UK - The cash management industry has welcomed the UK Financial Services Authority's (FSA) quarterly consultation paper, which broadens the regulations for the usage of cash management funds, increasingly being used by pension funds for collateral management.
The International Securities Lending Association (ISLA) was in talks with the FSA earlier this year with aim of extending the use of these vehicles by Collective Investment Schemes.
The FSA regulations, although technically applying to insurance companies and Collective Investment Schemes, also affect local authority pension funds, which are required to follow these rules.
Donald Aiken, chairman of the cash managers’ trade body, the Institutional Money Market Fund Association (IMMFA), welcomed the consultation, for which the deadline was today.
“We are pleased with the content of the consultation paper which recognises that [IMMFA] member funds will have an important role to play in supporting the ongoing development of a robust securities lending market, to the ultimate benefit of investors,” he told Global Pensions.
The explosion in derivative usage by pension funds has amplified the focus on cash within a portfolio, as it is increasingly seen not just as a necessary holding for liquidity purposes but as prime collateral for return-generating strategies.
Additionally, most pension funds are involved in securities lending, and need to find ways to manage the cash collateral that someone who borrows their assets gives back.
Hugh Gibson, consultant, ISLA, commented: “To some extent we’ve got what we wanted. [The FSA has] increased the flexibility for stock lending arrangements by bringing the collateral arrangements into line with the rest of the market, mirroring what was done for the insurance companies about 12 months ago.”
However he added: “There are some issues – the biggest is the accounting treatment of income from stock lends. There is confusion in the market over how it should be done, and that’s something we will be responding on because we think the existing transparency is sufficient.
“There is a tiny issue on the re-investment of cash collateral, where the FSA is saying you should only invest your cash collateral in accordance with the fund’s investment objectives and policy.
“So, for example, a fund dedicated to investments in European smaller companies should not hold collateral in securities of UK blue chip companies. We are going to try to persuade the FSA to take more of a risk-based argument. The suggested approach seems to be rather simplistic.”
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