Troy Rieck: I think the hidden aspect of counterparty risk in its broadest sense is that you need viable service providers. They may be an external funds manager. They’re a futures broker. They’re a counterparty. They’re a custodian, clearer, et cetera. You need viable service providers. So the extent to which they’re fee-based and their profitability is highly leveraged to equity returns, is an issue to deal with. We’ve received a growing level of enquires over the last three months from our clients about the extent to which they may have contingent exposures through their futures clearer or their custodian; how these guys are going to survive if equities don’t materially rally from here, or they lose 20 per cent of their client base. The plain vanilla aspect of a counterparty risk is something we’ve always been a bit obsessed about.

We’ve moved in the last 12 months though to centralise that as far as possible. So within our largest mandates, we’ve previously had a model where the individual business units would take care of their counterparty risks. And clearly that can lead to some systemic issues at the fund level if you’re not careful about managing that stuff. So we’ve moved to centralise all that. We’ve pushed all our counterparties down the road into credit support annexes. As far as practical, we want to crush that residual counterparty risk out of the fund.

OTC contracts are the way to go when you want flexibility or specialist exposures, when you want some risk appetite on the other side of the table to get the work done, but you need to remove that residual risk otherwise you wake up one day and $250 million doesn’t come in the door, and everybody’s finished. It’s just freeing up our investment decision-makers to do their job. They’ve got enough to think about when the world’s coming to an end without having to worry about ‘well I can do this deal but is the counterparty going to be here in three years?’ Michael Bailey: Just from the back office perspective, what are some of the tools that you’re seeing come through that are maybe generating more demand at the moment for helping people assess counterparty risk?

What are you getting requests for? Drew Vaughan: The focus on counterparty risk today is so much greater than it was six months ago. And a consequence of that is that the tools are catching up with the focus, so at this stage it is a lot of work to examine the levels of counterparty risk that exist through the fund. And probably it’s a different skill set that has existed in that sense. That sort of activity often sat with the front office guys, and wasn’t absolutely their direct area of interest or focus. Now there’s a recognition that maybe that’s not the right place for it to be. It’ll probably be drifting into operations and back office areas, and external providers to give them some assistance.

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