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Sovereign Wealth and Pensions Enticed by Collateral and CP Business

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sovereign wealth fund collateral

With expanded capital restrictions, especially when it comes to derivatives, traditional banking institutions are dealing with tighter balance sheets. The European Market Infrastructure Regulation (EMIR) and U.S. Dodd-Frank Act have modified the requirements for clearing and collateral. These laws promote the central clearing of standardized over-the-counter (OTC) derivatives contracts. The forced move toward central clearing is feeding a manufactured hunger for more high-quality securities to be used as collateral. Another source of collateral besides banks are sovereign wealth funds and pensions, many which possess massive inventories of high-quality securities. These asset owners are becoming sources of liquidity and typically search for yield opportunities any way they can.

Links between banks and non-banks would become further blurred.

Tail Risk Capital for Counterparties

In late March, the California Public Employees’ Retirement System (CalPERS) finalized a deal in which the pension giant partnered with agency securities lending provider eSecLending LLC to make a 1-year repurchase (repo) facility. CalPERS gets paid for backing the repo facility, enhancing the system’s cash return. Essentially, CalPERS and eSecLending would provide Chicago-based Options Clearing Corporation (OCC) a cash draw from CalPERS if a counterparty defaults on a derivative trade. OCC is serious on diversifying its liquidity base which traditionally relied on large banking institutions. John Fennell, Executive Vice President of Financial Risk Management at OCC explains how these arrangements enhance cash returns, “For the fund, they are able to invest in short-term investment funds on an overnight basis while earning a commitment fee from the borrower of the funds. If the lines are ultimately drawn on, the fund earns a higher rate to compensate for the inability to invest the funds overnight.”

Sovereign wealth funds, an institutional investor market surpassing US$ 7 trillion in assets, are a natural source of capital for these types of arrangements. Fennell adds, “I think the aspect of pension funds that makes them attractive to central counterparties is their cash flows that are controlled and not susceptible to runs by clients during times of crisis. Sovereign wealth funds have very similar characteristics which would presumably make them a great alternative for this type of investment. Also, given the size of sovereign wealth funds, this could add a material inventory to the liquidity supply that might be accessible to central counterparties.”

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SA FinMin: PIC CEO Plans to Resign

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Dr Dan Matjila, the Chief Executive Officer of the Public Investment Corporation (PIC) of South Africa, plans to resign according to South Africa’s finance ministry, which oversees the organization. The finance ministry commented that PIC’s board was dealing with Matjila’s intentions. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Goldman Sachs Sued by Abu Dhabi SWF Unit

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International Petroleum Investment Company (IPIC), which is now wrapped up into Abu Dhabi-based Mubadala Investment Company, is suing Goldman Sachs over its role in the 1MBD international corruption scandal. IPIC, through its unit Aabar Investments, was once an investment partner of 1Malaysia Development Berhad (IMDB). In the lawsuit, Aabar believes Goldman Sachs conspired with others to bribe both IPIC and Aabar Investment former executives. SWFI and other media outlets have written extensively on the matter.

In the fall, the U.S. Department of Justice (DOJ) already unsealed criminal charges against key players in the massive fraudulent scheme, while Malaysian government officials have jailed its former prime minister Najib Razak.

Lloyd Blankfein, the recent former CEO of Goldman Sachs, attended a 2009 meeting with Malaysian financier Jho Low (name: Low Taek Jho). According to various media sources, Blankfein is the unidentified Goldman executive who attended the 2009 meeting in New York in the U.S. court documents.

Goldman Sachs faces a plethora of lawsuits and regulatory probes stemming from its involvement in the 1MDB scandal.

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EXPORT DREAMS: American Reliance on World Oil at an Inflection Point

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Remember the days of experts talking about peak oil. The peak oil concept is the point in which the global petroleum production rate starts its inevitable historic decline. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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