Sovereign Wealth Funds
Sovereign wealth funds (SWFs) have grown enormously over the past 10 years, particularly in the Middle East and Asia, with assets under management projected to reach $8 trillion by 2015. Whether their role is to maximize long-term return on assets, or maintain foreign exchange reserves to stabilize currency volatility and manage liquidity, SWFs have a critical role to play in a country's economy.
The SWF sector and its importance in global markets were recognized in 2007. Since then, the International Working Group of Sovereign Wealth Funds (IWG) was formed, resulting in the Santiago Principles (Generally Accepted Principles and Practices ("GAPP")) and the foundation of the International Forum of Sovereign Wealth Funds (IFSWF) was formed. These illustrate the growing maturity of the sector, and the increasing obligation for SWFs to demonstrate to political and economic stakeholders, both at home and overseas, that they have robust internal frameworks and governance practices, and competent investment policies and procedures with an economic and financial basis. This requires integrated securities and fund services, from front office through to middle office, custody and administration, supported with comprehensive reporting and analytic capabilities.
Central banks' long term investments in equity and debt instruments need to be managed responsibly and efficiently to increase market confidence. The increased focus on effective securities management is fuelling demand for robust, integrated securities and fund services, with flexible, transparent reporting.
To achieve their investment objectives, SWFs need complete and timely access to intelligence on market trends and developments, and access to a diverse range of investment opportunities across all industry sectors and regions, including alternative investment classes. Furthermore, SWFs need to be able to review a variety of financing and hedging alternatives, and source advice on raising financing successfully. Having determined appropriate investment, financing and hedging strategies, SWFs require powerful, efficient and cost-effective trade execution across fixed income, FX and equities, both globally and regionally, and access to services such as prime finance services.
SWFs often hold large foreign exchange balances, either as reserve capital or for investment purposes. Monitoring and managing foreign exchange risk is essential to fulfilling the fund's objectives, and avoiding fragmentation of cash by holding non-reserve foreign currency balances in order to make foreign payments. Furthermore, with highly complex cash and liquidity management requirements for both working capital and foreign exchange reserves, cash positioning through to cash concentration and efficient investment are essential requirements.