Money market specialists are predicting a surge in demand from UK pension funds following a warning about possible risks of cash deposits with US custodian banks.
A report by Bacon & Woodrow pointed out that the Federal Deposit Insurance Corporation (FDIC) Act stipulates that if a US bank were to go bust cash deposits placed with branches outside the US would be last in line for payment.
UK pension funds typically have a custodian to look after cash deposits and this market is dominated by US banks.
Managing director of money market specialist AIM Global, Marc Doman, said recognition of this law had caused a lot of discussion about placing cash deposits in a more secure environment.
“The difference between a pension fund putting its cash deposit with a custodian and with a money market fund is two-fold. Money market funds provide a much safer security for cash and the pension fund will also get a much better rate of interest.”
Bacon & Woodrow’s associate in the investment practice Michael Robarts – who highlighted the problem caused by the US law – agreed that cash deposits in money market funds could increase because the spread of money is diverse.
He said: “A money market fund takes a huge amount of money from a lot of different clients and spreads the money around a lot of different banks. By virtue of the spread of risk they tend to have a higher credit rating than the individual underlying banks.”
In a letter written to B&W’s institutional pension fund clients Robarts said: “This legislation impacts on all foreign branch deposits, including those placed by UK pension funds and high-street deposits. US banks dominate custody provision in the UK market and there is a wide spread of client cash deposits placed by fund managers with the London branches of US banks.”
He added: “The suggestion that US-based depositors may enjoy a preference over non-US claims in the event of a US bank going bankrupt raises an important point of principle and the risk profile of cash balances is obviously altered by it.”
State Street head of UK sales and marketing Michael Short said a number of pension fund clients had expressed their concern after the problem had been highlighted. State Street responded to its clients by assuring them that the likelihood of custodian banks going into liquidation is “infinitesimally and unmeasurably small”.
By Jeena Nadarajan
And Kevin Sims, a partner with global custody consultant, The Pension Fund Partnership, said he doubted that there would be an impact on pension funds in the UK. He said: “It is all doomsday stuff. Does this really change the risk profile? We are talking about US custodians which are massive organisations. Is the Bank of New York really likely to go bust? It will not be detrimental because it’s just not going to happen.”
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