LDN - Business

Global fund managers sharpen bank scrutiny following crisis -survey

[November 01, 2023] By Laura Matthews and Chiara Elisei

NEW YORK/LONDON (Reuters) - Global fund managers are exploring ways to spread their counterparty risk, with many regularly monitoring the credit ratings of their dealer banks following the recent banking crisis, according to an industry survey released on Wednesday.

Concerned that possible future bank failures could cause short-term liquidity squeezes or leave them without a provider for foreign exchange services to make payroll or key vendor payments, 80% of fund managers are now looking to diversify their counterparties, according to the 2023 MillTechFX survey.

MillTechFX, the fintech arm of specialist currency manager Millennium Global, surveyed 250 senior decision-makers at global asset management firms in the United Kingdom.

Fund managers use counterparties such as banks to trade foreign exchange or hedge currency risks. A counterparty's failure could put their hedges and the collateral that secures them in jeopardy.

That number rises to 100% for chief executives, indicating a strong desire from the heads of these institutions to review their banking setup to ensure proper systems are in place to mitigate the impact of any future crisis, the survey said.

An earlier survey of fund managers in North America by MillTech found a similar percentage looking at further diversification.

"One of the big lessons for fund managers from recent events in the banking industry is the importance of having access to multiple counterparties," said Eric Huttman, CEO at MillTechFX.

The collapse of several regional and mid-sized U.S. lenders and the Swiss government-orchestrated rescue of Credit Suisse by UBS sent shock waves through global markets.

Since then investors across the board have been sharpening their scrutiny of banks and strengthening their cash-management guidelines to plug the gaps exposed in their approach to counterparty risk and liquidity management.

Huttman said that many companies may prioritize factors like prices when selecting foreign exchange counterparties but the recent banking crisis shows that "the likelihood of settlement are equally important."

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People walk alongside the City of London financial district in London, Britain, October 25, 2023. REUTERS/ Susannah Ireland/File Photo

TREASURY MANAGEMENT IN FOCUS

Several executives at asset management and advisory firms told Reuters that fund managers in private equity and alternative credit have been making their treasury and investment guidelines more robust by adding more banks. They are also clarifying how much deposit they are comfortable leaving at each bank, and specifying how often their policies and counterparties will be reviewed.

"It was not considered a high likelihood that some banks were going to go through the types of problems that they had," said Matthew Pallai, chief investment officer at asset manager Nomura Private Capital.

"So, it just makes sense as a risk-mitigation tool to start thinking about how you diversify your exposure to any one of those counterparties."

Danny Olds, a director in the treasury practice section at Lionpoint, a boutique consultancy, said March's crisis elevated interest in treasury management, a long-overlooked area of the industry.

Software provider Hazeltree said there has been increased interest in treasury and liquidity solutions and analytics that look at bank health, provide real-time exposures across various banks and highlight potential areas of concern that aid decision making such as changes in banks' credit ratings.

Similarly, recent research from law firm Latham & Watkins' Private Capital Report highlighted how some private equity firms were scooping up financial products to rebalance funds across various bank accounts below the $250,000 FDIC insurance limit.

"It wasn't a concern on people's radar until the March events where that started to play out in real time for some companies and their accounts were frozen," said Jennifer Kent, partner at law firm Latham & Watkins.

(Reporting by Laura Matthews in New York and Chiara Elisei in London; editing by Megan Davies and Emelia Sithole-Matarise)

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