The legal terms and conditions of these collateral arrangements are increasingly nonstandardised and opaque, resulting in collateral recapture processes which remain inherently untestable until the event of an actual stress. 3. Funded reinsurance also introduces material wrong-way risk, in that the performance of the counterparty and the collateral posted are likely to be positively correlated. Page 5  In an increasingly competitive market place, with limited capital to support a rising volume of new Bulk Purchase Annuity (BPA) transactions, we are alive to the potential for growth in the use of funded reinsurance. This may result in a greater concentration to a limited number of lessdiversified, asset-intensive reinsurers. Moreover, indirect exposure to foreign credit markets also adds to cross-jurisdiction complexities and introduces contagion risk. This is a developing part of the market with each incremental change bringing more complex valuation, operational and legal risks that need to be carefully assessed and managed. Funded reinsurance is small at present, but it could pose a risk to our objectives if it were to become routine. High levels of funded reinsurance would render the payment of a significant value of UK pensions dependent upon the strength of a concentrated and correlated group of reinsurers. These reinsurers are held to standards set outside the UK. Given our own ongoing efforts to tailor prudential standards for annuity business, standards elsewhere may well not have been designed with UK annuity risks in mind – and so may not yet handle them as effectively.
One possible solution I think is that of making all contracts on AFET U.S. dollar denominated. This way, the arbitrageurs are not exposed to any foreign exchange risk and they can manage their positions across markets with ease. Of all the commodities listed on SICOM, only one contract namely ribbed smoked rubber sheet no. 1 is Singapore dollar-denominated and coincidentally, it is also the least liquid contract on the SICOM. All other contracts are denominated in U.S. dollar. Moreover, commodity prices in the world are generally quoted in U.S. dollar, therefore, corporate buyers and sellers are already aware of their costs and revenues in terms of U.S. dollar. If we aim to establish futures price of, for instance, white rice on the AFET as a benchmark, it is logical for this reference price to be denominated in an international currency such as the U.S. dollar. That way, the price quotations would purely reflect all relevant information relating to demand and supply conditions of the products and are not influenced by exchange rate fluctuations. Some may express concern, however, that by eliminating foreign exchange risk for foreign arbitrageurs, we in turn, expose our local producers and end-users to the very same risk. I feel, on the contrary, that local buyers and sellers are already accustomed to commodity prices being quoted in U.S. dollar in the world market and manage the risk in a proficient manner.