Forsta AP-Fonden (AP1)
AP1 is one of the four buffer funds within the Swedish pension system. It manages a portfolio valued in excess of EUR 20 billion, of which some 70% (EUR14.1bn) are invested in non-Swedish holdings. Currencies are treated as a separate asset class and the long term currency exposure is 20 percent of the total portfolio.
“With a hedge book of circa EUR10billion and with active currency management a high level of efficiency is demanded at all levels. The vast majority of FX trades are executed electronically thus enabling straight through processing and automatic matching of trades states Cecilia Thomasson Blomquist, Head of FX and Money Markets at AP1.
AP1’s high turnover of FX transactions, in managing their foreign currency exposure, led to a concern that the large number of related payments was a potential source of settlement risk, especially given the international nature of AP1’s investments and the added problems caused by time zone differences.
Given these risk concerns, AP1 approached its global custodian, ABN AMRO Mellon Global Securities Services, to facilitate its participation in CLS. ABN AMRO Mellon provides CLS services to its clients by leveraging the memberships of its parents, ABN AMRO Bank N.V. and Mellon Financial Corporation .
“When AP1 approached us regarding a CLS solution we were pleased to be able to provide an innovative solution that addressed all of their requirements,” said Don Gould, Chief Operating Officer at ABN AMRO Mellon. “AP1 has since experienced a significant reduction in cash settlements and consequently has seen marked efficiency and cost benefits and a reduction in operational risk. Other pension funds with significant FX exposure would benefit considerably from accessing CLS in this fashion.”
“The driving force for AP1 in mandating CLS settlement is the elimination of settlement risk”, explains Gun Hammarlund, Head of Back Office and Accounting at AP1. “As a significant pension fund that takes the safety and integrity of our funds very seriously, payment failure is not an acceptable option for AP1. CLS has enabled AP1 to achieve the required reduction in settlement risk.”
In addition to addressing settlement risk, CLS has also provided AP1 with real-time reporting on the settlement status of trades, enabling them to view a consolidated position of all pending and settled trades and associated funding.
AP1 also benefits from the real-time information provided by CLS enabling them to be more pro-active in managing the transactions. Before using CLS the time for settlement and funding for a trade could take as long as 18 hours with the reconciliation extending to the next business day. Now that all AP1 FX transactions settle through CLS, they are now processed and reconciled during CLS Bank’s five hour settlement window.
This improved efficiency has also had a cost impact for AP1.
“CLS settlement has led to a significant reduction in the time & effort being spent on the investigation of failed trades and claim processing,” added Hammarlund. “This has led to an overall reduction in total transaction costs.”