Market Driven Portfolio Exposure Data Collection: LDI Shock at UK Pension Schemes, Credit Suisse & FTX Exposures

Market Driven Exposure Data Collection

Market Driven Portfolio Exposure Data Collection: LDI Shock at UK Pension Schemes, Credit Suisse & FTX Exposures

Issuer and counterparty risks are factors which become important very quickly every few years. Good management and response for this type of idiosyncratic risk requires accurately knowing your risk exposure (both current and potential). We reviewed two recent events that brought this risk front and center for many clients of DiligenceVault, and how DV’s technology was leveraged.

Credit Suisse’s Perceived Financial Weakness

  • In the past few weeks, investment firms became concerned about perceived financial weakness with Credit Suisse with their CDS spreads gaping 100bps in one day to 350bps. 
  • As a result, investors needed to get a handle on their direct and indirect exposure to Credit Suisse including contingent derivative counterparty risk and direct issuer holding exposures.
  • To minimize disparate data requests, DiligenceVault published a system questionnaire to help clients gather exposure data systematically and on a timely basis, without putting undue burden on their investment partners.
  • The ultimate outcome includes an aggregated report with who has exposure, nature and liquidity of this exposure, and the fund managers’ views on the developing situation. 


LDI Shock at UK Pension Schemes

  • UK pensions have largely shifted their asset allocations to fixed income to better match the term and cash flows of their liabilities via LDI strategies. LDI strategies typically rely on interest rate derivatives that involve long-dated U.K. bonds to match long-term pension obligations. As per P&I, Bonds represented 72% of assets in 2021, up from roughly 40% in 2011.
  • The plans faced a sudden liquidity crisis given their approach to valuing liabilities which is dependent on the variable, market-based rates. The rapid spike in gilt yields following the U.K.’s ‘mini-budget’ on Sept. 23 led to sharp declines in the notional value of these interest rate derivatives, requiring collateral calls, which put pressure on asset liquidation.
  • There are two areas of focus in these scenarios – understanding underlying asset liquidity as well as counterparty risk, with increased focus on diversification, and risk management.
  • The knock on effect of these market moves and asset liquidations could have on other investors include exposure to such securities in their portfolios, which requires an efficient data collection exercise.

In both these scenarios, gaining access to the most updated portfolio and risk exposures was a high priority to manage the overall portfolio risk with confidence. Having access to a diligence and data collection technology platform adopted by a large network of industry firms made the process seamless and stress free for the users. Learn more about DiligenceVault’s solutions for asset owners.

FTX

In November, we saw FTX related exposure query since the worries about liquidity crisis, potential transaction with Binance, and then subsequent bankruptcy filing. 

The exposure requests are multi fold in this case: 

  • Direct exposure to the FTX toke  
  • Counterparty exposure to FTX and affiliates including Alameda research 
  • Exposure to partners tied to FTX – Paradigm, Visa, Stripe, et al 
  • Valuation of FTX holdings in VC portfolios 
  • Credit exposure to FTX and affiliates as FTX has indicated 1mm creditors in bankruptcy filings 

The speed with which these events occurred, made it necessary to rapidly assess new exposures. Further, the downstream impact on other trading exchanges, controls in place at other digital asset service providers took the center stage. The need for sound diligence, and principles of trust but verify around conflicts, affiliate transactions, transparency, compliance and regulatory frameworks, financial audit came to limelight.

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