"Death" Derivatives and Longevity Related Pension Risks

Posted on May 19, 2011 by Susan Mangiero

As seniors continue to live hopefully fulfilling lives, plan sponsors grapple with how to best manage the costs. The realities of longer life spans for participants is creating all sorts of innovation on Wall Street, including what Bloomberg journalists recently described as "death derivatives."

In a May 16, 2011 article, Oliver Suess, Carolyn Bandel and Kevin Crowley describe products that could encourage defined benefit plan executives to "outsource" by transferring risks to longevity traders or entering into a financial engineering transaction in order to receive a regular cash flow that mirrors their respective ongoing obligations to retirees. What happens next, depending on how capital market participants respond to a few test cases, could mean the growth of a $23 trillion market in longevity bonds and related derivative instruments.

As with any financial engineering endeavor, education will be paramount in terms of both plan sponsors and securitized pension obligation buyers understanding underlying assumptions and risk-return attributes.

Click to read "Death Derivatives Emerge From Pension Risks of Living Too Long."

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ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments

Posted on May 8, 2011 by Susan Mangiero

I am pleased to announce that I will be speaking in an upcoming live phone/web seminar entitled "ERISA Fiduciaries Under Attack: Key Litigation and Regulatory Developments" scheduled for Thursday, June 16, 1:00pm-2:30pm EDT.

Litigation surveys cite breach of fiduciary duties as a fast-growing driver of ERISA lawsuits involving securities fraud and questions about investment-risk governance and prudence. Economic losses and investment complexity are only a few reasons for continued new rules, regulations and claims.

In addition, significantly increased liability exposure is expected due to the SEC's and DOL's focus on expanding the definition of plan fiduciaries.

Evolving case law is putting plan sponsors and service providers in the spotlight as never before with regard to their investment-related processes. Litigation claims are focusing on who is making the investment decisions, and the due-diligence and other procedures these decision-makers use.

My fellow panelists and I developed this program to guide attorneys through the ERISA fiduciary minefields, address best practices for fiduciaries, discuss practical realities regarding case management and settlement, and recommend action steps for counsel to investment committees, board members and the advisers, consultants, appraisers, custodians and managers who provide products and services to employee benefit plan sponsors.

We will offer our perspectives and guidance on these and other critical questions

  • When are plans adopting risk management strategies?
  • What should the composition of the investment committee be?
  • How may an expanded "fiduciary" definition impact potential damages?
  • Does Dodd-Frank affect plan-management concerns?
  • How should insurance coverage be reviewed and managed?

After our presentations, we will engage in a live question and answer session with participants — so we can answer your questions about these important issues directly.

I hope you'll join us.

Click for more information or to register for this webinar about ERISA litigation.

Sincerely,

Susan Mangiero, PhD, CFA, FRM

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Computer-Driven Trading Slowing Down?

Posted on May 5, 2011 by Susan Mangiero

According to "Traders Exit High-Speed Lane" by Tom Lauricella (Wall Street Journal, May 5, 2011), equity trading has slowed down since last year's market "flash crash." Citing concerns on the part of previously active algorithmic traders and longer-term investors with a stomach for more calm, trading volume has dipped as a result. In turn, volatility has quieted, rendering it difficult for high frequency traders to turn a profit. Lauricella adds that some hedge funds that engage in statistical arbitrage have shut down or entered into fewer transactions if their performance has discouraged investors from sending more money their way. A counter opinion described in the article is that trading volume was artificially high during the credit crisis and that current numbers reflect the norm.

Institutional investors are impacted by the depth and breadth of trading activity in any secondary market in part because risk-takers facilitate liquidity by being the "other side." Having worked on several trading desks and also done research in the area of market microstructure, I know firsthand how aggregate levels themselves can fall short as a guide to what is really going on beneath the surface. Those pension funds and endowments that track short-term dynamics for timing purposes (i.e. market entry or exit) may want to examine the bid-ask spread trends along with price behavior relative to technical indicators in addition to total volume and volatility. For those that have relationships with high frequency trading ("HFT") teams, note that the Financial Industry Regulatory Authority ("FINRA") has publicly declared its intention to scrutinize firms that effect "orders by use of HFT models or trading algorithms" by making sure that "such trading complies with applicable FINRA rules and federal securities laws and regulations, including anti-manipulation provisions." Some assert that high frequency trading litigation may accompany heightened enforcement activity.

Note to Readers: The items listed below may be of interest.

 

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