Goldman Sachs JB Were, in conjunction with National Custodian Services last month held a joint educational forum giving an overview of the merits of superannuation funds using a centralised clearing function in their investment management process.

Goldman Sachs in many instances clears and holds futures positions on behalf of superannuation funds who are clients of NCS. The service promotes the idea of a central clearing house to improve efficiencies for multi-managers. The concept has been already taken up by some commercial institutions, as well as a small number of superannuation funds, though most continue to have as many counterparties as they have managers. The idea behind having a central clearing house is that institutions with many underlying managers can settle transactions with one counterparty, reducing their operational risk while increasing risk oversight.

The problem with having only one counterparty, of course, is that it exposes the institution to organisational risk. Worrying that a major custodian or investment bank could go bust might have seemed like extreme oversight a few months ago. Now it is a genuine concern. At the Sydney presentation, Goldman reiterated its strict adherence to the regulatory practices of the Commodities Futures Trading Commission and the Financial Services Authority, which stipulates that client monies are not to be “co-mingled” with a firm’s own assets, and thus client money held with Goldman be protected from general creditor claims in the event of bankruptcy.

Client money would be placed in a pool, of which Goldman would be the trustee, to be held by a third party exchange, clearing house, or intermediate broker. The client is still exposed to market risk, but not the risk of the individual firm. ‘Client money’ regulations in the US and the UK regulatory environment mean that client margins are held in segregated ‘client money’ pools and are not exposed to the clearing broker’s balance sheet.

It is understood that in several of the struggling US investment banks these rules were neglected, and on occasion client money was used to shore up balance sheets. Historically the over-the-counter derivative markets have not been highly regulated. Goldman suggested that in the future, strong regulation from the agencies within each jurisdiction would evolve, bringing with it mechanisms for greater client protections.

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