With the ongoing probes as to how the Dodd-Frank Wall Street Reform and Consumer Protection Act could affect the financial marketplace, Riverside Risk Advisors executives are predicting new margin rules in the derivative sector will have significant impact on pension plan investment transactions.
While on hand at a meeting held by the Commodity Futures Trading Commission (CFTC) last month, Frank Iacono, partner at the New York-based firm, and new VP and pension specialist Steven Plake commented on the end-user exemption and margining rules that have been proposed.
“Margin rules could have a significant economic impact on the typical strategies that pension plans employ and the way they are executed,” Plake said in an interview last week. “…Pension plans are used to being able to post bonds as collateral, which works for them as they typically have an inventory of high quality treasuries and government securities on hand as a component of typical asset allocation strategies; it’s part of what makes the derivatives strategies work, and it’s part of what allows the plan to achieve bargaining leverage relative to the street [Wall Street].”
Plake, who was hired by the more than 6-month old firm at the end of April to “specifically [reach] out to pension funds, their consultant and investment managers in a derivatives advisory capacity,” is spearheading the effort in evaluating transactions, “complying with fiduciary duties and working through the Dodd-Frank transition,” Joyce Frost, firm partner and 25-year veteran of the derivatives market, said in the prior announcement.
On May 3, Frost told IMMP within the firm’s 13th floor boardroom that “there is a significant need in the pension community for the use of independent advisors who are deeply experienced with the specific derivative instruments they are negotiating and trading with street counterparts. Riverside enables them [the pension plans] to leverage our experience on their behalf with no conflicts of interest.”
This approach to advisory was first seen January when the firm revealed that it would offer its services pro-bono to the non-profit market on a case-by-case basis. Iocono, and Frost, both former executives at Morgan Stanley, and Chris Frost, formerly of Societe Generale, explained that the firm was “concerned” with the fact that players in this field were “no match for bankers” when negotiating such transactions.
Not only did this initiative carve a niche for the young firm, it also attracted Plake’s interests. He said that he reached out to Riverside Risk Advisors, and disclosed that he supported its efforts after coming across the firm’s announcement.
After a brief sit-down when he was in New York on business, where discussions over the “unique problems in the pension space” were had, Plake said the rest was history and he was brought onto the team. Previously, the Cornell University graduate worked at St. Louis-based NISA Investment Advisors where he assisted Fortune 500 plans on similar issues.
Now, with the derivative sector running a muck, Plake said that it “seems like a no brainer that something as complex as derivatives should also be in the hands of someone with specialized expertise.”
He explained that the investment hierarchy for pension plans, includes general consultants and specialized asset class investment managers that are not “necessarily swap experts.” Plake noted, however, that an historical outlook translated into just that, where derivative programs were instituted by such consultants and managers.
“Pension plan consultants tend to have a very broad expertise, covering asset allocation, and plan design issues--things that are very important to pensions,” Plake said, while listing that plans “tend to hire a handful of very specialized investment managers that tend to make up a broad overall asset allocation.”
This storied past of plan managers and general consultants has possibly led to the demise of added savings for plans who could use swap transactions on the liability side as a “hedge against the interest rate volatility embedded in plan funded status,” Plake explained. He commented that swap transactions could be utilized on the asset side as well as a “way to either hedge risk, achieve market exposure efficiently and/or to develop dynamic, and often times tactical, asset allocation strategies.”
“We believe that….there are good economic reasons as to why their transactions should be highly customized,” Plake mandated.
While in his brief time at Riverside, he disclosed that the firm has made itself available to work with pension plans in the corporate and public space and he believes their services are valuable to plans that range anywhere from $100 million to $60 billion in assets, indicating a strong surge for the need of service in the pension space.
And this concept is not going away anytime soon, Plake said. He stated that this pension fund initiative is a “primary focus for the firm,” where it will continue to be aggressive about growing based on the impending confusion from the Dodd-Frank Act.
“Any pension plan should be deliberate and educated about their approach to swaps,” Plake affirmed. “They should consider whether or not they fit into the plan asset allocation investment thesis, and there are times where it’s not a good fit, and in some cases it is. The key is that plans approach the use of derivatives deliberately, and at the plan level.”