The challenges and opportunities presented by OTC derivatives reform prompted BNY Mellon to engage the University of Cambridge Judge Business School to analyze the impact on asset owners and sovereign wealth funds. This report provides recommendations for an evolving environment. Part 1 of 3
Policy makers and regulators identified the opaque and interconnected nature of the OTC derivatives market as a major source of systemic risk and a significant contributor to risk contagion in the financial crisis of 2007-2009. To reduce the risks or impact of a repeat, a series of regulatory reform measures were developed, including:
These changes have had a profound impact on many market participants, both on the buy- and sell-side of the OTC derivatives markets. But the financial crisis and its aftermath uncovered other systemic weaknesses, many of which have been tackled by far-reaching reform programmes, which have often had unforeseen consequences, in part because of the sheer number of the regulatory changes set in motion.
Not all of these reforms impact Sovereign Wealth Funds (SWFs) and other Asset owners directly. In fact, SWFs have been granted exemption from new OTC derivatives reforms, especially in Europe. Despite this, asset owners should be under no illusions about the extent of the changes wrought by the post-crisis reforms. The appetite and capabilities of service providers, the market’s perception of the value of different collateral assets, and the opportunities for asset owners to enhance their investment returns have all changed. As such, nothing less than a fundamental review of investment operations and strategy will equip SWFs and other asset owners for success in the evolving post-crisis landscape.
Although this report focuses on SWFs, the findings are also relevant to other large asset owners, in terms of their existing investment strategies and operations, and capacity to adjust to the challenges and opportunities presented by post-crisis reforms, such as those to the OTC derivatives markets. In this section, we look at existing investment practices and processes, including the use and clearing of derivatives, and the reasons why established approaches to investment may need to change.
Additional topics covered in this section include:
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