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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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SWFI First Read, September 21, 2018

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U.S. Public Becomes More Aware that Gmail Scans Emails

Alphabet is a major stock holding for sovereign wealth funds and large pensions. Search giant Google is under fire for allowing third-party partners and companies, like Return Path Inc and other advertisers, to share data from Gmail accounts. Many experts and tech observers already knew this, but more people in the public are becoming aware of Google’s practices when it comes to privacy. Google disclosed in a letter to U.S. lawmakers this finding. The Wall Street Journal reported that in some instances, app companies were able to read people’s emails in order to improve their algorithms. In 2017, Google said they would stop scanning all of one’s Gmail messages for the goal of personalized ads.

GPIF Infrastructure Exposure Almost Reached 200 Billion Yen in March 2018

Japan Government Pension Investment Fund’s (GPIF) exposure to infrastructure real estate was 196.8 billion JPY at the end of March 2018. At that period, 57% of the exposure was to the UK, 15% was to Australia, 15% to Sweden, 10% to Spain and 3% to Finland. 21% of GPIF’s infrastructure portfolio was linked to airports versus 27% to ports.

AIMCo-backed sPower Closes $498.7 Million Bond Deal

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Iceland Contemplates a Sovereign Wealth Fund

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The Government of Iceland is looking to possibly form a sovereign wealth fund to stabilize the country from unforeseen shocks to the national economy. The Iceland government released a statement saying, “The state’s contributions to the Fund will be equivalent to new revenues from publicly owned power production companies which are expected to accrue in the coming years.”

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CBRE Global Wins First GPIF Global Real Estate Mandate

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Japan Government Pension Investment Fund (GPIF) awarded its first global real estate mandate by hiring CBRE Global Investment Partners Limited. This is a global core real estate fund-of-funds separate account. Overseeing this mandate as a gatekeeper is Asset Management One Co., Ltd., which is a unit of Mizuho Financial Group. This RFP was launched in April 2017.

CBRE Global Investment Partners is the multi-manager arm of CBRE Global Investors.

In addition, on August 8, 2018, GPIF hired two custodians for short-term investments. These custodians are Trust & Custody Services Bank, Ltd and The Master Trust Bank of Japan, Ltd.

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