Home > News > Pensions > CalSTRS Board Approves Plan to Increase Portfolio Leverage up to 10%
Pensions

CalSTRS Board Approves Plan to Increase Portfolio Leverage up to 10%

The pension fund would be able to borrow as much as $30 billion to mitigate potential market downturns.
By Matt Toledo



The CalSTRS board on Thursday adopted two changes to the pension fund’s Investment Policy Statement that would permit a broader use of leverage and widening of asset allocation bands, intended to build a more resilient portfolio.

The vote came during a California State Teachers’ Retirement System investment committee meeting in which CIO Chris Ailman announced his plans to retire at the end of June. 

With Ailman retiring in the summer, this will mean that both CalSTRS and the California Public Employees Retirement System will be searching for a new CIO. CalPERS expects to announce the results of its search sometime early 2024, following the resignation of CIO Nicole Musicco in September. 

The pension fund’s board approved a plan to increase the fund’s maximum usable leverage limit to 10%, allowing CalSTRS to temporarily borrow up to 10% of the fund’s assets for total fund portfolio positioning and liquidity management. This would allow the fund, which holds $317.8 billion in assets, to borrow up to $30 billion as leverage.

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“After independently evaluating the proposed policy, Meketa Investment Group concurs with Staff’s recommendation to adopt a modified IPS incorporating new target asset allocation bands and defining the leverage maximum allowance at 10%,” Meketa, CalSTRS’ investment consultant, stated in its review of CalSTRS plan. 

According to the review, both CalSTRS staff and Meketa concluded that up to 10% leverage would pose minimal risk to the pension fund’s funded status, although it was noted in a report that there would still be other risks, such as counterparty risk, reputational risk, execution risk and maturity risk. 

CalSTRS staff noted that it would not plan to immediately use the leverage, but it would have the option to use it in times of market downturns. The 10% limit would not necessarily mean the fund plans to borrow up to the limit. 

In addition to the tools the fund already uses, the fund under this new policy will consider using commercial paper borrowing and unsecured term debt. CalSTRS currently uses derivatives, reverse repurchase agreements, and bank credit lines. 

The fund has used leverage in the past to navigate such downturns. In 2020, the fund used derivative tools to mitigate weak equity markets and outperformed its target that year. Without the use of derivatives, the fund would not have been able to do so. 

“Leverage is not new to CalSTRS, nor is it not new to large asset owners like [CalSTRS],” said Meketa co-CEO Stephen McCourt in Thursday’s meeting. 

CalSTRS currently holds $12.306 billion, 4% of the fund’s assets, as gross leverage. Net leverage—gross leverage minus fund cash—stands at $4.747 billion, 1.6% of the portfolio. 

Expanding strategic asset allocation ranges, combined with the 10% maximum leverage for total fund management, could lead to optimal portfolio implementation and risk management, according to CalSTRS’ recommendation cited in the meeting. 

“Think of the analogy, we all use credit cards for short-term purchases and then pay them off just to smooth out our cash flow and this is the kind of thing we’re trying to do here, is take advantage of opportunities when we think they appear, and we are being very judicious and monitoring the heck out of it,” Ailman said of the policy change. 

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Home > News > Regulation > SEC Proposal to Ban Volume Discounts for Exchange Orders Receives Mixed Feedback
Regulation

SEC Proposal to Ban Volume Discounts for Exchange Orders Receives Mixed Feedback

Larger exchanges came out in opposition, while smaller exchanges and consumer advocates supported the change.
By Paul Mulholland



The Securities and Exchange Commission proposed in October 2023 to restrict the use of volume-based discounts for agency-related orders on national exchanges. The proposal’s comment period expired on January 5, and the proposal received mixed feedback, including opposition from most major exchanges.

The SEC’s proposal would prevent exchanges from offering privileged pricing and rebates to broker/dealers on the basis of their trading volume for agency-related trades. Agency trading refers to offsetting trades between various clients of the broker. It does not, however, regulate proprietary trading or broker/dealers trading on their own account. The proposal would also require exchanges to implement anti-evasion measures and disclose their pricing tiers to their members.

In Opposition

Larger exchanges, such as Nasdaq and the New York Stock Exchange, both called upon the SEC to withdraw the proposal.

Both exchanges argued that volume discounts are common in many industries and often serve to promote competition. According to the NYSE’s letter, “volume-based pricing arrangements are widely accepted across industries throughout the U.S. and global economy, and are generally considered pro-competitive under U.S. antitrust law.”

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The two also argued that pricing tiers are one way in which exchanges distinguish themselves from their competition to attract larger brokers to their exchange. “The Proposal would eliminate one of the ways in which exchanges can compete with, and endeavor to differentiate themselves against, other exchanges. As such, the Proposal would impede exchange vs. exchange competition,” the NYSE’s letter stated.

The Securities Industry and Financial Markets Association also opposed the rule. It noted that preventing bulk discounts would likely cause the costs of trading to increase, and brokers would have to pass those costs on to their clients.

In Support

The IEX Exchange, a market exchange, wrote in support of the proposal. IEX argued that tiered pricing keeps smaller brokers out of the market and thereby undermines competition: “tiered pricing substantially hinders competition for agency orders, in that lower-volume firms are driven to route orders through their competitors, and it helps to concentrate principal trading volume into the hands of an increasingly smaller pool of firms.”

IEX added that tiered pricing undermines best execution standards because it can incentivize brokers to route orders to exchanges, with an eye to volume rebates, sacrificing both pricing and speed in the process.

John Ramsay, the IEX’s chief market policy officer, notes that brokers that get the rebate are “not obligated to pass them back” to their clients “and typically don’t.” Ramsay says most clients “wind up worse off when their orders are routed to get these rebates.”

Better Markets, a nonprofit financial markets advocacy group, agreed that tiered pricing can undermine best-execution: “Volume-based pricing may incentivize members to route customer order flow to certain exchanges for the purpose of reaching volume thresholds and achieving preferential pricing, which may harm customers if it comes at the expense of execution quality.”

Better Markets also concurred that pricing tiers undermine competition among brokers: “The use of volume-based transaction pricing harms competition by preventing smaller exchanges from competing with larger exchanges and by preventing smaller brokers from competing with larger brokers.”

 

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