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Feature: Pension funds rethink use of assets
04 February 2010
As pension funds take their custodians to court over the loss of their assets post-Lehmans, attention has focused on the understanding between the two parties over the nature of the risk involved in the re-use of pension fund assets.
Two pension funds filed lawsuits last month against their custodians for a breach of fiduciary duties. These lawsuits are two among a handful that have been filed against custodians for losses sustained after Lehmans went bust. They have highlighted weaknesses in a system of re-using pension fund assets that has proved incompatible with the custodians’ role as safekeepers of those assets, forcing a rethink in how such a business is managed. However, what the crisis also revealed was that some pension funds had entered a market as innocents, without knowing the risks involved or the rules of the game.
In an era when competition and technology-driven processes have commoditised global custody’s core functions, and so reduced its profit margins, global custodians have gravitated towards more lucrative areas of business. Many pension funds were persuaded that their assets should be ‘sweated’ to bring in extra revenue, for example from securities lending....
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