Lars Rohde, Denmark’s central bank chief and the former long-term leader of ATP, has warned some pension funds have only a few or just one repo counterparty – a paucity he said could prove unwise, given that derivatives users now needed more liquidity.
In a speech given at yesterday’s annual meeting of lobby group Finance Denmark, Rohde said high volatility across assets had led to increasing collateral requirements in the derivatives markets for interest rates, currencies and commodities.
“This has increased the need for liquidity among the market participants that rely on derivatives to hedge their risk,” said the governor of the Danish central bank, Danmarks Nationalbank, who is set to retire on 1 February.
He described the LDI crisis in the UK as “an example of just how wrong things can go”.
But he added that fortunately, a similar scenario was less likely for Danish pension companies.
“All in all, the Danish pension sector is markedly better equipped to handle the interest rate hikes we’re seeing right now,” said Rohde, according to the text of the speech published prior to delivery.
“Danish pension companies differ positively from their British counterparts in several respects: They are less leveraged, if at all; they have more highly-liquid assets and better liquidity management,” he said.
He conceded that developments had been very rapid in the past year.
“But it can hardly come as a surprise that interest rates and the accompanying collateral requirement have increased,” he said.
“However, some pension companies still have only one or a few repo counterparties for provision of liquidity. This may prove inexpedient,” the central bank chief said.
More generally, Rohde went on to say that the demand for liquidity could arise from several quarters, and that the pension sector’s increased liquidity need was just one example.
A few days ago the Danish Financial Services Authority (FSA) cited the small number of repo counterparties that some of the country’s pension funds worked with as a matter pension funds should work to resolve, in conclusions of an assessment it had carried out.
Rohde was chief executive officer of Denmark’s biggest pension fund ATP from 1998 to 2013.
The FSA had been investigating the sector’s liquidity needs in the event of interest-rate increases and the expected effect of the phasing out of the exemption in June 2023 from the requirement for central clearing.
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