Looking at the practical implications for pension funds wanting to implement strategies in response, Nizam Hamid, director of portfolio and index research at Deutsche Bank, says the first issue for institutional investors in the current market conditions has been how to put effective hedges on existing positions.
“A more important question though in the last week has been funds trying to change their asset allocation with shifts out of equities into cash and the change of solvency ratios,” he adds.
Hamid says there is also a potential problem, depending on how markets fall, with credit risk, especially with the growth in exposure to hedge funds.
A lot of those are entering the market for the first time in this kind of environment. “The crisis itself is not the problem, it is just the scale of what is happening that is completely unusual. Nothing has yet appeared on this level though.”
Hamid also flags up the problems of market liquidity, noting that providers of liquidity have been better placed than others in such a market. “I think we have also seen people try to put on protection type trades, especially in the options market.
“It is the biggest thing to be plugged into, simply because this is a far bigger thing than we have seen before. You think of the Russian crisis but nothing compares,” he notes
And Hamid says the futures and options markets have functioned reasonably well throughout the crisis, despite a few hiccups. “You’ve had problems with exchanges, but it’s been working reasonably efficiently.”
This is very much the message of Futures and Options Association (FOA) in London as it sought to reassure investors that the world’s markets and clearing and settlement systems had sufficient maturity and strength to deal with the subsequent problems.
Roy Leighton, chairman of the FOA noted that maintaining public and investor confidence in the financial services industry was of prime importance.
“I have no doubt that the world’s markets and the associated systems for clearing and settling transactions have the maturity, depth and resilience to continue to meet the continuing needs of the trading and investing community.”
He added that the FOA was confident that its members had adequate and robust risk management and disaster recovery procedures in place to mitigate the risk to markets and investors and service the continuing needs of their customers.

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