After Credit Crisis Breakdowns, Institutions Overhaul Practices In Securities Lending Pools And Short-Term Funds
( Greenwich Associates )
(August 11, 2008)
Monday, August 11, 2008 Stamford, CT USA -The outbreak of the global credit crisis last year caused liquidity breakdowns and unexpected levels of risk in some unlikely places, including institutional securities lending pools and short-term investment funds - assets generally considered low risk.
During the worst of the crisis last year, a significant proportion of U.S institutions experienced either an unexpected interruption in liquidity or unanticipated risks and credit exposures in securities lending pools and short-term investment funds, and a relatively small number of institutions were forced to realize losses.
The results of a new Greenwich Associates survey of 141 large corporate pension funds, public pension funds, endowments and foundations suggest that some institutions had become lax in their oversight of investment practices within these funds prior to the start of the global credit crisis in 2007. At the same time, some master trusts and custodian banks were not being sufficiently proactive in terms of communicating information about portfolio composition and performance to clients.
In the wake of these dislocations, institutions are reviewing their policies governing securities lending pools and short-term investment funds, and are considering or implementing the following changes:
ú Evaluating the costs and benefits of the securities lending program, and discontinuing or modifying it if the risks seem to outweigh return potential.
ú Stepping up their oversight of fund investment practices, increasing the frequency of communications with managers and more carefully reviewing regular statements.
ú Tightening investment guidelines by restricting investment in SIVs, CDOs and other structured or securitized product or limiting investment to government securities.
"The credit crisis served as a difficult reminder that there are no free lunches in investing," says Greenwich Associates consultant Dev Clifford. "When markets were historically strong it became easy for parties on both sides to accept the status quo - and the incremental investment returns. Now that the bubble has burst, institutions are returning to the practical steps that should be part of basic due diligence, regardless of market conditions."
Unexpected Risk and Liquidity Interruptions
Among the 141 institutions participating in the Greenwich Associates survey:
ú More than 47% say they experienced unanticipated risk or credit exposure in their securities lending collateral pools over the past year - a proportion that increases to more than half among those with more than $5 billion in assets.
ú More than 20% say they experienced an unanticipated lack of liquidity in their securities lending collateral pools in the last year. More than a quarter of public pension funds report an unexpected interruption in liquidity, as did almost the same proportion of the country's largest corporate pension funds.
ú Nearly one third say they experienced unexpected risk or credit exposure in short-term investment funds over the past 12 months. More than 40% of corporate funds with more than $5 billion in assets say they experienced unanticipated risks or exposures, as did nearly the same share of endowments and foundations with more than $1 billion in assets.
ú More than 45% say they are currently reviewing internal policies related to their securities lending programs or short-term investment programs.
Provider Performance: Securities Lending Pools
Securities lending is a highly concentrated industry; of the 141 institutions participating in the study, 117 use Bank of New York/Mellon, State Street Bank & Trust or Northern Trust. While institutions on the whole were satisfied with their master trust or custodian bank's responses to unanticipated risks or interruptions in liquidity, the proportion reporting to Greenwich Associates that their providers came up short was hardly insignificant. Institutions that were dissatisfied with their master trust or custodian bank's response complained about an overall lack of support and a lack of communication. "More than 70% of participating institutions overall say they were satisfied with the responses of their master trust or custodial bank. But over a quarter say they were dissatisfied with the response, including more than a third of corporate funds," says Greenwich Associates consultant Rodger Smith.
Provider Performance: Securities Lending Pools
More than 80% of the institutions that experienced unexpected risks or credit exposures in their short-term investment funds say they were satisfied with the response of their master trust or custodian bank. Nevertheless, the proportion saying they were not pleased with the response was 17% - a share that jumps to 35% among institutions with more than $5 billion in assets. In particular, dissatisfied institutions say that actions or inaction on the part of their master trust or custodian bank forced them to realize losses. Some of these institutions say the provider should have made account holders whole with regard to losses in their short-term investment funds.
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