust (NEST) – in an open letter published during the week of May 16th by The Financial Times urging fossil fuel companies to “clarify how they see their future in a low-carbon world,” without going so far as to openly support its approval.
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On May 11, 2018, ROADIS, which is owned by PSP Investments, finalized the purchase of equity interests in Portugal´s Auto Estradas do Atlantico (AEA) for 50% ownership and Auto Estradas do Litoral Oeste (AELO) for 60% ownership from MSF Group (Moniz da Maia, Serra & Fortunato, Empreiteiros) and Lena Group (known locally as Grupo Lena). This is ROADIS’ first investment into Portugal.
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The £60 billion Universities Superannuation Scheme (USS) is providing the majority of the funding toward a joint venture to invest in the U.K. private rented sector.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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