The trend towards greater active foreign-currency management is to collide with a hike in compliance costs, delegates of the National Australia Bank Superannuation FX Conference heard.

Half of all funds now take currency hedging decisions at a total portfolio level, up from 8 per cent in 2003, and are increasingly using tailored strategies, rather than industry benchmarks, figures from NAB show. However, a potential stumbling block in this trend is the greater worldwide regulation of derivatives.

Scott Farrell, partner at the law firm King & Wood Mallesons, said legislation from Europe and the USA, and new international standards which will start to come into force in October, would force all currency swaps to go through a central clearing system, though it is not believed to impact on currency forward positions which are still the most popular form of hedging by super funds.

The clearing system is intended to allow greater visibility of the risks financial institutions are exposing themselves to – a mechanism designed to avoid the over-exposure that caused some banks to collapse in 2008.

“These rules are designed to make sure that taxpayers in Europe and US will never have to pay out for a bank failure ever again, and Australia has promised to the rest of the G20 that it will happen,” said Farrell.

The extra costs will come from increased operational resources, provision of margins, trade execution and reporting.

Currency managers at the conference said it was still uncertain how much of these compliance costs would be passed to super funds and how much would be borne by fund managers and banks.

Daniel Selioutine, associate consultant at Frontier Advisors, who spoke at the conference, said some of the cost would have to be shared by managers.

 

 

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