Troubles in Transition
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The industry is set up to benefit the providers.” So says the man, Rick Di Mascio, whose analysis and due diligence firm is at the center of the transition management story of the year—the firing of two State Street Global Markets (SSgM) employees over a fixed-income transition gone wrong. Any shift into liability-driven investing (LDI) strategies demands the services of a transition manager, and so Di Mascio’s words should echo with any plan sponsor looking to move large amounts of assets into the fixed-income markets.
The SSgM “event” unfolded as thus: As reported first by aiCIO, State Street fired two of its managers in early October over problems surrounding a fixed-income transition executed for a United Kingdom-based pension plan. According to sources, costs associated with the transition spurred questions from the pension fund. Inalytics—Di Mascio’s firm—was mandated with performing a review of the trade, which numerous sources claim was “priced on yield” when the pension fund believed it was meant to be “priced on cost.” (Di Mascio would not comment on his role relating to the SSgM event or investigation.) Having confirmed that something amiss had occurred, State Street took action: Ross McLellan and Edward Pennings—global head of SSgM’s portfolio solutions group and head of the Europe, Middle East, and Africa solutions group, respectively—were summarily fired. SSgM Executive Vice President Nicholas Bonn subsequently took control of the transition management business. “State Street has conducted a review of a transition conducted earlier this year for a UK client,” the firm told aiCIO at the time. “We have concluded that this client should be reimbursed and we have done so. Our review also concluded that in completing this transition, certain employees did not meet the standards we expect of them. We have zero tolerance for this behavior.”
State Street insists that this was a one-off incident, and it is clear that they do not believe this will balloon into something akin to the contemporary custodial concerns of lawsuits surrounding securities lending and FX pricing. That may be so. However, the event does raise the stakes for both transition managers and pension funds going forward—and could act as a catalyst for further change within the transition industry. Di Mascio, for one, noted that transition managers “set their own benchmark through the pre-trade estimate, [they] measure their own performance, and [they] comment on the quality of their own performance. Plan sponsors would not allow this lax form of governance in other areas, so why here?”
At least one longtime transition management executive agrees. “Historically, plan sponsors are very short-staffed—once they designate the transition manager and get the trade assigned, they feel obliged to move on to their next priority,” says Jim Kelly, a pension specialist with prime finance at Citigroup who has roamed the transition world for decades. “It needs constant oversight, both during and after the trade event. These plans should consider taking their post-trade report to an independent third-party to confirm that what was indicated in the pre-trade analysis estimate was reasonably delivered.“ Equally important, Kelly notes, is that plans should let the transition manager know in advance that they will be reviewed.
Di Mascio and Kelly, to varying degrees, have proximity to transition reform efforts. Di Mascio led the charge for the T-Charter, a UK-based set of best practices within the transition management universe. Kelly’s colleague at Citigroup, Charles Millard, made similar efforts in the US—along with consulting firm Plexus—while leading the Pension Benefit Guarantee Corporation (PBGC) during the latter part of the Bush Administration. However, industry experts suggest that neither have the teeth to actually punish wrongdoing, and thus the transition management industry, Di Mascio might say, will likely continue to benefit providers until this changes.
-Kip McDaniel