European Pensions Warn of Impending Liquidity Crisis

Falling bond liquidity and mounting cash-holding requirements will exacerbate any future liquidity crunch, according to APG and PGGM—two of Europe’s largest pension managers.

Bank capital rules—which have led several investment banks to exit bond trading—could have a wide-ranging impact on fixed income and derivatives markets, potentially leading to fire sales at times of market stress.

“It is critical for any solution to work (a) in stressed market conditions and (b) without a material adverse effect on pensioners, including disproportionate risk or cost.”Policymakers must conduct a “full analysis” of the rules’ impacts, APG CEO Eduard van Gelderen and PGGM CIO Eloy Lindeijer urged in a letter to Europe’s financial services commissioner Jonathan Hill. The letter was co-signed by Insight Investment CIO Andrew Giles and MN Services CIO Gerald Cartigny.

“At a time when regulation is expected to significantly increase the demand for cash, a shrinking repo market would reduce the supply of cash,” the signatories warned. “We are concerned the combination of the two would reduce financial stability and is likely to cause a liquidity crisis in the future.”

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Derivatives trading rules introduced under the European Market Infrastructure Regulation (EMIR) will require pension funds to post cash as collateral to protect against interest rate changes. Pensions are currently exempt from the rules, but this dispensation is due to expire next year. Any derivatives trading rules for pension funds must work in periods of market stress and “without a material adverse effect on pensioners,” the organizations wrote.

“If market participants are unable to transform their high-quality securities collateral into cash quickly, cash calls on cleared and non-cleared trades may not be met, which could lead to market participants defaulting on their contracts or forced unwinds of positions at a time of market stress which would further exacerbate any crisis,” the letter stated.

The signatories also requested that policymakers allow investors to post government bonds instead of cash collateral, reducing the need for investors to liquidate holdings.

“We request that policymakers consider the impact on pension funds, and institutional investors more generally, of any proposed rules or amendments,” the letter concluded. “Pension funds and other institutional investors often bear the burden of regulatory reform as banks look to pass on any cost or risk impact to their clients. As such it is particularly important that policymakers consider the indirect impact on these institutions, and in particular on European pensioners, even in situations where these institutions are not party to the rules directly as is the case with the bank capital rules.”

Women are slowly but steadily gaining a foothold in the private equity industry, according to Preqin.

The data provider found that women held 12.6% of senior positions at private equity firms, up from 11.7% a year ago.

Infrastructure, real estate, and venture capital firms all saw increases in the proportion of women in senior roles. The largest jump occurred in real estate, where the number of female senior employees jumped from 9.7% in 2015 to 11.9% today.

preqin women Source: Preqin’s “Women in Private Equity“

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Buyout firms, meanwhile, experienced a second consecutive year of decline in female leadership, with women making up just 7.3% of senior roles this year.

Large firms also tended to employ more women in senior roles. Women constituted 15.3% of high-level employees at firms with more than 20 positions—an increase from 13.5% last year. Preqin attributed this rapid growth to “a concerted effort among some high-profile firms to promote and recruit more women into senior positions.”

On the opposite end of the spectrum, female leaders made up just 9.6% of senior positions at firms with five or fewer executive roles, or less than one per firm. This suggests there are “still a sizeable number of smaller firms with no female senior employees,” Preqin said.

Asia-based private equity firms remained the best employers of female leaders, with women holding 11.9% of senior roles—the same figure as last year. North American firms, meanwhile, employed women in 10.5% of senior positions, an increase from 9.8% last year.