Transcript of Question & Answer Session Australia’s External Position and the Evolution of the FX Markets

Chris, thanks very much for your remarks. name redacted. You noted the superannuation funds buying a lot of offshore assets, in the details, that is, mostly equities. Are you starting to see some fixed income buying from the super funds or an increase in fixed income? And do you expect that we’re going to see that? If you look at the Aussie super funds, they’re heavily exposed relative to other pension funds around the world to equities. Do you think that will shift as the structure of those assets changes over time?

That’s a good question, name redacted. I don’t know the answer to it. I would expect that, as part of a balanced portfolio, they should be exploring that like other assets. The extent that they have, though, I’m not sure, maybe some of our panellists later on can come back to that one, but it’s a good question.

Thank you. Thanks, Chris.

Thanks, Chris, for that. Just on that point that you make about the increasing hedge books that the superannuation funds are running as they continue to accumulate overseas assets, the last two Financial Stability Reports from the RBA seem to be highlighting or expressing some concerns about the size of those hedge books. Could you expand a little bit about where, from a regulatory point of view, the RBA’s concerns really lie?

That’s a good question. This is really joint concerns amongst members of the CFR and particularly APRA, who are the regulators of the super funds. I think the issue isn’t so much the hedges but that hedges imply one way or another that the super funds need to be able to provide liquidity at critical times when markets are moving a lot and their position might move against them in a way that they have to front up with some cash, either when they’re rolling their positions or for margins and the like. So, it’s more about just sensible liquidity management. And I think the concern is that, at least potentially, if all super funds are rushing for a bit of liquidity at the same time, what secondary effects might that have on other markets? The hedges in a way are a stabilising mechanism, but the response to volatility when you have a lot of hedges in place might cause some volatility and knock-on effects in other markets.