The Three Pillars of Solvency

Filed in:

The Solvency II Directive is reshaping the entire insurance sector at huge expense to the industry.

Markit Magazine - The Three Pillars of Solvency II

View the text version of this client publication

The Three Pillars of Solvency

The Solvency II Directive is reshaping the entire insurance sector at huge expense to the industry reports Richard Willsher

The first major regulatory overhaul of the insurance sector since Sol- vency I in 2002, Solvency II is scheduled to become effective in January 2014. However, insurers who use their own so-called “internal models” for calculating and reporting their solvency positions will have to operate them for 12 months before this date.

The heat is therefore well and truly on for those firms that have yet to finalise their models. The big picture benefits of the direc- tive are, in the words of the UK Financial Services Authority, that it “will set out new, stronger EU-wide requirements on capital adequacy and risk management for insurers with the aim of increasing protection for policyholders. The strengthened regime should reduce the possibility of consumer loss or market disruption in insurance.”

Liabilities and assets
Like banking’s Basel II and III capital ade- quacy regulation, Solvency II is built around a three-pillar structure covering respectively: capital requirements, governance and supervision, and disclosure (see panel p44). At its heart is the issue of risk management and how to quantify and report on risk in terms of data. A nonprofessional thinking about what insurance companies do could imagine that they are likely to be good at understanding the risks they cover and the containment of resulting claims.

This is generally the case. If they cannot manage the liability side of their balance sheets, insurers may quickly go out of busi- ness. Solvency II brings increased rigour and reporting requirements to this in order to calculate how much capital they need to hold vis-à-vis the risks they write. However, quantifying and analysing risk on the asset or investment side of the balance sheet is more challenging for many insurers.

“A lot of firms are really struggling on the asset side. Many of them are geared towards the liability side and the asset side is highly fragmented,” explains Daniel Simpson managing director at Markit EDM. “We’ve seen two approaches: first, head offices [of large insurance groups] publish- ing data guidelines for their subsidiaries to follow, defining an in-house standard and pushing it down to the group. The other approach is to say, ‘send us what you’ve got and we’ll scrub this at the group level.’ Both have their pros and cons, and differ- ent challenges.”

Insurers may hold a variety of assets including cash, bonds and equities, alter- natives such as commercial property,private equity, hedge funds, exchange traded funds and derivative positions. Their hold- ings may span the whole gamut of asset classes. Not only that, but they may be held in different jurisdictions, some within the EU forexample, others else- where, such as off- shore locations. Gath- ering and collating disparate data across a large, federated inter-national insurer can bea challenge if this has not been necessary in such detail before.

Risk concentration
Understanding and analysing risk exposures is unlikely to be straightforward. Aggregation of risk can easily occur. For example, an insurer may hold the equities of a particular company, but through different subsidiaries and through listings on different markets. It may hold corporate bonds in the same firm. It may invest in property occupied by the same corporate. It may also effectively have a risk exposure to the same name through holdings in various funds.

In addition, managers of those funds may buy and sell the funds’ holdings at any time and in any quantity. The task facing the insurer is to know their exposure at any one time and being able to report on them both internally and externally to regulators when they need to. This has been dubbed their “co-mingled look through” capability.

“There are no common standards across the industry and across jurisdictions for things such as counterparty identifiers and issuer hierarchies for example,” says Daniel Simpson. “In the world of over the counter instruments, such as various derivative financial products, there are no market iden- tifiers. So when you’re given very disparate sets of data at head office, where historically there has not been a data management team or an IT team responsible for aggregat- ing this, there is now an inordinate amount of data and there is no systems infrastruc- ture in place to consume and manage it.”

One fear across the industry is that all insurers would need to produce the same level of data and granularity of reporting. What might be appropriate for a large general insurer such as an Allianz, Aviva or Axa to report might be also be required of a small insurer with nothing like the same size, spread of business, geographical foot- print and risk exposures.

Fortunately, for smaller businesses a set of updated reporting guidelines and tem- plates were released in early July. Their effect was to exempt smaller insurers from some of these requirements. Arguably, however, smaller firms have an easier job of managing their risks and their data anyway, simply because they would hold fewer assets and these might also be more liquid. However, the industry view is that, eventually, all firms are likely to be faced with the same reporting requirements and so will be forced to face up to the same data gathering and management challenges.

Cost and industry restructuring
Solvency II’s requirement for more rigorous risk management has meant significant cost burden’s across the industry. An early Euro- pean Commission estimate of the overall cost to the EU’s insurance sector was in the range of €2-3 billion over a period of five years. In fact, some of the larger European insurance firms have reportedly earmarked between €100 million and €120 million each for their Solvency II projects. The chief infor- mation officer of one company says, “As a comparison, we know from [the banking industry’s] Basel II experience that IT resources and budget should not be under- estimated. The reality from Basel II is that the banks spent between three to six times more than they originally budgeted for and 70% of that was on IT.”

IT spend includes consultants and other expert human resources, rather than just boxes, cabling and monitors. Peter Gatenby, who leads the actuarial practice of account- ant and adviser, Mazars, in the life, pensions and healthcare sectors, says that the largest firms, such as Aviva, Prudential, Zurich and Standard Life, resourced their Solvency II teams while good people were more readily available. However smaller firms tended to get started later and some now face a lack of expert staff, which in turn means they must pay more for the expertise they need.

One response to these cost pressures has been to outsource IT services in part or altogether. This is particularly the case with smaller firms that prefer to concentrate on the business of insurance, which they know best. Solvency II costs, though, are also driving consolidation in the sector. Again smaller firms are taking the view that they need to gain scale economies in order to make their businesses worthwhile. Joining with a larger enterprise or forming partner- ships with other, smaller firms can be more economical. Liverpool Victoria and Thread- needle’s combination is an example of this in practice.

“There is definitely consolidation with the smaller players who just can’t get the costs of running an insurance company or asset management business to work without scale,” says Markit EDM’s Simpson. “We will see more consolidation. We are seeing more firms looking to outsource the pieces that are not their core competency in the middle and back office. This model is now proven. I think this trend will continue.”

There have been similar moves on the asset side of the balance sheet specifically. Faced with the challenge of developing suf- ficient scale in asset management to draw the most from the costs of tooling up for Solvency II, some insurance firms have chosen to make asset management a service that they can operate commercially. Aegon’s rebranding of its asset management operation a year ago was based upon its intention to boost its asset management operation in this context. Firms such as Aegon might have followed such a path anyway in due course, but Solvency II may have quickened the process.

At the same time, asset custodians have been quick to recognise a role for them- selves in the asset data space. Firms such Bank of New York Mellon, HSBC, Northern Trust and State Street, which are in all prob- ability administrating the bulk of insurance company assets, either directly or as service providers to asset management firms and funds, are well placed to draw upon the data they already hold. Importantly, they have made considerable technology investments in their very large-scale global operations. They can draw on their own systems and capabilities to meet the data needs of insur- ers and reap additional income at marginal extra cost.

If Solvency II is forcing change and reshap- ing the insurance industry in the aftermath of the financial crisis, we should not imagine that the effects are all cost producing with little benefit other than that of achieving compliance. It also offers opportunities and business benefits.

Better risk management on both sides of the balance sheet is one obvious gain. In addition better asset/liability matching lowers the probability of insolvency. These are achieved largely through improved IT systems and data management and less possibility of human error. Streamlined systems producing consistent internal and external data makes reporting easier and management information quicker, more accurate and more useful.

“Most people in financial services are in data management to a greater or a lesser extent,” says Simpson. “The better you do that the more resource you can free up... Moreover insurance company investors are more concerned to know that their investee companies are well structured from an infor- mation technology point of view. This is being carefully scrutinised by chief operat- ing officers and chief risk officers.

“The reputational risk of having a break or a breach is too high” Simpson says. “Unless they have confidence in a firm’s IT, investors may prefer to invest elsewhere... However the flip side is that if you are getting it right, if you do a good job of managing your risks it will free up capital to do other things. And this is, after all, what this is designed to do.”

Therefore, Solvency II is not just another piece of regulation. It is a root and branch spring clean for an industry that some now recognise was long overdue. Whether it will enable the industry to avoid another AIG-like catastrophe and government bailout remains to be seen.

The results will not be fully quantifiable for some time to come and in any case, even the regulators themselves see this as an evolving story. Solvency III, IV or V looks highly likely in light of successive iterations of other financial sector regulation such as Basel, the Capital Requirements Directive itself, MiFID and UCITS. For the moment, however insurance businesses across the EU are still coming to terms with Solvency II and time is short if they are all to achieve compliance by January 1, 2014.

Regional e-FX perspective on the Middle East

Filed in: , it, turkey, retail, foreign exchange, abu dhabi, saudi arabia, forex, regulation, trading

Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

E-Forex Regional Perspective ME17

View the text version of this client publication

Regional e-FX perspective on the Middle East

Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

By Richard Willsher
Electronic foreign exchange trading made a slow start in the Middle East. Take up is now well advanced in some sectors and some countries, though a lack of infrastructure, varying degrees of regulation and local civil and political disturbances paint a mixed picture across the region as a whole.

If we define “Middle East” to include the entire Arabian peninsula encompassing the Gulf, Iran, Iraq, Syria, Jordan, Lebanon Turkey, Israel and Egypt, it is region with massive foreign exchange needs. On one side the largely US dollar denominated receipts from the sale of hydrocarbons, on the other the import bills for manufactured goods and infrastructure developments produce huge foreign currency liquidity while local currency requirements also need to be met. Add to these trade requirements the appetite for foreign exchange trading and speculation and the Middle East region ought to register more prominently than it does. The latest Bank for International Settlements Triennial Central Bank Survey groups Middle East and Africa as one, and last among all regions for the size of its average daily turnover in spot transactions as at April 2010 with just $13 billion out of a total of $1.8 trillion. Across all product categories the region accounts for $41 billion out of $5 trillion globally.

Yet look below the surface to the economics of individual countries and stats from the International Energy Agency show that in 2009 Saudi Arabia was the world’s largest net exporter of crude oil with Iran, United Arab Emirates (UAE), Iraq and Kuwait all in the top ten. Similarly Qatar is third in the league table of net exporters of natural gas. These countries’ continuing currency inflows seem assured given their vast reserves and the inexorable rise in the cost of energy. Moreover, companies that operate in the region, especially in the oil and gas sector, logistics, transport and financial services are world leaders with sophisticated understanding of treasury management, including the use of foreign exchange operations and electronic management and trading tools.

What quickly becomes clear however is the fragmented and patchy nature of both FX e-trading in the region and the legislative and technical infrastructure that facilitates it country by country. Generalisations about the region have to give way to
country specifics and to business models and products geared to segmented client groups.

Buy-side clients and business models
“We have a double coverage model,” explains Deutsche Bank’s Head of CEEMEA FX sales Amine Berraoui. “As a bank we cover both financial institutions and corporates. Ourcorporate franchise follows our footprint and geographical
presence. We have a fully- fledged license at DIFC in Dubai as an offshore bank. We have an onshore license in Abu Dhabi. We have a presence in Qatar, and a local presence in Saudi. The rest of the countries we didn’t feel it necessary to have a local presence in and we cover out of London. Our strongest markets in the region are UAE and Saudi Arabia.”

Barraoui’s colleague Robert Wade, who is head of electronic FX corporate sales for EMEA & Americas, says that the bank’s Autobahn platform is an expanding franchise. “As the sophistication level of our clients increases they are making greater use of Autobahn. This applies to the largest of local corporates. They are looking for simple, easy workflow. Everything else is covered out of our voice team. But interest in electronic is absolutely growing.”

“The Middle East is a region where you have some of the largest sovereign wealth funds and some central banks with significant liquidity,” adds Barraoui. “These are looking for more and more services especially those that are electronically delivered, so I see our FX platform, other platforms and other electronic services being well positioned for growth.”

This view is echoed by Citi’s Sandip Sen, CEEMEA Corporate e-Sales Head. “Most of government-owned companies as well as corporate firms have adopted electronic trading over the last few years mainly for non local currency FX exposures. The constant demand for best execution, coupled with integrated pre and post trade services, reinforces the need and hence the growth in the use of electronic trading channels.”

Tod Van Name, global head of Bloomberg Foreign Exchange says that the Middle East as a whole has lagged in the adoption of e-trading, but this is changing quickly. “Many large corporations in the region are analysing their treasury management systems and are looking at how e-commerce can address issues like best execution and audit trails. Corporate treasurers are turning to multi-bank platforms, like Bloomberg FXGO, to manage their FX risk, make requests for quotes and execute their FX trades, thereby minimizing the manual processing of transactions.”

This is forcing competition upon forex platform providers. Van Name adds, “Institutional buy-side clients in the Middle East have banking relationships with local and international banks, which cater
to clients’ FX requirements by different means. Whereas the majority of FX business conducted with local banks is executed traditionally, over the phone, large international banks are responding to increasing market demand for electronic platforms and e-commerce services. This shift towards e-trading is driving larger local banks to invest in e-commerce offerings, and we expect to see them start providing their own e-trading solutions to their buy-side clients.”

This view is corroborated by Johnny Nielsen, head of institutional business in Middle East region at Saxo Bank. “We have remarked a strong interest in the relation to our White Label solution, actually from most of the Middle East region. We have recently seen increasing interest for non-domestic markets, in particular for international equities, futures and FX, all of which are available to trade via our award winning platforms in a single account.”

“Our White Label solutions are also receiving increasing attention from non-retail end users, including funds, private banks and bank trading desks” Nielsen continues. “This is further supported by our investments in Saxo Direct – an API (application programming interface) liquidity offering tailored to retail brokers, asset managers and hedge funds. All clients are essentially looking for similar ingredients to ensure that their trading needs are met: transparency, efficient execution, standardized pricing and anonymous trading. Moreover, they want quality service from market professionals as well as a reputable partner.”

“There has been a definite shift of the large corporates and a good chunk of the interbank market towards multibank providers, like ours,” says Alex Johnson, sales manager Middle East/Africa at 360T. “The role of the treasurer in the Middle East has changed dramatically in recent years. The treasurer of today faces more challenges and needs, and uses a broad range of tools to help him manage his company’s exposure and finances. Key requirements such as efficient straight through processing (STP) to treasury management systems and audit logs of quote histories necessitate electronic trading. At 360T, we have concentrated on speaking to and gaining local market makers onto the platform as well as the traditional global players, thereby giving clients a choice of banks. Many large corporates especially seem to have developed very quickly in the past couple of years in this respect, leapfrogging some evolutionary stages that European or American corporates went through on their journey. They have even jumped to using the intra-group tool, which allows a central treasury to manage, control and execute requests of satellite subsidiaries.”

Regulation, relationships and Shariya law
So the large corporate and institutional sectors across the region as a whole represent a significant and growing market. This is being addressed by major international banks and platform providers and the local banks are playing catch up, well aware that electronically delivered services are the way forward and they need to compete. However no one is saying that the region is an easy one in which to build e-business, not least because of restrictions and regulation of forex trading.

“The most important thing about forex trading at the moment is regulation,” explains Ahmad Khatib, CEO of Beirut based Amana Capital. “Regulation is not uniform. Some countries have little or no regulation others impose restrictions.Lebanon,
for example, has a very strong financial sector historically and was advanced in introducing a regulatory regime for foreign and regional investors. The UAE has introduced licensing for foreign exchange trading offshore. Then Saudi Arabia has the largest number of potential traders but
no licensing. Therefore many clients work on-line.”

Add to this the traditional, cautious Middle Eastern approach to business based on relationships and the need for transparency, and this can pose problems both for dealing with financial brands that may be well known in the west but not locally and also embracing new technologies which offer no human interaction. This is particularly true of the retail sector, where FX Solutions has been building its business since 2004.

“We at FX Solutions recognize that everything with regard to the Middle East is based on trust and reputation. Bottom line, the relationship is key,” says CEO Michael Cairns. “The market in the Middle East is relationship driven and the role of the introducing broker (IB) in forging those relationships cannot
be underestimated. From the outset we decided to utilize the IB network and our IB partners have helped contribute to our growth and success in the retail sector. They are our sales force on the ground for the most part. For example”, he continues, “a
typical client will visit a company’s website but then go and talk to someone who has done business with that company. That someone is usually an IB. It’s word of mouth, it’s validation. Blogs and forums are very important, perception is everything. People are concerned about the safety of their funds and won’t just sign up on-line without doing a background check. If they know someone who knows us, who recommends us, then they feel more comfortable and are likely to open an account. It helps that FX Solutions has worked hard to build a strong brand and a
reputation based on innovation, on fairness and on total transparency.”

Cairns adds, “FX Solutions has hadparticular success in Saudi Arabia but it was, and is, important to slowly build confidence among regulators in order to be able to gain credibility. In Saudi Arabia the monetary authority is understandably very wary of new markets. There is intense scrutiny of business practices and participants with a view to both protecting their citizens and making sure that their laws and regulations are upheld. The onus is on us to convince the authorities that we deserve their trust. This in itself isn’t a bad thing. A history of regulatory compliance is vitally important in this regard and it helps to point to our record in the US, where we are registered with the CFTC and an NFA member, and the UK (FSA). Saudi Arabia remains very strict financially and the barrier to entry is high. Apart from anything else, a company requires more regulatory capital to register in Saudi Arabia than to register in the US. It’s not only the money, the relationships are important also. That being said, we’ve seen encouraging signs in the past few years that the retail forex market is perhaps opening up and gaining acceptance. FX Solutions has participated in several trade shows where interest in our product was high. Perhaps the door, whilst not fully open, is slightly ajar?”

Although the common perception may be that Islamic or Shariya principles restrict the development of forex trading in the region, this is not a consistent picture and is surrounded in uncertainty and lack of clarity. There are a number of approaches to this issue.

“Shariya in general does not give one a clear set of rules governing forex trading,” says Amana Capital’s Ahmad Khatib. “Forex is relatively new and there is a lot of client demand. What discussion there is, is about swaps and interest rate products. Regarding speculation, anything undertaken without proper knowledge and understanding would be speculative and would necessarily fall foul of Shariya principles on gambling. That is why we offer educational services alongside our technical products and services.”

FX Solutions has consistently adopted a cautious and respectful strategy where Shariya is concerned. “Over the years, we have spoken with many of our partners in the region who happen to be religious scholars and have sought their advice on how best to approach this market,” says Michael Cairns. “These discussions, for example, led to our providing “interest-free” accounts to clients in the region. Whilst we have done our due diligence to provide Shariya compliant markets we are aware that our clients have also done their own due diligence. Many of our IBs provide online tools to assist clients in this regard.”

“The electronic aspect of Shariya-compliant trading is still nascent,” says Tod Van Name of Bloomberg Foreign Exchange, “because market players do not have the scale and footprint to warrant investment in the technology required to offer FX and deposit- executable prices. Bloomberg offers a wide range of information, news and data on the Islamic capital markets, and is working on integrating Shariya- compliant products, such as Islamic deposits, into Bloomberg’s multi-bank trading platform. This will enable market participants to conduct business on an electronic platform without the financial and resource investments they would normally need to make.”

“Shariya products are by definition a very important area,” explains Saxo’s Nielsen, “however FX trading is more than a question of interest rates. Aspects such as margin trading, shorting etc have also to be taken into consideration. Any introduction of Shariya compliant products will be in close cooperation with bodies that ensure the compliance of the offering. On other instruments, such as equities we have recently given clients the possibility of analyzing equities to monitor their compliance. This feature has been very well received and indicated the strong interest for such products.”

Meanwhile 360T has also taken a pro-active approach, “We have launched an Islamic Multibank Trading Portal for FX Spot offering Islamic banks and corporations the opportunity to embrace electronic trading whilst adhering to Shariya principles,” says Alex Johnson.
“We were the first and, until now, the only multibank platform provider to offer an Islamic Platform.”

Retail FX
Talking to people active in providing FX trading services in the Middle East region also produces a more pragmatic approach to Shariya-approved trading. In essence clients, particularly on the retail side, for whom Islamic principles are important will either choose approved products and structures or will not trade. Others who are less concerned will use available platforms and perhaps offshore centres, such as Cyprus, to trade as they wish. Traders and investors will let conscience be their guide. What is clear is that retail customers across the region are increasingly attracted to the simplicity, and perhaps the excitement, of trading forex on their own account by electronic means.

“Retail / day traders are a group that is expanding rapidly having started late,” says Ahmad Khatib at Amana Capital. “Now they are looking for mobile trading capability through phone and tablets requiring no minimum account size. Unlike international banks, regional banks have not really taken this up.”

This view is echoed by FX Solutions’ Cairns who also notes that client types differ significantly market-to- market. Retail traders in Saudi Arabia tend to be a mix of individuals and successful business people, some extremely wealthy. Account sizes tend to be larger than the norm which, in turn, leads to larger deal ticket size. In Egypt, where trading is very active, the client base typically comprises more of those who start trading with minimum account sizes of $250-$1,000 utilizing FX Solutions’ available leverage of up to 400:1. “We see Egypt as more lower equity accounts but with a lot of traders. The accounts may be smaller but they tend to be more active. In Saudi, by contrast, we have clients who are trading very large positions, some probably larger than the banks – you are talking €50m - €100m at a clip,” Cairns explains.

“In Saudi,” he continues, “there is a tremendous quest for knowledge and an embracing of the latest technology. They are very interested in technical analysis and like to use charts to help with their trading decisions. The UAE, although seemingly more westernised, doesn’t produce a huge number of individuals looking to trade right now but we are actively targeting that region. With Lebanon, on the other hand, the issue is more one of (US and UK) government restrictions on accepting clients from that country, possibly due to its proximity to Syria. We are bound by the laws and regulations, not only of those counties in which we operate, but of those countries in which we are registered and regulated. If you look at Turkey you have a similar trading mentality as that in Egypt or Saudi Arabia but the government there has clamped down on firms operating without a physical presence in Turkey and without registration. They have made registration extremely difficult and costly. Things can change dramatically but in the countries where we are most accepted there seems to be a willingness to embrace what we do. They’d rather
be part of it and regulate it rather than force it out of existence with restrictions.”

Another reason for the popularity of retail trading of forex has been disappointment with other asset classes. “Retail traders and investors have not seen great returns from local stock markets over the past few years,” notes Michael Rautmann, Head of Marketplaces, FX&FI for Middle East Africa and Russia, Thomson Reuters. “This has led to an increase in the number of participants in the FX market, and since many of these investors are already used to using electronic platforms to trade equities, a switch to FX is relatively simple.”

Moreover, Bloomberg’s Tod Van Name adds that there is a large appetite for risk in the Middle East retail market where traders operating across time zones look to their FX providers to offer 24-hour trading without loss of liquidity. However while the retail sector largely trades the major currency pairs there is some appetite for links with other asset classes such as commodities, futures and stock indices.

Specialised services
At the other end of the scale, development of wholesale services such as prime brokerage and growth in high performance algorithmic and high frequency trading seems not to have reached its tipping point as yet. “Algorithmic and programmatic trading has become extremely popular globally, but less so regionally as volumes are still relatively low,” says Rautmann. “We have however seen a move to liquidity aggregation – tools, such as Thomson Reuters Dealing Aggregator and FXall, which allow FX traders to view all of the various sources of liquidity on one screen. As aggregation gains popularity in the region overall liquidity will increase, traders will start to embed aggregation in their strategies, and this will encourage more price makers to participate in the market and therefore drive algorithmic trading in the future. Bilateral credit has also been a problem for medium to smaller financial institutions in the Gulf, which make PB offerings attractive.”

Bloomberg’s Van Name believes that these markets are well starred for future growth. “In a global market where Western financial institutions continue to suffer from reduced lending, defaults, rogue trading and economic contractions, many firms are seeking business relationships with Middle East banks offering superior credit positions and ratings. These institutions are taking advantage of these global shifts and establishing specialist services such as PB divisions. It is likely that in the near future, new regional players will emerge offering PB and HFT services to the FX market,” he concludes.

“There is some interest for FX algo trading and this seems to be growing more recently,” echoes Citi’s Eugenia Hanoune, EMEA Institutional e-Sales Head. “HFT is not as prevalent in the Middle East as in the western markets. As volumes and processing time for trades increase, the conversations about Prime Brokerage seem to be happening more and more. There is a feeling that many more firms will require Prime Brokerage services in future.”

Future prospects
Everyone we spoke to in our research for this regional perspective was upbeat about the rate at which interest in forex products and their electronic delivery was growing. There was general optimism about how the Middle East still had some distance to go before it fulfilled its potential but there are some headwinds. Some of these originate in the region itself and others from beyond its shores.

From the countries themselves comes fears about political stability. Syria, Iraq, Iran, Bahrain and Egypt are all the subject of upheavals or circumstances the outcomes of which are uncertain. Lebanon while stable itself and a favourite business and financial centre for the Middle East has also seen initial overspill of tension from the conflict in Syria which the Lebanese authorities have been keen to staunch and quell.

Several commentators have suggested that the turmoil in Bahrain has put the brakes on its growth potential as a leading Gulf finance and banking centre. Others have suggested that the financial crisis linked to the property crash in Dubai may have damaged it as well, if only temporarily.

Meanwhile as countries such as Jordan, Lebanon and Israel (see panel) among others have sought to introduce greater regulation across financial markets in general, including over the counter (OTC) forex and derivatives, the winds of regulatory change have often blown in from abroad.

“There is uncertainty of the impact that regulation, particularly in relation to OTC derivatives trading recommended for G20 countries, such as those required by the Dodd Frank Act in the US,” says Thomson Reuters’ Michael Rautmann. “These G20 reforms look to change the OTC derivatives trading workflow, increase transparency, and create greater supervision of banks.With Saudi Arabia being part of the G20 and with the UAE Central Bank advising regional banks to meet liquidity requirements by 2013, in preparation for Basel III, the regulatory impact on regional markets cannot be discounted.”

Many regional financial institutions need to not only understand how local regulation will affect their participation in FX markets, but also how it affects their relationships with financial institutions who they trade with based in Europe or the US. There may be no local regulations governing OTC derivatives trading in a specific country, however a bank’s international counterparty could be forced by legislation to trade on a regulated platform.

This not only creates complications for financial service institutions but also the providers of trading tools to these organisations. For this reason Thomson Reuters has worked closely with legislators and regulators to ensure that we fully understand the policy goals and proposed changes, and we will be registering our Thomson Reuters Dealing product as a regulated service in Europe (MTF) and in the US (SEF).”

An additional headwind is the state of the communications infrastructure in some geographies. “In the Middle East and Africa the connectivity issues are still there,” according to Deutsche’s Robert Wade. “It varies country to country. Where the infrastructure is not as good, you often see clients and banks investing in dedicated lines, leased lines etc. to provide connectivity. Over time, as governments continue to invest further in their infrastructure, this will just enhance the capability that is available to clients across the region. Most of the large institutional players would have dedicated lines. The ones that are most impacted would be mid-market or local corporates. We have infrastructure, resources and people in the Middle East. We are investing in our platform globally. We believe that there are good growth prospects in the region in general particularly in UAE and Saudi.”

“National communication infrastructure will play a critical part in defining the market,” believes Bloomberg’s Tod Van Name, “creating natural “hotspots” and “notspots,” as the gap widens between countries with fast and reliable Internet connections and those without.” Those with good infrastructure include Gulf states such as Dubai, Abu Dhabi and Qatar while by common consent Saudi Arabia is making huge efforts to upgrade its telecoms capabilities.

Growth and product development
On the back of this the range of products on offer across the region is set to grow significantly from vanilla spot and forward between the majors. Johnny Nielsen of Saxo says he sees further growth opportunities in the majors (FX Spot) as well as spot metals and oil futures. “We recognize further growth opportunities in other assets classes such as CFD commodities and contract options. Our White Label solution enables end-users to bring their existing portfolios to the platform and seamlessly expand their trading activities into other asset classes. Having a broad white label client base in the Middle East, EU, APAC and Eastern Europe, spot FX trading and bespoke currency availability is essential. Expanding our exotics and precious metals offering such as AED, BHD, QAR, KWD, SAR, OMR, JOD, RUB, HUF, RON, LTL, PLN, CZK, MXN, ZAR, HKD, XAU and XAG helps us meet our clients’ localized product needs. With more than 160 crosses including all majors, spot metals and regional exotics Saxo Bank’s liquidity distribution services generate EUR 2,160 billion in annual FX volumes.”

So far the only exchange offering currency futures in the Middle East is the Dubai Gold & Commodities Exchange (DGCX), where, according to 360T’s Alex Johnson, volumes are thin. “Most trading is OTC and predominantly in vanilla products. Some more sophisticated corporates are involved in structured options but this is by no means a big market.” However with the growing power and sophistication of large corporates, central banks and sovereign wealth funds in the region these could be set for growth.

Across the region there is no doubt that we can expect further development of forex products on e-platforms. One issue that constantly arises, especially in light of regulatory change, local restrictions and political unrest is the extent to which trading generated by Middle Eastern clients of all shapes and sizes from major corporates to retail traders will remain onshore or be conducted through major global financial centres such as London or New York or offshore centres such as Cyprus. E-trading capabilities can facilitate this process and removes the need for “regionalization” of trading. That however is as difficult to quantify as itis for local authorities to control, and is the subject, perhaps, of another story altogether.

London under threat

Filed in: , solvency ii, london, banking, barclays, new york, basel iii, singapore, markets, regulation

How seriously might the latest series of financial scandals affect London’s standing as the leading financial marketplace?

London under threat

How seriously might the latest series of financial scandals affect London’s standing as the leading financial marketplace, asks Richard Willsher.

Many outside of the City and beyond British shores will be saying, ‘I told you so.’ Effectively self-regulating markets ruled by corporate fat cats and dealt in by big-bonus-earning wide boys is the picture they see of London as a global financial centre. So how seriously might the latest series of financial scandals affect London’s standing as a leading, trustworthy financial marketplace?

The LIBOR rigging scandal is widening. The New York attorney general has a subpoenaed seven banks. While these include four non-UK banks, Deutsche, Citi, JP Morgan Chase and UBS, the heat remains on the City, as it is the London interbank offered rate that is the issue. Meanwhile HSBC and Standard Chartered still appear to be in deep water with US regulators despite their attempts to settle.

London looks under siege. The New York hounds are in full cry. Bloomberg, the news service founded and majority owned by the current New York City mayor, ran a story on 6 July entitled, 'Made-in-London Scandals Risk City Reputation as Money Center.' The story catalogues a series of London events and misdemeanours including the losses made by the London operations of AIG, J.P. Morgan Chase, Bear Stearns and Lehman Brothers. The bad apples were and are over here, not over there.

European Union regulators are gunning for the City too it appears. While broad, industry wide bodies of regulation such as Basel III and Solvency II will affect banks and insurance companies across the EU, they will impact the City more because there are simply more of them there than anywhere else. The Alternative Investment Fund Managers Directive, the European Markets Infrastructure Regulation, the Markets in Financial Instruments Directive and the proposed Financial Transactions or ‘Tobin’ Tax would have a greater effect on London’s financial markets, because they are far bigger than others in the Single Market and the world’s significant market players tend to use London as a principal trading hub.

Those who speak for the City sound a little contrite but see regulatory attacks coming from the City’s biggest competitors. ‘The Barclays LIBOR affair has certainly made the task of explaining, supporting and promoting the City more difficult,’ admits Mark Boleat, chairman of Policy and Resources Committee, City of London Corporation. ‘It has given ammunition to those inside the country who want to see the UK’s financial services industry reduced in size, and to those overseas who want to challenge London’s status as a global financial centre.’

London’s challengers are not only based in developed western economies either. Financial markets such as Dubai, Singapore and Hong Kong are well located to profit from financial services business gushing from India’s and China’s rapidly growing economies, whether on the macro scale of raising capital and recycling liquidity or handling the wealth of the growing number of high net worth individuals in these regions. Their institutions and individuals may read reports about what appears to be rotten in the City of London and prefer to keep their business closer to home.

Part of the UK government’s response has been to rejig the tri-partite regulatory system. HM Treasury is abolishing the Financial Services Authority. The Bank of England will oversee the ‘wider economic and financial risks to the stability of the system.’ The Prudential Regulation Authority (PRA) will be responsible for the day-to-day supervision of financial institutions. The Financial Conduct Authority (FCA), will, ‘take a tough approach to regulating how firms conduct their business.’

On top of this the European Banking Authority (EBA) functions as the top European Union regulator for banks. Interestingly however from the midst of the cacophony of name-calling and competitors baying for London’s blood, the role of the EBA may offer some scope for optimism in the City.

The EBA lists among its roles ‘preventing regulatory arbitrage, guaranteeing a level playing field, strengthening international supervisory coordination and promoting supervisory convergence…’ If it achieves these things then London ought not to fear for its future, especially if the level playing field extends to coordinating regulation and supervision with regimes in the US and other financial centres.

London’s location may still count for something, slung as it is between Asia and North America time zones, though with electronic trading and communications this may not be as important as it was. The thing about London is the sheer scale of its infrastructure. While the LIBOR scandal rumbles on, London’s other markets such as foreign exchange, commodities exchanges, Lloyds of London, its stock market, and debt and derivatives markets function well and scoop a large global market share. Its support services such as commercial property, fund management, legal, accounting, actuarial and consulting services remain those of choice for many of the world’s major businesses.

No one is likely to deny at this point that where there’s money there’s muck. When the stakes are so high and there is so much money in play, there is a good chance mistakes will be made and crime may fester. All the regulation in the world is unlikely to stop this once and for all but on a level playing field, London has an edge.

There used to be an old joke that if you dropped two bankers from an aeroplane, a clearing banker and an investment banker, the clearing banker would cover his private parts in an attempt to protect his most valuable assets while the investment banker would grab his briefcase and run to do the next deal. London’s financial services’ greatest asset will be their ability to follow the money and move smartly on. And yes, they are now going to have to do so quicker, better, cleaner and more transparently to win the business.

Collision avoided but what of Basel III?

Filed in: , bank, banking, france, fsa, basel, germany, euro, crd, eu

The issues that gave rise to the early May spat in Brussels between UK Chancellor Osborne and EU Commissioner responsible for the internal market and services Michel Barnier look to have been resolved. But will the EU’s banking regulation match up to the standards set by Basel III?

Collision avoided but what of Basel III?

The issues that gave rise to the early May spat in Brussels between UK Chancellor Osborne and EU Commissioner responsible for the internal market and services Michel Barnier look to have been resolved. But will the EU’s banking regulation match up to the standards set by Basel III?

As we go to press, Brussels has announced that a deal has been struck that will open the way forward to the next stage of EU banking reforms.

Monsieur Barnier’s task is to regulate as he put it '…every financial actor, financial market, financial activity and product…' in the European Union, carrying through pledges made by the G20 club of nations following the 2008 financial crisis. As far as regulating the banking system is concerned this means writing into EU law the so called Basel III guidance developed by the Bank of International Settlement’s Committee on Banking Supervision.

Basel III sets out a three-pillar structure, which the UK Financial Services Authority describes as follows:

  • Pillar I sets out the minimum capital requirements firms will be required to meet for credit, market and operational risk.
  • Under Pillar 2, firms and supervisors have to take a view on whether a firm should hold additional capital against risks not covered in Pillar I and must take action accordingly.
  • Pillar 3 aims to improve market discipline by requiring firms to publish certain details of their risks, capital and risk management.

These measures will be implemented in the EU by means of the Capital Requirements Directive (CRD) and it was the fourth iteration of this that was in discussion when Messrs. Osborne and Barnier found themselves at odds. Once agreed, it will form part of the Single European Rulebook governing all 8,300 EU banks. There was to be relatively little margin to vary the capital that banks must hold in relation to their 'risk-weighted assets' (RWA), that is the loans that they make to borrowers of differing credit standings.

CRD VI allows for some flexibility in the amount of capital required but sets a maximum ceiling for this. The British position is that the proposed levels are not flexible enough. In September 2011 the Vickers Report of the UK’s Independent Commission on Banking made this recommendation among others, 'The international reform agenda – notably the Basel process and EU initiatives – is making important headway, but needs to be supported and enhanced by national measures. This is especially so given the position of the UK as an open economy with very large banks extensively engaged in global wholesale and investment banking alongside UK retail banking. Indeed part of the challenge for reform is to reconcile the UK’s position as an international financial centre with stable banking in the UK.'

This however set London and Brussels on a collision course. A requirement for UK banks to hold higher levels of regulatory capital suggests on the face of it that UK banks would be disadvantaged because the cost of doing so would render them less competitive. However the concern in Brussels was that more strongly capitalised UK based banks would attract more business from banks in the rest of Europe, which would be perceived as weaker banking partners. And so the cherished single market goal of a level banking playing field would be compromised.

French and German banks have been lobbying hard to be allowed to hold lower levels of capital. This however plays to a downward spiral where potentially under capitalised banks pose a greater risk to their respective governments that would need to rescue them in case of distress, so impairing their sovereign credit ratings.

The UK argues that it is a special case because it is home to the largest financial services sector in the European time zones. The financial sector plays a bigger role in the UK’s economy than it does in that of any other EU country.

'London is a very important centre but... there are other centres alongside London which also merit consideration,' says Mr. Barnier, a former French government minister, reports Reuters. The level EU playing field must take precedence.

Now it is reported that the UK and, by implication, any other European country can gold-plate its banks through exceeding the EU’s capital requirements. The UK will be allowed to implement the Vickers recommendations without reference to Brussels. Others will be allowed to hold less capital than Basel III has suggested. This now hits not only at the fundamental ideal of unity across the single market, which members supposedly bought into when they joined, for better or worse, but also at the standards set by the Basel Committee on Banking Supervision.

The fine resolutions of the G20 representatives to avert and avoid any future financial crisis are at stake here. They risk becoming slowly and at times somewhat acrimoniously watered down in the process of compromise and counter-compromise EU politics. This is not what the great and good had in mind when they met in Washington in November 2008, in the aftermath of the Lehman’s collapse and the world wide financial meltdown that followed it, and from which EU and global economies have yet to recover.

Scotland – how independent can it be?

Filed in: trade, standard life, financial, pound, independence, scotland

The Scottish National Party’s vision statement sets the scene. ‘It will create a partnership of equals - a social union to replace the current political union. That means, on independence day, we'll no longer have a Tory government, but the Queen will be our head of state, the Pound will be our currency and you will still be watching your favourite programmes on the BBC. As members of the EU there will continue to be open borders, shared rights, free trade and extensive cooperation.

Scotland – how independent can it be?

The Scottish National Party’s vision statement sets the scene. ‘It will create a partnership of equals - a social union to replace the current political union. That means, on independence day, we'll no longer have a Tory government, but the Queen will be our head of state, the Pound will be our currency and you will still be watching your favourite programmes on the BBC. As members of the EU there will continue to be open borders, shared rights, free trade and extensive cooperation.

The big difference will be that Scotland's future will be in our own hands. Instead of only deciding some issues here in Scotland, independence will allow us to take decisions on all the major issues. That is the reality of independence in this interdependent world.’

The last sentence gives the game away. How much independence Scotland would have while using the Pound Sterling as its currency and with much of its legislation deriving from the EU is a moot point.

The financial services sector accounts for around 7% of Scottish gross domestic product, according to Scottish Development International, the country’s inward investment promotion agency. The industry directly employs 95,000 people and 70,000 indirectly and generates in the region of £7bn for the Scottish economy. Its traditional strengths are in insurance, investment management, asset servicing and banking.

Moreover, they are international in scope. A spokesperson for Standard Life, the savings and investments business, told the Daily Telegraph, ‘Scotland's constitutional future is a matter for politicians and voters. However, it is important to Standard Life that Scotland continues to create a competitive environment from which to do business.’ 

The italics are mine. The point is that Standard Life and other major Scottish financial sector players long ago outgrew their home country. They are bound to look at Scottish independence pragmatically in terms what is good or bad for their businesses.

Owen Kelly, chief executive of Scottish Financial Enterprise, which represents the industry north of the border says, ‘It is important that some uncertainties are removed. Issues like currency, membership of the EU, regulation and the possible impact on the UK as a single market… need to be clarified so that companies, employees, customers and shareholders can understand the changes that independence will bring.’

There has been very little clarity as yet. Regulation is one area where the SNP has nailed its colours to the mast. In September 2008, in the wake of the Lehmans collapse the party’s Ian Hudghton commented, ‘It is clear that the UK authorities have let Scotland down and we could support constructive suggestions on tighter regulation, particularly proposals for EU-wide action to co-ordinate standards and increase transparency…Our core belief is that we want to see an independent Scotland with the powers to regulate the Scottish institutions…’

Regulation matters greatly to all financial services firms but it looks improbable that Scotland could or would regulate its firms more than the EU requires. If they did it would disadvantage them and they might consider moving to a less regulated regime. If Scotland’s regulatory regime was less stringent than the EU’s then it would be in breach of EU law.

How much independence can they really have therefore?
SNP spokespeople have referred to Ireland’s International Financial Services Centre as a role model for Scotland’s financial sector. Its success lies principally in tax legislation. If Scotland can secure an EU carve out for similar tax incentives they may well be able to attract financial services businesses to move there. However, Luxembourg, Switzerland, Monaco, Jersey and Guernsey are already much further along the curve and Scotland would find it hard to catch up.

Which leads to the question of Scotland’s independent tax raising powers. As long as it continues to use the Pound as its currency it will not be able to regulate the strength of its currency, nor its interest rates. Taxation is a remaining economic lever. If it were to adopt the Euro however, and this has been mooted, the likelihood is that it might well have to submit to unitary Eurozone taxation, which would hobble its independence.

Scotland’s interdependency with other countries and economies means that it cannot simply play with its own financial and fiscal train set in any way it pleases, and financial services firms appreciate the implications of this better than most.

So in the final analysis, money is so fungible and the financial services industry so international and so competitive, it is difficult to see how Scottish independence will really make any difference to the way Scottish and British firms will operate.

If Scotland’s regime proves onerous, its firms will be forced to play the game of regulatory arbitrage. At the same time it cannot, within the scope of its international memberships and obligations, have much room to manoeuvre in establishing an operating environment that is significantly more competitive than other countries and financial centres.

Tobin or not Tobin?

Filed in: tax, bank, banking, financial transactions tax, tobin, markets, ftt

The banking industry is against it. The securities firms and asset managers are against it. But what's the Financial Transactions Tax (FTT) really about?

Tobin or not Tobin?

The banking industry is against it. The securities firms and asset managers are against it. But what's the Financial Transactions Tax (FTT) really about?

When American Nobel Prize winning economist James Tobin proposed such a tax, it was to be on cross border foreign exchange transactions. He devised it following the abandonment of the Bretton Woods monetary system.

In essence, it was to be a tool to help central banks control currency speculation and in particular to protect the US dollar which had become the global reference currency.

Now that the euro needs protection, how appropriate to dust off the idea and see if it can be used to help fix the problem. But the EU proposal goes further than Tobin. First rejected by the G20 in 2010 and again at their meeting in Cannes in November this year, the plan is to levy a tax of 0.1% on stock and bond transactions and 0.01% on derivatives.

Analyst Jon Peace at Nomura suggests that this could raise between €30bn and €50bn annually and would come into force in 2014. Research by consultants PwC says, 'European policy makers believe that it will cleanse the market of high-tech practices which fuel speculation, market noise and technical trading and market volatility. Various other market behaviours and business models are likely to be severely affected as well.'

A similar tax has been proposed in the US by Democrat senator Tom Harkin who is quoted by Bloomberg as saying, '…It’s a significant way to raise some needed revenue. Quite frankly, I bet nobody would even feel it...'

International battle lines have firmed up and an FTT is opposed by the US and UK, while France and Germany are its principal supporters. The bankers’ position explained by the British Bankers Association is this: 'This transaction tax is a job loser and the costs will be borne by the wider economy… Financial transaction taxes are not taxes on banks - they are taxes collected for governments by banks. Banks conduct transactions for their customers, therefore any tax on transactions would be an additional tax on customers…'

The BBA continues, '… Anything less than a globally-applied, uniform tax would distort the markets and reward dissenting low-tax regimes rather than raising significant revenue. The UK would be particularly affected by any such tax, as it is the world’s financial centre. Four of every five financial transactions in the EU take place in the UK.'

Understandably, Prime Minister Cameron and Chancellor Osborne broadly support this position. German parliamentarian and Chancellor Merkel ally, Volker Kauder, has accused the UK of selfishness in the face of a pan-EU crisis. 'To applause,' reported the Financial Times on 15 November, 'he said it was not acceptable that the UK was "only defending its own interests" rather than that of the wider EU.'

Economics and politics
If a FTT was introduced it would particularly affect certain types of high volume, low margin transactions such as high velocity trading of stocks and bonds and this is where the financial agenda aligns with a political one.

Significant market movements resulting from large, often automated, algorithmic strategies, are viewed by politicians who support the FTT as uncontrollable market manipulation. They say that this benefits only a small group of large financial institutions and hedge funds and their wealthy private and institutional investors. And their timing of the FTT proposal is propitious.

Popular support for banks in particular and the financial services industry in general is at an all time low. Few lay voices would be raised against this 'Robin Hood tax,' styled as a levy on the industry rather than on its customers.

Moreover, similar opportunism has been displayed by the likes of Bill Gates and the Archbishop of Canterbury to promote their charitable or moral agendas, seeking a slice of the FTT pie. But there is more to this.

If implemented across the EU it would be an initial step towards pan-European taxation, which supporters of a closer EU regard as essential if the EU project and its associated currency are to be a long-term success.

Those who oppose fiscal union, such as many in the UK and elsewhere in Northern Europe, do so because they see it as hard working Northern Europeans having to pay for the results of political corruption, wide scale tax evasion and the excesses of la dolce vita in the south.

So a Tobin tax may be portrayed as a timely strike against the banking industry to get it to pay the price for its outrageous fortune. And it may be a way of taking up arms against a sea of economic troubles, and by opposing, end them.

But there are much bigger, more profound, much longer-tailed political issues at play here, which may override all others in the decades to come.

Eurozone - disaster averted?

Filed in: banks, euro, efsf, eurozone, sovereign, bailout

Under the latest scheme involving the Institute of International Finance (IIF), a global association of major financial institutions and the participation of the European Financial Stability Facility (EFSF), the €250bn Eurozone bailout fund, financial institutions have agreed to shoulder losses.

Eurozone - disaster averted?

Under the latest scheme involving the Institute of International Finance (IIF), a global association of major financial institutions and the participation of the European Financial Stability Facility (EFSF), the €250bn Eurozone bailout fund, financial institutions have agreed to shoulder losses.

Lenders have agreed to exchange the Greek debt they currently hold for instruments with maturities out to 30 years. They have also agreed to accept a loss on their original investment of 21% calculated by means of present valuing the expected future cash flows at a discount rate of 9%.

Whereas a Greek default would have crystallised an immediate loss for the debt holders, the current plan, scheduled to begin this month, will spread the pain over many years.

The private sector bondholders will lose something but their losses may not be that great. 'That’s why I believe that any one, two or even three Eurozone countries failing will not actually damage British banks that much,' says Ralph Silva, analyst at research and broadcast firm SRN. 'I’d have to revise that view if the haircut turned out to be much larger but I suspect they are not going to be that significant.'

To put the British banks’ position in perspective, total debt exposure to Greece including public sector, banks and non-bank private sector totalled US$14.65bn according to statistics released by the Bank of England in its 24 June 2011 Financial Stability Report.

Comparable figures for other problem Eurozone countries are: Ireland US$136.6 billion, Italy US$68.8bn, Portugal US$26.6bn and Spain US$100.8bn. This excludes exposures to derivatives and guarantees.

Bank exposure to Eurozone debtors falls into several categories. They may be loans, investments in the form of bonds, they may be collateral held in the form of debt securities, or they could be securities in a trading portfolio as assets held for sale.

The nature of these holdings affects their impact on the holders, though in any event they need to be written down in accounting terms. The question for regulatory purposes is whether further capital is required to restore capital adequacy ratios. As yet the impact is not sufficiently severe for this to be necessary.

An example of how one bank has dealt with its exposure is described in analysis from Moody’s Investors Service. 'Royal Bank of Scotland… took a £733m charge for 50% of its entire Greek debt available-for-sale portfolio (including maturities before and after 2020), fully reflecting the low market value that existed at 30 June, 2011. RBS said there is evidence that all Greek debt securities are impaired at 30 June, and as such the bank has recognized an impairment charge for all of these securities that it holds, whether or not each is eligible to participate in the exchange offer.'

In practice, however, assuming the offer as described above is finalized, RBS would be in a position to write back £275m of this charge, according to Moody’s. Moreover, moving the exposure to a long-term investment or loan book from the trading book averts the need to mark the exposure to what are, at present, rather volatile markets.

The position of insurance companies is similar. They may also hold Greek debt as part of their capital and/or as investments. However, Ralph Silva’s view is that insurers will be even less affected, as their time frames tend to be longer. While they may also need to provide for their Greek or other Eurozone exposures they would be much more severely impacted by short-term catastrophic events that they insure, such as a 9/11 or hurricane Katrina event.

One catastrophe that has, for the moment as least, been avoided is that of the partial collapse of the Euro due to one or more sovereign default.

As Andrew Gray, UK banking leader at consultants PriceWaterhouseCoopers, points out, because economies of different sizes and performances are yoked together in the Euro, they have surrendered two important levers of control over their economies: exchange rates – the ability to devalue if necessary, and interest rates - to control inflation. Gray says that the Greek situation takes us into uncharted economic management territory.

For the UK’s financial institutions this is extremely important. Dealing with a default of a relatively minor Eurozone economy is one thing, but the collapse of the European single currency would be truly catastrophic because of the vast scale of the Euro denominated assets that British banks and insurance companies hold.

Unpicking the Euro into constituent currencies and the consequent devaluation of weaker local currencies as well as revaluation of stronger ones, is a nightmare scenario that no one wants to contemplate. Hopefully the Greek rescheduling model will mean that we will never have to.

European Banks Take Different Perspectives on Greek Debt Impairment Charges.

Extracted from 'Moody's Weekly Credit Outlook', dated 8 August 2011.

Will the insurance sector be ready for Solvency II?

Filed in: , solvency ii, it, insurance, fsa, regulation

While a large proportion of Europe’s insurance sector seems well advanced in its preparations for new Solvency II regulation, closer examination reveals glaring differences between how jurisdictions and types of insurance firms are progressing.

Will the insurance sector be ready for Solvency II?

While a large proportion of Europe’s insurance sector seems well advanced in its preparations for new Solvency II regulation, closer examination reveals glaring differences between how jurisdictions and types of insurance firms are progressing.

In March the European Insurance and Occupational Pensions Authority (EIOPA), responsible for regulating the EU insurance sector, released its report on the fifth Quantitative Impact Study (QIS5). This was the latest in a series of 'field tests' to determine the effects and practical concerns arising from Solvency II’s requirements. The results, drawn from 30 countries, and covering a large majority of substantial insurance groups, as well as a lesser proportion of small firms, showed there were notable differences in their preparedness as the clock ticks towards the end 2012 target date.

In the UK, QIS5 showed that large groups were well ahead in their preparations. Peter Gatenby, who leads the actuarial work of accountants and advisors Mazars in the life, pensions and healthcare sectors, says that the largest firms such as Aviva, Prudential, Zurich and Standard Life started their preparations early. They also resourced their Solvency II teams while good people were more readily available. However, smaller firms tended to get started later and some now face a lack of expert staff, which in turn means that they are forced to pay more for the expertise they need. Alex Lenihan, head of financial services, Russam GMS, a provider of interim management staff, says that there is definitely a lack of good staff, and those who are available can be expected to charge top rates.

On the technical level, the requirements of Solvency II entail significant IT cost, which can be difficult to quantify. As one chief information officer puts it, 'as a comparison we know from Basel II experience (the banking industry’s equivalent of Solvency II) that IT resources and budget should not be under estimated. The reality from Basel II is that the banks spent between three to six times more than they originally budgeted for and 70% of that was on IT.'

Another lesson from Basel II that insurers are now learning to live with is that some classes of business will now be so capital intensive that they may have to reprice them, restructure them or withdraw them. This was a key finding of the EIOPA report.

Consultants KPMG say that industry consolidation will inevitably follow. This will be 'driven by companies seeking to increase diversification, which is rewarded under Solvency II. In addition, we expect that companies struggling to meet the new capital requirements may look to merge with, or be acquired by, companies with higher levels of capital,' they add.

A troubling aspect of Solvency II is the mismatch between regulators in different jurisdictions. The UK’s FSA is regarded as being a leader among regulators, with a rigorous approach to its regulatory duties. Others, among which Gibraltar and Ireland were mentioned by one expert, are regarded as having a 'lighter touch'. This, says Mazars’ Peter Gatenby provides scope for 'regulatory arbitrage' where firms may seek to rebase their operations to jurisdictions where they believe the regulation enforcement may be less onerous. He notes that Aviva and Zurich have both announced relocations of the head offices of their non-life businesses to Ireland with their European operations becoming branches rather than local subsidiaries.

At the same time insurers are facing some difficult valuation issues on both sides of their balance sheets. Those with long tail liabilities fear more costly valuation requirements under Solvency II. 'There remain a number of outstanding issues in Solvency II, particularly the treatment of some long-term products which carry guarantees for consumers,' says Peter Vipond, Director of Financial Regulation and Taxation at the Association of British Insurers.

On the asset side they face similar issues to those that banks have had to tackle under Basel II in marking to market the securities held in their portfolios. Banks have lamented how volatility in market pricing of, for example, their bond portfolios, affects their capital requirements and does not take into account the smoothing of prices over time. Insurance firms will now have to live with this.

Some smaller firms at the bottom of the insurance market food chain may have their work cut out in meeting all of Solvency II’s requirements by deadline, but there is some give and take in the system. The concept of 'proportionality allows regulators to be more flexible to firms that do not greatly impact consumers or the stability of markets as a whole. But taking this into account and considering the different speeds and rigour adopted by regulators in different jurisdictions it is difficult to see that there will be anything like a level pan-European insurance playing field come 2013. Although a high degree of uniformity is the holy grail of joined up regulation post the financial crisis, commentators seem to be saying that this is unlikely to be achieved in the foreseeable future. Consequently there are bound to be winners and losers across the European insurance sector and some losers may feel that their businesses will have been disadvantaged unfairly by powers and circumstances beyond their control.

Solvency II
In the words of the UK Financial Services Authority (FSA), Solvency II 'will set out new, stronger EU-wide requirements on capital adequacy and risk management for insurers with the aim of increasing protection for policyholders. The strengthened regime should reduce the possibility of consumer loss or market disruption in insurance.'

Insurance firms will be required to have implemented its terms by 1 January 2013, assuming the European Parliament approval process follows its expected course. This will be the first major overhaul of insurance industry regulation since Solvency I in 2002. It is built around three key sets of requirements or 'pillars'. The following description is reproduced courtesy of Lloyds of London:

Pillar 1 - Capital requirements
There are two thresholds:
- Solvency Capital Requirement (SCR)
- Minimum Capital Requirement (MCR)

SCR is calculated using either a standard formula or, with regulatory approval, an internal model.

MCR is calculated as a linear function of specified variables: it cannot fall below 25%, or exceed 45% of an insurer's SCR.

There are also harmonised standards for the valuation of assets and liabilities.

Pillar 2 - Governance and supervision
Effective risk management system.

Own Risk and Solvency Assessment (ORSA)

Supervisory review and intervention.

Pillar 3 - Disclosure
Insurers required to publish details of the risks facing them, capital adequacy and risk management.

Transparency and open information are intended to assist market forces in imposing greater discipline on the industry.

FSA tightens its grip

Filed in: fsa, insider trading, regulation, regulator, fraud, sec

Slowly but surely the UK Financial Services Authority (FSA) is quashing market abuse and bringing insider traders to book, explains Richard Willsher.

FSA tightens its grip

Slowly but surely the UK Financial Services Authority (FSA) is quashing market abuse and bringing insider traders to book, explains Richard Willsher.

On 7 February 2011 the FSA announced: 'the Upper Tribunal (Tax and Chancery Chamber) has directed the Financial Services Authority (FSA) to fine David Massey £150,000 and ban him from performing any role in regulated financial services for engaging in market abuse'.

Massey’s crime was to short sell shares in Eicom just before it was about to issue new stock at a lower price, having received inside information of the impending issue from the company. It emerged that Massey had had a close relationship with the company that he failed to disclose. He also tried to hide his insider dealing from his employers Zimmerman Adams International, where he was a corporate finance executive.

This, the latest in a series of discoveries, arrests and prosecutions by the UK markets regulator, tells us several things. Firstly, that it is closing its net around wrongdoers. Secondly, that market abuse does not pay – Massey is reported to have earned £100,000 from his Eicom trades but was fined £150,000 and banned from the financial services industry. Thirdly, it supports the long-term aims of Margaret Cole, managing director of enforcement and financial crime at the FSA, to clean up the market. She commented, 'Massey used the trust invested in him by both parties to create the opportunity to trade on the basis of inside information and he distorted the truth to hide his actions, profiting at the expense of other market users. This type of conduct threatens the integrity of the market and will not be tolerated by the FSA'.

Credible deterrence
The key concept underlying the strategy that Cole has been pursuing since 2007 is 'credible deterrence'. This involves using several tactics:

  • obtaining criminal prosecutions where possible
  • bringing cases using its own Regulatory Decisions Committee as well as using the Tribunal process
  • developing its in-house transaction reporting system to pick up irregular or suspicious dealing activity
  • working with other agencies such as the Serious Organised Crime Agency, City of London Police and other police forces on searches, arrests and extradition
  • working with regulators in other jurisdictions to expose international conspiracies which threaten the integrity of the UK markets.

In 2010 the FSA levied fines of over £89m during the year for offences across the full range of its supervisory activities. In terms of market abuse, of which insider trading is a subset, the FSA can only levy civil fines. The total collected here amounted to £10 million, with five successful criminal insider-dealing prosecutions. Although hardly a vast sum, this represents a degree of success.

It also launched a much-publicised series of dawn raids in spring of 2010, which it was keen to make public. Announcing its actions and successes is part of the credible deterrence programme.

'In terms of insider dealing, the FSA seem to be following through on what they have been promising for a long time and have made sure that the action they have taken is well publicised,' says Carmen Reynolds, a partner in the banking and capital markets group at international law firm White & Case. We can expect that there will be further announcements in due course as suspects arrested over the last couple of years are brought to court.

International cooperation
No market is an island. Regulators across the globe have long recognised that as capital, trading and markets become more international, people aiming to exploit illegal, specialised knowledge to their own advantage can only be apprehended if they work together. Indeed, just as the global financial system itself is only as strong as its weakest link, so too regulation and law enforcement.

For example, on 30 December 2010 the SEC announced that it had charged a San Francisco based former Deloitte Tax LLP partner and his wife, Arnold and Annabel McClellan, with leaking inside information about merger and acquisition deals to relatives in the UK. The FSA brought charges against James and Miranda Sanders, the London-based relatives. The allegation is that they gained US$3 million through their efforts.

Clearly international insider trading can produce significant sums for those involved and so significant penalties need to be imposed if they are to prove dissuasive. Here the United States’ Securities and Exchange Commission has a distinct advantage over the FSA as it is empowered to levy massive fines, far in excess of those possible in the English courts. However, how many such international groups may operate in this way we cannot know and it seems unlikely that the McClellens and the Sanders are unique in devising such schemes.

What other recent cases have shown is that so-called 'expert rings' are now being targeted by regulators. The Galleon case is one example. Here the SEC alleges that Galleon Management LP, a New York based hedge fund, engaged in insider trading where others involved included 'senior executives at IBM, Intel and McKinsey & Company'. A number of those charged have pleaded guilty while the investigation continues to widen its list of suspects and other similar rings appear to be being uncovered in the US.

Elsewhere, in the European Union and in Hong Kong for example, there are moves afoot to tighten insider-trading regulation, though at differing pace. But it is difficult to know whether they are doing enough. For example, despite the FSA’s efforts, reports suggest that significant volumes of trading may be occurring around the time of almost one third of UK takeovers, some of which could be suspicious. And what of those whose success at insider trading is never identified or, if it is, then cannot be pursued by regulators for lack of evidence? Are we seeing the rump of insider trades now brought to light or merely the tips of much larger market abuse icebergs? As long as we do not know the answer to these questions, markets cannot be said to be clean or fair, even though the FSA and others seem from their public announcements to be making inroads among criminals and market abusers.

Regional e-FX perspective on Latin America

Filed in: banks, trade, latin america, foreign exchange, forex, fx, chile, e-forex, trading, ndf

Global trade, local politics and regulation are the factors that most influence electronic foreign exchange trading in Latin America, while south of the US border the market is as rich and diverse as the countries that comprise the region.

E-Forex Regional Perspective Latam

View the text version of this client publication

Global trade, local politics and regulation are the
factors that most influence electronic foreign
exchange trading in Latin America, while south of
the US border the market is as rich and diverse
as the countries that comprise the region.

In many ways Mexico is the role model. The
Mexican peso is now the fourteenth most traded
currency, according to the most recent Bank for
International Settlements Triennial Central Bank
Survey. Its share of average daily turnover in global
foreign exchange markets in April 2010 stood at
1.3%, so while it is far from being a major currency,
it does register alongside the Norwegian krone
and ahead of the Indian rupee, Russian rouble and
Chinese renminbi. Mexico leads the Latin American
pack, and is the biggest of the “big five” followed by
Brazil, Chile, Colombia and Peru. Mexico leads not
only in terms of size of turnover, but as a country
that over the last three decades has been through the
mill of indebtedness, default and rehabilitation with
the most developed nations’ financial community
and then full currency liberalisation with
membership of the wealthier countries
club, the Organisation of Economic
Co-operation and Development
(OECD). It is a path that other
Latin countries have yet to
follow to its end.
Lessons from Mexico
“Mexico’s presence within
the North American Free
Trade Association (NAFTA)
definitely opened things up,”
explains Simon Jones head of FX
e-trading at Citi. “We treat Mexico
just as we would treat Swiss francs or
“Mexico is in many ways a developed
centre. I don’t think we can call Mexico an
emerging market anymore,” says Matt O’Hara,
senior vice president and global head of business
operations at Thomson Reuters. “It’s an emerged and
developed centre. They have been faster adopters of
technology in order to enable their connectivity and
internationalisation. Thomson Reuters worked with
the Mexican authorities to help them meet their
internationalisation goals. We helped them do that
with our matching service, our interbank electronic
brokerage platform, which if you fast-forward to the
present day is now seeing a significant amount of
global liquidity. We are considered to be the primary
pool of liquidity and the reference rate for the
Mexican peso. Around 80% of all Mexican volume is
traded outside Mexico which shows the power of the
forex market when a domestic community that was
previously closed, opens up and connects to the global
market place. It has grown hugely and is significantly
traded in places like London and New York.”
That said, even in Mexico, local regulations can seem
cumbersome if you are used to market conditions in
Europe or the US. For this reason, says Michael Bernal,
sales director for Latin America at FXall, multibank
platforms have additional appeal. “It is not only for
transparency and pricing that multibank platforms are
used, but also for their pre- and post-trade execution
capabilities with end-to-end processing and connectivity
to corporate treasury management systems. This
enables them to reduce or eliminate manual interface
in the processing of the transactions. For example the
“know your customer” regulations in Mexico are quite
different than they are in the US. You actually have to
visit the customer at their place of business as part of
the process” This is a theme that recurs again and again
when you examine forex trading conditions throughout
the LATAM region.
If Mexico is the role model, it is Brazil that those
inside the Latin American theatre and in financial
markets worldwide are watching most attentively.
The size of its economy, the power of its wealth
generation capacity, its rich reserves of natural
resources and agricultural production and its booming
international trade relations, particularly with China,
point to a market that offers massive opportunities for
foreign exchange trading. That the bulk of this will in turn migrate to electronic transacting seems inevitable
and indeed the only practical way forward that can
efficiently handle demand. However, the Brazilian
monetary authorities are fully alive to the risks they
face in what they term “currency wars.”
“Brazil is cautious because of the demand for inflow
of capital,” says FXall’s Michael Bernal. “Brazil does
not want the Real to appreciate so much that the
currency becomes too strong. Over the next five to
ten years regulation will slowly change to allow Brazil’s
own internal market to trade more freely but in the
meantime regulation is protecting the economy from
Which is by no means the same thing as saying they
are not open to ideas and progressive in their adoption
of technology.
“Both Brazil and Chile are set to see further growth
in the use of electronic trading systems because these
are countries where volumes are growing at very fast
pace,” according to Ernesto Semedo, Sales Manager
LATAM from 360T. “The adoption of technology is a
necessary requirement to keep pace with the increasing
Most people we spoke to agree with this. “Brazil
seems to everyone an obvious growth market for eFX
Channels,” agrees Debra Lodge, HSBC’s managing
director and head of eFX sales and strategy for Latin
America. “Interestingly enough, there are only three
players, HSBC being one of them, that offer a locally
tailored solution and we expect to see major volume
growth over these platforms in 2012. As of yet, very
few multilateral channels have been able to mark their
presence in this market, mostly due to lack of local
liquidity providers and the value of bilateral relationships
with credit worthy institutions. Over the next couple
of years we do expect more local players to release their
own single dealer platforms (SDPs) plus enhancements
by major international players to their offerings to cater
to the often complex onshore BRL market.”
Chile has long been regarded as Latin America’s
economic model state. In particular the country’s
revenues from the mining and sale of copper, its
relatively small population and the richness of its
farming and fishing industries have been for the most
part well managed. Its US educated economists have
established basic rules and infrastructure that place
Chile among the top emerging market credits.
“A broad spectrum of clients in Chile have embraced
eFX channels, market regulation is not overly
restrictive, and we expect competitors will see this as
an obvious target market after Mexico for both SDPs
and multi dealer platforms (MDPs),” adds Debra

Citi’s Simon Jones notes that while the Chilean peso
is generally traded in the form of non-deliverable
forwards, he adds that Chile “would be a great case
study of a Latin America country if it opened its
markets up for deliverability.” If and when Chilean,
and indeed Brazilian currencies will become fully
deliverable is a moot point. But the consensus does
seem to be driving towards greater openness and less
regulation in due course.
Colombia and Peru
Both smaller in terms of potential market, Colombia
and Peru are following a similar path to Chile in
terms of their commodity-dependent economies
and currency pursuing an internationalising agenda.
Interestingly as Thomson Reuters’ Matt O’Hara points
out, these markets already have a regulatory regime
which, when viewed positively, are ahead of markets
in Europe and United States. “Latin America is in
many ways ahead of the game when it comes to the
infrastructure and connectivity and the regulations,”
he explains. “There is an OTC spot market which is
then cleared through the local exchanges in Chile and
Colombia for example, and they are registered to the
superintendencias, their regulators. The same is true in
Argentina as well.”
He adds that there has been a good deal of work done
in countries like Colombia and Chile to overhaul their
regulatory regimes such that their ability to embrace
technological change and move towards open and
transparent international trading in their currencies
when appropriate, will be well advanced.
Meanwhile, although Peru may be further behind
the curve than some of its bigger neighbours, its
prospects look encouraging. “Peru presents an exciting
opportunity for the future for eFX channels,” says
HSBC’s Debra Lodge. “A dual currency economy
(USD and PEN), and as of 2011, one of the fastest
growing economies in the world, Peru remains one
of the largest commodities producers and exporters,
attracting investment from numerous multinational
Drivers and products
History plays an important role in understanding
Latin American countries’ attitudes towards their
currencies and to liberalising the markets in them.
There is not a country in the region that has not at
some stage over the last three decades or so experienced
boom and bust. Boom in commodity prices; boom in
foreign investment; boom in currency inflows and the
euphoria associated with each of these. However, the
same countries have experienced political turbulence,
commodity price collapse, over-indebtedness driven by
international banks, corruption and exodus of flight
capital. The way in which Latin American currencies are
regulated today in all the significant countries, with the
exception of Mexico, needs to be viewed through this
lens. Countries like Brazil, Chile and Colombia but also
Argentina and Venezuela, wish to be masters of their
own destinies rather than slaves of the international
markets. Only their methods of going about it and their
political motivations may differ.
Having said this, the region’s most successful economies
are dependent on primary industries of mining, oils and
gas, and agriculture and livestock farming to generate
foreign currency revenues. Hence the most important
driver for foreign exchange trading is real trade.
“A large part of the commercial FX market in
july 2012 e-FOREX | 63
LATAM is driven by imports and exports,” explains
HSBC’s Debra Lodge, “and having a good standing
relationship with a bank is one of the determining
factors for transacting business.”
Spot and limited maturity forward transactions meet
the needs of most businesses. On the whole there is
relatively little speculative foreign exchange trading –
though there is some, of which more later.
“Clients in Latin America use the same set of things
clients in North America or Europe use,” explains
Caio Blasco, Deutsche Bank’s director of LATAM
e-commerce sales based in Sao Paolo. “However, e-FX
in the region is still some steps behind as clients are
learning about algorithmic execution. Usually, what
differentiates them is the number of currencies they
trade, with the caveat that most currencies traded in
LATAM are restricted by nature (BRL, CLP, COP, etc).”
Banks such as Deutsche, Citi and HSBC, but also
other platform providers have combined their ability
to provide first voice but then electronic platforms
with the ability to provide the administration that is
generated by the need to meet local exchange control
Citi’s Al Saeed is project manager for their cross
asset and research portal Velocity. “To execute an
FX transaction in these countries involves an entire
workflow. There may be heaps of documentation to
process and approve and very few people do that.
“Our corporate platform, FX Pulse, automates all of
the regulatory requirements for places like Brazil. You
have to describe whether the underlying trade is an
import or an export, there’s tax to be calculated. It’s
the same in Colombia where there is a tax calculation
of every FX transaction. In Argentina there is an entire
workflow for collecting documentation, making sure
everything is in order, that the FX transaction is off
the back of genuine trade rather than speculation
before it’s approved.”
FXall’s Michael Bernal agrees with the premise of the
importance of value added beyond facilitating trading.
“We’ve found that corporates have been driven to our
platforms by our automated processing which eliminates
the need to send faxes, phone or e-mail confirmations.
Instead confirmation is sent from the bank via SWIFT’s
messaging to the corporation. This means that payments
are made automatically.”
Against a background of the regulatory need for forex
transactions to be linked to real trade flows, it is not
surprising that the range of instruments beyond spot
and forwards are relatively undeveloped. Consequently,
NDF products have grown up offshore. ICAP for
example offers NDFs in ARS, BRL, CLP, COP and
PEN and Thomson Reuters has supported the largest
community of Latam and Global NDF traders on
its Dealing platform since
NDF’s were first introduced
to the market. But this is by
no means the whole story
as Thomson Reuters Matt
O’Hara explains.
“The foreign exchange market
in Brazil, for example, grew
as a futures market, primarily traded on the BM&F market. There is a domestic spot
market and we see that growing, but the majority of the
liquidity is in the futures market just as there is liquidity
in the NDF market offshore. So there are domestic
capabilities in Brazil that work very well and electronic
in nature. Then in Chile there are domestic trading
platforms that are for the domestic spot market which
have relationships with the local bolsas – or exchanges.”
We will look at regulatory issues in more detail
later, but there are two other important areas that
are in growth phase as far as electronic capabilities
are concerned. The first is in speculative money and
second is in retail. These are both “emerging markets”
in their own right.
Prime brokerage and hedge funds
“There is not a lot of movement in the G10 space at
the moment,” says Citi’s Simon Jones. “There has been
central bank guidance in CHF and JPY, EUR / USD
has hovered either side of 1.30 all year, threatening
much but delivering little. For a long while now
our customers have been looking for other areas of
interest. Brazil, Chile, Colombia and Peru to some
extent, while among the deliverables, Mexico is our
biggest pair in the emerging market space. The
majority of the market is Asset Driven or Speculative
flow with spot and forwards against the dollar
accounting for the bulk of it.”
He goes on to add that where such flows are
provided by hedge funds they are accustomed to
using electronic trading platforms and expect them
to be available where Latin American currencies are
FXall’s Michael Bernal sees developments in the prime
brokerage area. “On the prime brokerage side we are
definitely seeing more high frequency traders (HFT)
using prime brokers for liquidity and credit purposes.
We are also seeing a very careful selection process with
regards to who HFTs are using for prime brokerage as
they tend to concentrate their exposures with only one
or two institutions. There has been a strong growth in
PB business in LATAM over the last couple of years,
offered by the 5 – 10 major US and global institutions
with a strong presence in LATAM.”
“We currently have a number of LATAM hedge
funds based mainly in Rio de Janeiro, São Paulo and
Santiago trading FX through our platform,” says Deutsche’s Caio Blasco. “We are experiencing decent
growth from those clients as it is a new asset class in
this region. In the HFT space, there are few players,
as the restricted nature of their main currencies make
HFT challenging. At the same time we believe that
prime brokerage is generally still under used in the
region. The cross margin ability and netting facilities
that an FX prime broker can offer clients can make
execution much smoother while requiring fewer
margin allocated to different banks.”
This view is corroborated by Joseph Conlan Global
Head of Sales at New York-based FC Stone LLC
which provides clients with trading and execution
services in a range of asset classes. “Prime brokerage
is just gaining traction in the region, allowing
participants to trade on the best rates market-wide,
as opposed to being captive clients. HFT and algo
trading will have an impact as more participants
migrate to open markets and dark pools.”
Debra Lodge also notes that prime brokerage is
significant growth area for HSBC, “Prime Brokerage
services are beginning to emerge in Brazil, and we
expect this business to become more prevalent with
the local hedge fund community in the near future.
HSBC is a large organisation with deep capabilities
in a lot of geographies and products, we aim to be
ready with such products as and when these emerging
markets dictate.” Her colleague Jacqueline Liau global
head of FX prime product and service adds, “We are
already live and servicing clients in Brazil with our
FX prime brokerage platform and continue to expand
our base. Local knowledge has been paramount to
ensuring our tools and technology are adequate for
this market.”
Retail FX
If the smart money is just beginning to show an
interest in LATAM and accessing it by electronic
means, it is not surprising that the retail market seems
to be relatively undeveloped as yet. This is also a
market that brings with it some complexities.
“In much of Latin America the retail FX market
is fed by remittances of emigrants, tourism and, unfortunately, illicit money from drug trafficking and
organised crime,” says Financial Software Systems’
Leigh Ann Wolfe director of new business development
Latin America and the Caribbean. “To combat some
of the negative aspects of FX trading, authorities in
Latin America are increasingly erecting obstacles to
the growth of the FX market. To the extent that the
retail FX trading market grows in Latin America,
sophisticated Latin American investors and traders will
want all of the features that investors around the world
expect and demand in FX trading platforms.”
Experience at Citi seems to suggest that the market
interest also lies elsewhere as well as in pure forex.
“We do see some interest in retail trading in Brazil,”
explains Al Saeed, “but if you ask the retail providers
where the interest has been over the last 12-18 months
they will tell you it has been more in metals than in
The market in platforms and technology shows plenty
of potential according to Ernesto Semedo of 360T,
“Retail FX has been growing at a very good rate,
although in some countries the marketing and sale
of these systems are prohibited by law. Nonetheless,
interest continues to grow on the part of individuals
with a strong interest from Brazil.”
In summary, Luis Simões Pereira Head of Retail Sales
in Latin America for Saxo Bank says, “Retail FX
has been developing steadily, although facing some
challenges. The multitude of Ponzi schemes across the
region left some scars on the investors and regulation
is in some cases complex or unclear. Across the board
investors are looking for information and educational
material and as they feel more confident, we are seeing
growing rates of adoption. The European crisis has
also played a role as there is a growing interest in the
development of events in the continent and a growing
will to speculate on the European currency(ies). In any
event, active traders have pretty much the same set
of interests as their European counterparts – pricing,
margins and speed of execution are paramount.”
Regulation, regulation, regulation
For all the complexities and complications of trading
foreign exchange in LATAM, market participants
highlight regulation as the biggest single barrier and
opportunity to development of e-trading.
That regulation is coming from both local markets
and developed ones is good news and bad news as
Saxo’s Luis Simões Pereira explains, “In several Latin
American countries, we have observed a growing
openness in the regulatory framework towards
the FX market. Either through specific regulation
or tacit approval, in a number of countries, it has
become common to trade FX as any other asset class.
However, the crisis hitting the developed countries has resurfaced some fears among the most important
economies, that could set back the path towards a
liberalization of the FX market.”
FXall’s Michael Bernal sees a divergence of regulation,
with some countries loosening controls while others
are becoming more stringent. “You see relaxation
of regulations in Brazil, then you see an increase
in regulation in Argentina and Venezuela. Even in
Mexico there are some regulations that are being
placed on funds for financial reporting purposes. The
position reporting carried out in the US or in Europe
is now being emulated in LATAM. This type of
regulation is more of an accumulation of information
of the financial risks that a country’s institutions are
facing. In places such as Argentina and Venezuela
regulation exists for purposes of expropriation and
government control. This sort of regulation is likely to
impact capital flows.”
The use of electronic trading platforms and capabilities
is increasing in response to such regulation as well to
customer demand. Greater compliance and reporting
demands more efficient connection from front to back
office using up-to-date electronic tools.
However, in some ways the development of reporting
requirements in Mexico and the move towards greater
market transparency is waiting on the more developed
markets to provide a lead. This is surely coming
according to Thomson Reuters’ Matt O’Hara. “Short
term I think the local market has to understand and
prepare for the changes that are inevitably coming in
the future. None of us know when these changes are
going to happen or what exactly they will contain.
But we’ve got a pretty good idea of what is going to
happen around certain OTC derivative instruments.
The paradigm is going to change. And with LATAM
they trade with the regions and jurisdictions that are
going to be impacted by these new regulations and so
they need to be ready for that.”
This also impacts the rate of innovation in the region
as a whole. “The market has had to spend a lot of time
and money, resources and investment on making sure
that they can continue to operate and comply with
the new regulations,” O’Hara continues. “That means
that the balance of innovations, especially around
proprietary trading platforms, macro-based electronic
trading platforms has had to slow down to make sure
they can be compliant. That’s something that the local
market absolutely has to understand and be working
on. There’s a lot more education and awareness around
and regulatory compliance to make sure that they’re
ready. Long term, when these regulations actually come
in there are certain instruments that we believe and
the market understands are going to be caught up in
these regulations. NDFs for example. That is a primary
trading instrument and hedging tool for LATAM. If
NDFs have to be traded in a different way in order to
meet these regulations then this is something that the
local market needs to be preparing for.”
Price transparency
Citi’s Simon Jones says bodies of regulation such as,
Dodd Frank and MiFID that affect developing world
currencies, as well as various localised regulations that
are coming from Asia, will lead to price transparency
that we haven’t seen in LATAM before. He says,
“This will open up the market for more hedge fund
involvement and will give price transparency to the
corporate and real money community that will be
good for business. This will happen in the next 6-18
months. Ultimately the liberalisation of currencies in
the BRICS or elsewhere is an inevitability. Knowing when this will happen is very difficult. You are
definitely seeing steps in Brazil and China to pave
the way for the day when their currencies become
deliverable as in Mexico, the United States and the
United Kingdom etc.”
However, the process need not be that traumatic for
LATAM countries. “There are many opportunities for
cooperation in Latin America,” says Tod van Name,
global head of FX Products, Bloomberg LP, “including
a new regional exchange created by the integration
of the exchanges of Chile, Colombia and Peru into a
single marketplace called MILA (Mercado Integrado
Latino Americano). The Bolsa de Santiago (Chile) is
also speaking with Brazil’s BMF Bovespa about sharing
technology. From an interbank perspective, many
LATAM countries already trade spot over interbank
exchange platforms. Eventually as the markets grow
here there will be room to expand to NDFs, futures
and options. It remains to be seen if this will be done
via an exchange or over the counter.”
One encouraging factor is that most technology
providers seem confident that the communications
infrastructure is sufficiently developed throughout the
major LATAM markets to enable increasingly rapid
development e-trading of forex.

“Regulatory changes or not, clients throughout
the region are beginning to warm up to the idea of
using eFX channels to transact business,” concludes
HSBC’s Debra Lodge. “Tailoring, but not necessarily
personalisation, is the name of the game, we have to
be able to support clients in a way they like to trade
and the way the market moves, this is certainly not a -
one size fits all type exercise.”
The outstanding questions facing electronic FX
trading in the region are very much those facing it
in other regions of the world, including the major
developed centres: what will regulation look like once
the politicians and regulators have put the finishing
touches to it? Secondly, when will new rules be put in
Layer on top of this the history, traditions and
requirements of local economic management and the
LATAM picture is full of hope and opportunity while
cautiously reaching out to the rest of the global FX
electronic trading community. All market participants we
spoke to were full of optimism for the promise that the
region offers for e-trading both for them and their clients.

Regional e-FX perspective on South East Asia

Filed in:

South East Asia’s increasing economic prosperity is driving growth in the region’s foreign exchange trading activity and, as Richard Willsher discovers, the regions electronic FX trading capabilities have accelerated even faster.

E-Forex Regional Perspective SE Asia

View the text version of this client publication

Regional e-FX perspective on South East Asia
Richard Willsher

The South East Asian region’s main geographical
markets include Indonesia, Malaysia, The
Philippines, Singapore, South Korea, Thailand
and Vietnam. Australia, China, India and Japan are
all influential in the regions markets but separate.
Statistics from the Bank of International Settlements
Triennial Central Bank Survey: Report on global
foreign exchange market activity in 2010 show that
Singapore remains the principal regional hub. Its share
of daily global forex market turnover remains at 5%
as compared with the previous survey but volume has
increased from US$242 billion to US$266 billion.
Also significant is the comparable figure for Hong
Kong, which has grown from US$181 billion in
2007 to US$238 billion in 2010. If counted together,
Singapore and Hong Kong would account for 10% of
daily turnover amounting to the third largest foreign
exchange market behind the UK and the USA. This
indicates how important Asia has become in the FX

Increased turnover in both centres has been aided by
the move to electronic trading. “We have seen growth
of anywhere between 20% and 40% year-on-year in the
amount of foreign exchange business that is conducted
via the electronic channels,” estimates Shankar Hari,
regional head of FX - Asia ex Japan at JP Morgan.
“Specifically in the bank space rather than among the
corporates, as banks and financial institutions face fewer
restrictions than corporates,” he says.
“South East Asia has seen a tremendous growth in
e-trading over the past few years,” says Jamie Salamon
Head of FICC eCommerce APAC at Royal Bank of
Scotland, “and this is down to a variety of reasons.
First, there is much more acceptance of e-trading
FX as a beneficial way of conducting business that
is also complementary to traditional telephone
business. Second, there is more pricing and functional
sophistication available via single bank and multibank
portals that will cater for the many needs of clients.
And third, as more money comes into Asia, FX has
become a much more attractive asset class to investors
as some clients move away from other investment
These trends have accelerated over the last ten years,
explains Phillip Futures’ head of foreign exchange
Joseph Ng in Singapore, as US and European financial
institutions have either set up or expanded their
operations in the region. “The landscape has become
very competitive and resources have been invested in
awareness and education. Clients now have choices from single bank platforms to multiple bank pricing
via electronic communications networks (ECNs) and
multi asset class platforms to suit different needs.”
“With e-trading becoming the norm,” adds Ng, “and
with the presence of stronger competition, prices have
also narrowed tremendously.”
Competition and price discovery
As an indication of the power of electronic trading
to introduce competition and accommodate best
pricing, the compression in bid-offer spreads has been
dramatic, to as tight as three basis points for major
currency pairs. But growth in the use of electronic
trading channels on both the buy and sell sides still
has some way to go.
Mathew Kuppe is Managing Director at, Singapore
based, 360T Asia Pacific Pte. Ltd., the multi-bank
trading platform provider. 360T has 110 market
maker customers worldwide who are the major global
and regional banks that provide and price liquidity
through the firm’s platform. Kuppe explains that 360T
has been in Singapore for five years and has doubled
its turnover every year. He anticipates 80% growth in
On the buy side the attractions for corporate
treasurers, asset managers, hedge funds, second
and third tier banks and broker dealers is easy to
appreciate. “They can access liquidity from a single
source on our platform, with a single straight through
processing (STP) with full transparency,” says Kuppe.
“Traditionally a corporate treasurer picked up the phone
to three different banks, selected the best price, wrote
the deal and then followed up with internal admin for
their in-house treasury management system. Now they
can check all the pricings of our panel banks, execute
the deal, enter it in the treasury management system
and complete the audit trail – all in ten seconds.”
Single bank offerings
The major banking and securities houses may feed
into multibank platforms such as 360T’s while at
the same time offering their own. Saurabh Sharma,
vice president FX electronic market sales at Nomura
says, “Our proprietary platform, Nomura Live, is
increasingly gaining traction in the region. Our focus
is on offering a bespoke solution to clients, be it
developing an algorithmic toolkit or a currency basket
to suit their specific needs.”
JP Morgan’s Morgan Direct platform is similar but
incorporates a hybrid approach to price quotation,
accessing the firm’s in-house prices as well as those
from the wider market. At RBS Jamie Salamon says
that their platform, RBSM, provides clients with a
variety of advanced tools should they want to trade
using a Volume Weighted Average Price (VWAP)
or clients may want to use their new ‘RBS Agile™’
platform to specify automated strategies for their
gamma hedging requirements. He adds that the buyside
is increasingly making use of algorithms.
Other major players offering similar platforms and
services include HSBC and Citi among others.
Meanwhile Standard Chartered, which reportedly
has over 150 staff on the forex sales and trading
side throughout South East Asia, now processes 80
per cent of its deal flow in the region electronically.
Moreover it continues to offer innovative crosses
involving more exotic Asian currencies.
Freedom from regulation
Speaking to market practitioners in the region it
doesn’t take long before they mention Asian currency
of crisis 1997 – 1998. It may be a long time ago
but the scars run deep. Things are different now.
Economies in the region have amassed large foreign
currency reserves as well as substantial sovereign wealth funds. These enable countries like Singapore,
Malaysia, Indonesia and South Korea to both manage
their currencies if, as earlier this year, they feel they
have become overvalued and also to invest in foreign
assets to protect their value against local market
downturns. Nonetheless fear of capital flows causing
economic stress do persist in a subliminal way.
The best example of how currencies are managed is
the Singapore Dollar. The Monetary Authority of
Singapore (MAS) explains the position very clearly,
“The objective of Singapore’s exchange rate policy has
always been to promote sustained and non-inflationary
growth for the Singapore economy. MAS manages
the Singapore dollar against a basket of currencies of
Singapore’s main trading partners and competitors. The
trade-weighted exchange rate is allowed to fluctuate
within a policy band, and where necessary, MAS
conducts direct interventions in the foreign exchange
market to maintain the exchange rate within this
band. The exchange rate policy path and the band are
regularly reviewed to ensure that they remain consistent
with underlying economic conditions. Information
pertaining to the policy band, composition of the
currency basket, weighting system, or money market
operations are not disclosed to the public.”
Singapore as well the other major economies in the
region each manage their currencies and reserves
very carefully. Informal regulation is to a significant
degree, a fact of life. Meanwhile in Europe and North
America no discussion of the future capabilities of
financial markets is free of the “R” word, yet it is early
days as far as South East Asia is concerned when it
comes to OTC forex products.
“People are looking to see what happens in Europe
and North America,” says JP Morgan’s Shanker Hari.
“Nobody wants to impose restrictions just for the
heck of it. Moreover from here when we look west at
what they do, we see that many of the problems that
the world finds itself with were not made in South
East Asia but in Europe and the US. People will wait and watch. No one here wants to rush into regulatory
reforms before examining them carefully.”
Achieving SEF and OTC status
“With APAC playing an increasingly influential role
in the global financial markets [regulation] is a hot
topic,” says Jamie Salamon. “We are already seeing
clearing of non deliverable forward (NDF) products,
foreign exchange options (FXO) are moving towards
central clearing and trading is being focused on swap
execution facilities (SEF) or organised trading facilities
(OTF). We will start to see the current platforms
increasingly gearing up their e-trading capabilities to
meet the regulatory requirements and get SEF/OTF
status. We will also likely see more requirements for
post-trade transactional reporting”
However Joseph Ng at Philip Futures highlighted
that, “From US to Asia, regulatory bodies around
the world are looking to bring more transparency
and accountability into the derivatives market, which
will certainly have a major impact on the overall
FX market. Controls and transparency are well and
good if they can be implemented reasonably without
disrupting business flow. This will create high barriers
to entry for investors, and possibly curb the growth
of the industry, making the market place niche and
opening it to only the big boys, high net worth and
sophisticated traders. It is also foreseeable that market
participants will move to set up business in countries
not affected by such reforms.”
Forex clearing
In October of this year Singapore Exchange (SGX)
launched a clearing service for FX non-deliverable
forwards in Asian currencies. The eligible currencies
are Chinese Renminbi (CNY), Indonesia Rupiah
(IDR) Indian Rupee (INR), Korean Won (KRW),
Malaysian Ringgit (MYR), Philippine Peso (PHP) and
Taiwan New Dollar (TWD).
Regulatory pressure in due course may lead to higher
volumes and additional products such as client
clearing. In addition if it emerges in due course that
FX options fall within new regulatory parameters
SGX advises that this may be added to the range of
products and facilities that it offers. Readers can find
further details of the SGX clearing facility in the leader
article of this issue of e-Forex.
Meanwhile several established global exchanges have
launched new currency futures products over the past
several years and Singapore is no exception Singapore
Mercantile Exchange has launched EUR/USD Futures
and CME has launched some Asia currencies futures.
FX prime brokerage
One of the currently growing business streams of the
global banking groups and larger local players in the
region is prime brokerage (PB). However while it may
assist clients and capture business flow for providers,
prime brokerage brings with it concerns which the
current crisis in the Eurozone and the inexorable
tightening in the interbank market are not helping.
“South East Asia is a highly fragmented market with
many countries and different regulatory frameworks.
Regulations in a lot of countries, unlike Europe,
do not permit financial institutions to participate
in the FX market,” says Nomura’s Saurabh Sharma.
“Therefore we expect demand for FX prime broking
as well as cross asset PB services to continue to grow
as more hedge funds and high frequency players look
to provide liquidity to institutions in the region but
would have very limited access without a PB.”

But the PB space is by no means a cakewalk. “It’s
hugely competitive,” says RBS’ Salamon. “We have
seen a number of the smaller banks in the region
move to become providers of FXPB services over the
last couple of years. This trend could increase due to
clients’ desire to source more competitive pricing and
a larger pool of liquidity. For certain types of clients
this can only be accessed through a PB relationship.
Additionally the requirement to centrally clear NDFs
could lead to more PB relationships in the region.”
All good news then but what about risk? “There
has been increasing interest in taking up FXPB to
minimise counterparty risk and to add convenience
to dealing with a single counterparty while at the
same time enjoying the liquidity of several liquidity
providers. The smaller FCMs use FXPBs to maximise
their funds and to increase mid-office operational
efficiency,” says Joseph Ng at Philip Futures. “We
observed that regional financial institutions offering
FX services are also deploying PB services to overcome
credit and counterparty issues. However, looking at
the cases of Lehman Brothers and MF Global, this
increasing reliance on a single clearing party seems to
amplify rather than reduce inherent risk.”
The risk angle is further focused by RBS’ Chia
Woon Khien, Head of Emerging Markets Research,
Emerging Asia. “Prime brokerage can be quite
capital intensive for providers of these services. At
the moment a lot of banks are carefully managing
their capital in the light of what’s going on in Europe
and capital constraints. When you provide prime
brokerage you take on risk and right now everyone
is worrying about taking on everybody else’s risk.”
The message is clearly that if there is a squeeze on
interbank credit lines or worries about hedge fund
risk for example, expanding prime brokerage services
might have to take a back seat, at least until calm and
trust are restored to the markets.
Retail FX
Meanwhile the growth of FX trading services to retail
traders and investors is expanding throughout the
region. Firstly, there are those individuals who trade
FX as an asset class, perhaps as a hobby or to make a living and who deal with the providers of leverage.
Hantec, OCBC Securities PTY Ltd, GK Goh and
Saxo Bank are among such providers. Larger, global
banks, such as JP Morgan and platform providers
such as FXall in turn supply liquidity to these players.
A second group is comprised of the private banks
and the wealth management operations of local and
international banks that have greatly increased the
amount of FX they transact on behalf of their clients.
There is a considerable volume of wealth being
invested both by family offices and by private banks.
“Retail FX trading has gained traction in South East
Asia over the last 10 years, being marketed by many
overseas brokers over the internet as an easy alternative
to equities trading,” according to Joseph Ng at Philip
Futures. Nonetheless, Singapore is presently the only
S.E Asia country with an approved regulatory structure
for financial institutions to offer leverage FX trading.
Many traders who start FX trading seek brokers who
are able to provide stable platforms, with competitive
prices. The desire for additional features such as charts,
news and advanced trading features are common
requests from more active traders. On the other hand,
more sophisticated FX traders who are looking to
trade with larger fund sizes would pay more attention
to a broker’s financial standing and the regulatory
regime that the broker operates under.
Financial institutions like Phillip Futures, which
operate from Singapore, are popular with this segment
of clients. “Singapore regulators has established a strict
set of conditions governing brokers’ activities and rules
administering the handling of clients’ funds,” he adds.
In addition although forex as an asset class in its
own right does not figure in the latest Cap Gemini
– Merrill Lynch “World Wealth Report”, what is
clear is that Asian high net worth individuals in
the region are investing a significant proportion of
their wealth – of the order of 50% - outside their
home territory, for example in the US. They are also
becoming increasingly diversified into asset classes
such as property and other alternatives. To do so
they inevitably have to come to the foreign exchange
market in order to purchase assets denominated in
currencies other than their own.

“With South East Asian economies expanding at a
rapid pace, countries like Indonesia have a growing
population of wealthy people,” says Nomura’s
Sharma. “Many of these have FX needs arising out
of investments abroad and a greater appetite to
participate in the retail foreign exchange market. It
has increasingly become clear to banks that catering to
a diverse set of clients and achieving scale via a good
electronic offering is paramount.”
Key importance of technology
“FX is as much about technology today as it is about
financial markets,” continues Sharma. “Most serious
players in the FX space are investing in technology to
reduce latency, and have their data centres in optimal
locations in order to eke out value from the business.
Algorithmic execution is slowly starting to pick up
in the region. Clients are not only looking for best
execution but also post trade analysis to best gauge the
impact of their trades on the market and also reduce
costs related to and around execution.”
Thomson Reuters is one leading FX provider which
has been steadily expanding its offerings in the region,
“As banks have further embraced technology from
a liquidity perspective we have developed a strong
community of users in this region, especially where
local currencies are allowed to be listed on Thomson Reuters Matching and Dealing,” says Anthony
Northam, the head of Asia for Thomson Reuters
Marketplaces group. “Some of the major regional
banks are adopting Reuters Electronic Trading (RET)
for in- house process management, they are using it
as a pricing engine and to automate their branches
for spot and swaps currency exchange. Whereas
before, currency exchange would have been done
mainly by phone, the benefits to them of automation
are straight-through processing and better risk
management. In addition, banks are now starting to
use RET as a pricing engine to push prices out to their
Another leading FX provider whose business has
been growing strongly in the region is New York
based FXall. Their multibank portal is now used
by many locals as well as international players in
South East Asia. “It is all about workflow,” says
Jonathan Woodward head of Asia-Pacific, “reducing
risk for the buy side, ensuring compliance with
various international accounting standards and
future-proofing them for the changing regulatory
Future growth
Looking ahead, FX markets in South East Asia look
well placed to prosper but where specifically is growth
going to be felt. We asked market participants for their
views. “I think there’s going to be a generic shift to the
Asian region,” FXall’s Woodward adds, “as everybody
looks to Asia as the saviour of the world economy - the
engine of growth. We will see a shift in asset allocation
strategies as funds search for alpha generating
investments and a lot of hedge funds have started to
spring up in Singapore and Hong Kong. You may pick
up investment capital from some of the local sovereign
wealth funds and escape, for the moment, some of the
regulatory moves that are taking place elsewhere. Prop
traders from banks who have been impacted by the
Volcker Rule and lost their jobs are thinking of setting
up funds here; there’s been a big growth in this area.”
Woodward says that FXall has seen 150% annual
growth in the NDF business traded on its platform.
He sees this continuing at a similar pace for the next
three to five years. He notes however that people tend
to overestimate the amount of change that may take
place in a two-year period but underestimate the change
in a ten-year one. He believes that over the longer term
NDF business could disappear in large measure as
restricted currencies become freely tradeable. JP Morgan’s Shankar Hari sees the greatest growth
potential in South East Asia as residing in the
countries outside Singapore. “Most Singaporean
clients have already been mined,” he says. “But in
other markets such as Philippines or Indonesia or
Malaysia there is greater scope for growth. As local
regulations become more relaxed it will also lead to
higher liquidity in their FX markets.”
“Japan remains the largest retail margin trading centre
in APAC despite the de-leveraging regulations brought
in over the last couple of years,” explains Jamie
Salamon at RBS. “However there is a definite trend for
growth outside of Japan and this is centred mainly in
Hong Kong, although pockets of substantial retail FX
business also exist in South East Asia.” He anticipates
continued growth in the retail space.
Other influences
Regulation is likely to remain a significant influence
for the foreseeable future. The credit risk challenges
currently confronting FX options business lead many
to believe that it will be necessary for there to be
clearing houses located in each time zone to cover each
FX derivative product, whether NDFs, options and
perhaps futures.
Consequently as co-president of the SGX exchange
Muthukrishnan Ramaswami surveys the future he
sees it as holding great prospects for his business and
for Singapore as a regional hub. “We want to be the
clearing centre of choice in Asia,” says Ramaswami.
“OTC transactions by nature are borderless but there
will also be instruments that are principally domestic
and participants may want those to be cleared locally.
We will have to wait for the regulations to emerge. We
currently list on SGX over 95% of the bonds listed
in Asia that are issued cross border. But not domestic
issues of which there are a great many. With other
products it will be the same way. We see that the risk
management will have to happen in each time zone
where the risk happens. Therefore, broadly speaking
there will be the need for a clearing centre in each of
the three time zones.”
His message, like those of others in the vibrant South
East Asian market, is that this is a region where FX
is a rapidly growing, technology facilitated business.
This is where there is going to be a lot happening as
continued strong economic fundamentals power the
development of new FX products and capabilities over
the coming years.

Regional Perspective on Africa

Filed in: banks, trade, foreign exchange, forex, africa, fx, e-forex, trading, rand

Richard Willsher discovers how trade and telecommunications infrastructure shape the current foreign exchange market in Africa as a whole and although South Africa is the continent’s leading electronic trading market, he outlines why we can expect to see growth in e-FX taking place in many other countries within the continent over the next few years.

E-Forex Regional Perspective Africa

View the text version of this client publication

Version:1.0 StartHTML:0000000105 EndHTML:0000004885 StartFragment:0000002784 EndFragment:0000004849

Richard Willsher discovers how trade and

telecommunications infrastructure shape the

current foreign exchange market in Africa

as a whole and although South Africa is the

continent’s leading electronic trading market,

he outlines why we can expect to see growth in

e-FX taking place in many other countries within

the continent over the next few years.

A glance at the most recent Bank for
International Settlements’ Triennial Central
Bank Survey published at the end of December
2010 reveals the foreign exchange market activity
on the African continent pales beside other regions.
Africa and the Middle East together accounted for
daily turnover of US$41 billion in all products in
April 2010. Th is was out of a global total of US$3,981
billion of which the two largest regions were
Western Europe’s totalled US$2,780 and Asia Pacifi c
US$1,159. South Africa was the only African country
listed individually by country breakdown in the BIS Survey and its daily
turnover amounted
to US$14 billion out
of the US$41 billion
mentioned above.
Growth opportunity
One might be forgiven
for imagining the
world’s second largest
land mass is something
of a backwater in
foreign exchange
terms but this would be to miss the point because it
represents an outstanding growth opportunity.
“Apart from South Africa, which can be considered
relatively advanced in its exposure to e-channels, the
remainder of Africa is relatively untouched,” explains
Declan Clements Director, eCommerce Business
Management Financial Markets at Standard Chartered
Bank. “Poor infrastructure, illiquid markets, regulatory
restrictions, inconsistency of electronic price availability,
relatively small ticket sizes and manual downstream processes represent an array of challenges to sell-side
institutions in delivering a relevant offering,” he adds
but his outlook is a positive one. “As infrastructure
improves, one of the larger barriers will be removed.
At Standard Chartered we see the upside opportunities
as substantial, and are investing heavily in creating
a technical capability that incorporates compliance,
straight through processing (STP) and post-trade
services alongside price discovery and execution.”
Clements says that the main beneficiaries of improved
access to electronic platforms will be corporate and
Institutional clients in the more liquid markets,
such as Kenya, Tanzania, Uganda and Ghana,
“notwithstanding a fluid governance environment that
requires providers to be extremely responsive to the
implementation of new regulations.”
Opening up new markets
Jacob Dajani, Head of Middle East and Africa for
Marketplaces at Thomson Reuters says that trading
and technology infrastructure go hand in hand and
telecommunications infrastructure has been a challenge
in some African countries. “As a consequence we had to
look at alternative methods to deliver Thomson Reuters
Dealing and this has helped to open up new countries
to the wider market. With more than 400 financial
institutions using Dealing this has become the common way of trading FX electronically in Africa from Cairo to
Lagos to Johannesburg, and our community continues
to grow. As markets, liquidity and infrastructure evolves
this creates new opportunities to introduce new services
such as Matching and providing single-bank platforms
such as Reuters Electronic Trading to enable banks to
reach and service their customers via an e-commerce
So the message is clear, there will be great scope for
growth in electronic trading once the infrastructure is adequate to facilitate it. What is happening in
South Africa today is likely to fl ow through to the
broader African region in years to come. Moreover
with commodity prices refl ecting continued global
concerns over the fi nite size of available resources,
increased income to mineral rich exporting territories
to fund imports and infrastructure development is
certainly on the cards.
“We see particular growth in demand and liquidity
from Nigeria and Kenya,” explains Richard de Roos
Head of Foreign Exchange at Standard Bank. “But
deals sizes are small. “In Rand we can deal in clips
of up to US$250m and also stream prices in tens
of millions. For the other African
currencies we also stream prices
into our own system as well as
to aggregators such as 360T
but up to sizes of about
US$3m. Moreover,
sometimes liquidity in
these the markets can
be a little one sided
and so you can only
show prices on one side.
On the buy side, given
the sizes of the equity and
bond markets we tend not to see
demand for clips of more than about US$5m.
When we do see demand we will either work the
deal or quote prices depending on the liquidity at
the time.”
He goes on to say that the smaller markets are
Mauritius, Botswana, Zambia, Uganda but these
are extremely small and Standard Bank concentrates
on order fi lling rather than streaming prices. It
concentrates on Anglophone areas of sub-Saharan
Africa and the Lusophone markets of Angola and
SA leads the continent
South Africa remains the continent’s leading foreign
exchange trading nation centred on Johannesburg.
With a share of turnover in the domestic Rand
between 30% and 35% de Roos believes Standard
Bank is the market leader. However even in this most
advanced of African countries, e-FX is still in relative
infancy when compared with Europe and North
“Even in South Africa with the market infl uenced
by the legacy of exchange control, the market is
dominated by the corporate rather than by the
investor community. Th e investor community here
are not really big players in the foreign exchange
markets. Th ere are no institutions in the SA market or
in the African continent that I know of who are actively
trading in currency as an asset class,” says de Roos.
However this has not prevented banks making
e-trading channels available to all of their customers.
Standard off ers its E-Market Trader, which is widely
used by the corporate market. Th ey also use this to
distribute to banks mainly on the African continent
as well as to their own internal sales offi ces around
the globe. “We have the ability to stream prices in
US$-Rand and its crosses in G10 currencies on
E-Market Trader. We also use this to distribute to the
pockets of liquidity that there are in the other African
currencies. Th is works well where it can
be associated with a strong brand and
is largely therefore on the African
Th e bank also has a product
called Standard FX
Trader, which is a
white label agreement
with Gain Capital and
is used to distribute to
individuals such as day
Rivals Absa Capital are able to
leverage the 55.5% shareholding
held in them by Barclays Bank
PLC in a number of ways, both
in the domestic South African
market and in the continent as
“We run the sub-Sahara Africa currency
book for Absa and for Barclays,” explains
James Scott Absa Capital’s Head of FX Sales and
eCommerce. “We are the price distribution source for
all of the sub-Saharan Africa currencies and also cover
risk management. Johannesburg is our hub and we
leverage the Absa and Barclays branches throughout
Africa to further distribute product. We off er pricing
in the more liquid of these currencies to our South
African client base as well as price those to Barclays
electronic client base. Th is could be to a UK asset
manager looking to do some Kenyan or to a South
African corporate looking to hedge Ugandan. We
publish a price as long as there is liquidity in it.” He
adds however, “In each of the domestic markets you
currently wouldn’t fi nd that there is much demand
from local banks to develop electronic trading at the
moment.” He points out that in many of Africa’s smaller
forex markets some of the international banks have
launched localised versions of their own electronic
platform. However even in South Africa itself getting
electronic trading to take root has not been easy, but
the market is developing quickly.
“Like a lot of developing markets, the infrastructure
in South Africa was really poor. It was very diffi cult to
get electronic capability into the buy-side client. Th e
asset managers and hedge funds were the fi rst to move
and where permissible they would tend to be trading
– G10 against major players off shore. Th en we and
other regional banks off ered our proprietary channel
to clients. We would off er FX, money market and
commodities in some cases. With certain clients we
would off er an API [application programme interface]
with pre- and post-trade services, depending on the
sophistication of the client and their requirements.
We have access to Barclays Capital technology, while
others had to develop their own capabilities or partner
with a global technology fi rm. Even though we had
access to the Barclays technology it is still important
to look at what made sense for the local South African
or African market and then customise our off ering
before rolling it out. In our case we launched PACE
FX powered by BARX and delivered to local buy side clients.We believe that our “Global-Local” approach is
unrivalled in Africa.”
Trade fl ows
A key feature underlying forex transactions in
South Africa, as well in other African markets where
exchange controls apply, is that there typically needs
to be a concrete, not speculative, need for a currency
exchange. A lot of the demand is driven by trade
activity whether it is in commodities or other types of
imports or exports.
“Broadly speaking that is what is driving the foreign
exchange market in all of these African markets,”
says Scott. “It’s less about the speculative fl ow and
more about actual underlying trade fl ows. If you take
that into the electronic space then there is going to
be scope for developing electronic capabilities that
service the types of clients which trade. Further it is
always likely that developing the full trade cycle from
pre-trade to execution and interface with treasury
management and internal reporting systems will
become a requirement. Absa Capital has continually
invested in these services for both its South African as
well as African client base.”

Th is is a view shared by Standard’s Richard de Roos.
His bank is actively developing its end-to-end off ering
across the value chain from research and pre-trade
to execution. Moreover reporting needs to be an
integrated feature of electronic off erings to corporates,
both for their internal needs and in order to meet
Reserve Bank compliance.
Product menu still limited
In terms of available forex products South Africa is
far in advance of any other African country. Spot and
forward trades against the G10 currencies account for
most of the market. Forwards can stretch as far out as
two years but de Roos says that average demand tends
to be around three months driven by large
corporates and investors hedging their
exposure to asset classes denominated in
Dollars or Euros. Th ere is however a healthy
and developing market in more sophisticated
“Th e liquid forward curve in the Rand goes
out to 2 years,” says de Roos. “However because the
bond market goes out to 30 years we are able to create
forwards out that far. Demand for the longer-term
transactions tends to be driven by large infrastructure
projects or large capex spend which would be required
to match the life of a project or purchasing cycle for
example. Th is we would price off of the swap curve.”
In addition the Johannesburg Stock Exchange quotes
currency futures that are also used by institutions
to hedge the currency risk associated with foreign
asset holdings. However for the moment other
products targeted at institutional clients such as prime
brokerage are still in early growth phase.
Prime brokerage
“At present the prime brokerage market is in its
infancy with most of it concentrated in South Africa.
says Th omson Reuters’ Jacob Dajani.
360T’s Alex Johnson who manages the fi rm’s sales in
the region notes that the market is currently somewhat
becalmed. “Hedge funds in places like Mauritius, may
70 | april 2012 e-FOREX april 2012 e-FOREX | 71
certainly demand such services, but like the rest of
the world, demand is down. 360T has features and
functionality to cater all such requirements but banks
and corporates are not normally requesting PB services
as they cost money and these requestors get better
liquidity and pricing by asking on a disclosed basis.”
Absa Capital’s James Scott is more upbeat however.
“We’ve got a multi-asset class PB platform that
includes currency futures at this point. With access to
Barclays Capitals FXPB platform and as the market
develops we will naturally assess demand and develop
accordingly. We will start to see demand from the
more developed markets outside of South Africa such
as Nigeria and Kenya.”
New developments
New developments may however come quicker in other
areas of the forex markets. Jacob Dajani says that he
foresees signifi cant e-FX growth and the proliferation
of eCommerce platforms will continue across the
continent. Th is seems to be echoed by the moves that
Standard Bank is making for example. “I think over the
next 10 years African currencies are going to get a lot
more attention,” says Richard de Roos. “Th e liquidity
and sophistication will then become self fulfi lling. For
Standard Bank it is about having the readiness. We
are proceeding on an “e-wise” basis. We are ready but
recognise that development is likely to be in a bespoke
form. So we are going to be prepared whether the
demand comes from retail investors or corporates alike.”

A view shared by Absa Capital’s Scott, is that it is
the bank’s plan to continually invest into its already
well established electronic product suite. “Africa will
provide a number of opportunities in the electronic
space which we believe we are well equipped to take
advantage of.”
At 360T Alex Johnson believes that commodities will
play a big role. “Given the traditional mining and
minerals focus of many African economies, certain
customers are wanting to transact in precious and
base metals and others in more niche mineral and
energy products. Due to the nature of the electronic
trading of commodities, certain products will fit and
others not. The major players in electronic trading, for
example, will offer precious metals trading.”
“Regulations here are increasingly being loosened and
that is opening the door for retail investors to trade
electronically,” adds James Scott at Absa Capital.
“There are very few electronic offerings either here
[in South Africa] or in the rest of Africa. More retail
electronic platforms will most likely be launched into
these markets probably with partnerships being forged
between local players and international technology
companies. We have seen ECN’s like 360T coming
into some of the African markets. They are looking
to get buy-side clients onto their channels. Multiple
banks are contributing to the pricing, but for the
moment there is relatively low demand. I think the
banks will continue to develop their proprietary
channels and the biggest growth will be in this space.”
Meanwhile Thomson Reuters is widely represented in
markets across Africa where, according to Jacob Dajani
they are working with the key market participants
from central banks, to regional banks and their
customers. “We have worked closely with countries
to help them move from a domestic to international
market. There is great opportunity in the region. We
are actively working to open up access to international
markets by providing the local news, content and
market insight via our Thomson Reuters Eikon
desktop plus the connections and infrastructures that
enable both local and international banks to trade.”
A clear message emerges then when speaking to market
participants. It is that lack of technology infrastructure
and exchange controls on essentially weak and illiquid
currencies remain the principal barriers to forex trading
in general and e-trading in particular in Africa. Yet the
balance of economic power is shifting from the formerly
wealthy west to commodity rich regions, wherever on
the planet they are. Africa remains in catch up mode
as compared with, for example, Latin America, Asia
or some of the former eastern block states and “catchup”
spells “growth prospects” for those who seek
opportunities in emerging markets. Trading in African
currencies offers exceptional scope for growth once they
have passed their growth tipping points. Then they may
leapfrog conventional foreign exchange dealing to e-FX
trading on a continental scale.

OTC FX Clearing Moves to Centre Stage

Filed in: foreign exchange, over the counter, forex, fx, emir, regulation, dodd-frank, otc, clearing, derivatives

Lack of clarity about the extent of mandatory regulation for over the counter foreign exchange (OTCFX) derivatives persists but 2012 should bring greater definition and guidance to those in the market.

E-Forex OTC Clearing

View the text version of this client publication

Lack of clarity about the extent of mandatory
regulation for over the counter foreign exchange
(OTCFX) derivatives persists but 2012 should bring
greater definition and guidance to those in the
market. Meanwhile, Richard Willsher reports on how
exchanges, clearing houses and service providers
are setting their strategies and gearing up their
technology for the opportunities that may emerge.


As it stands we know that non-deliverable
forwards (NDFs) and FX options will be
mandated under the European Markets
Infrastructure Regulation (EMIR) in Europe and the
Dodd-Frank Act in the US. We also know that both
pieces of regulation exclude spot FX and commercial
the [US] Commodity Futures Trading Commission
(CFTC) such as block size and whether block size will
apply to NDFs in general or by currency pair.”
Although CME clears a large range of FX futures and
options, in conjunction with ICAP, CME Clearport
now provides clearing for US Dollar (USD) / Chilean
Peso (CLP) NDFs. The model is a central clearing
counterparty (CCP) one where CME Clearport
becomes the guarantor to every buyer and seller of
the product. It is an early offering that will lead to “a
full suite of cleared OTCFX products,” CME reports.
They anticipate offering 11 NDFs and 26 cash-settled
futures (CSFs) in due course.
This example represents a pre-emptive strike by
a major exchange for a share of the increasingly
demanded forward market in restricted emerging
markets currencies. It is geared to meet what is
thought likely to be required under Dodd-Frank. It
provides a secure platform for financial institutions
that require hedging for their corporate clients or
proprietary trading capability for their own account.
forward transactions. Beyond that a regulatory fog
“Clearing of OTCFX continues to be an evolving
topic with more questions than answers at this point,”
according to Chip Lowry, Chief Operating Officer
at New York headquartered FX platform Currenex.
“Certainly, Dodd-Frank mandates the clearing of
NDFs and FX options however the timing of this
requirement is still being determined. Globally, some
clearing houses already offer clearing services for
NDFs but take-up has been slow.”
“The US appears to be the first jurisdiction that will
mandate clearing of NDFs; however the industry is
still waiting for solutions to appear,” continues Lowry.
“Several important rules are awaiting finalisation from
Noteworthy is the choice of a Latin American
(LATAM) currency where the time zone is the same
or similar to that of the US financial markets. The
Chilean Peso is supported by a growing and resource
rich economy and the general trend in USD/CLP
rates has been relatively stable in comparison to more
exotic or dramatically fluctuating currencies in the
LATAM region. These key features are already being
replicated for other emerging market NDF currencies
in another time zone, i.e. South East Asia.
On 24th October this year Singapore Exchange (SGX)
launched a clearing service for FX non-deliverable
forwards in Asian currencies. Settling in US Dollars
and with a maximum residual term from date of
submission of 375 days, the currencies eligible for
clearing are Chinese Renminbi (CNY), Indonesia
Rupiah (IDR) Indian Rupee (INR), Korean Won
(KRW), Malaysian Ringgit (MYR), Philippine Peso
(PHP) and Taiwan New Dollar (TWD).
As Asia’s only CCP facility for a variety of derivatives,
the clearing members eligible to take part in clearing
include: Barclays Bank PLC, Citibank N.A., Credit
Suisse AG, DBS Bank Limited, Deutsche Bank
AG, HSBC, Oversea-Chinese Banking Corporation
Limited, RBS, Standard Chartered Bank, United
Overseas Bank Limited and UBS. As yet it is early
days for this new on-exchange clearing activity
and volumes have so far been relatively modest
as compared with longer established SGX listed
products, however, research carried out by the
exchange ensures that the facility is demand led.
“We have chosen to clear trades that are between
professional clearing members,” explains SGX copresident
Muthukrishnan Ramaswami. “There have
been pretty high bi-lateral risks that they are taking
today. This way is more capital efficient for them as
taking risk on a CCP carries a lower capital rating
than bilateral risk, especially when Basle III comes
into force.”
In due course Ramaswami expects SGX will extend
this model to clearing client trades, and, in due course,
probably FX options – of which more later. The
introduction of clearing for NDFs posed a variety of
challenges on the technical side which SGX dealt with
in a pragmatic and system-agnostic manner.
“We are not setting the agenda on what needs to be cleared,” Ramaswami continues. “What needs to be
cleared is determined by the capital requirements
for each instrument and therefore what each of our
participants wants to do for their various asset classes.
It is different from an exchange led process. It is what
our members want to clear. We are a need fulfiller in
this context. As an exchange we work with probably
30 different order management systems in our futures
and securities context but we work with them using a
FIX protocol or a specific [application programming
interface] API. The providers will usually be able to
work with one of those. So it’s about standardising the
interfaces rather than standardising the registration
mechanisms. Moreover these providers also want to
connect to many clearing houses. They want to be able
to service their clients in multiple jurisdictions. So this
is a two-way industry need between the registration
systems and the clearing houses. The OTC execution
remains as is. Putting it into a clearing house brings the
rigour of margining and rigour of having collateral to
support your positions. And having that held in a ring
fenced manner in a clearing house and away from any
risk you may run from having it with a broker or bank.”

Challenges and risks
Significantly however, while SGX has an eye towards
EMIR and Dodd-Frank, no mandatory regulation is
yet on the horizon in Singapore. This brings with it
with the risk, or the opportunity, depending how you
look at it, for regulatory arbitrage. This is an evolving
story and it remains to be seen whether OTCFX
clearing becomes a global phenomenon.
“The global nature of the FX market means that
clearing infrastructure and processes need to be as
harmonised as possible across the world’s financial
centres. Regulatory harmonisation will be key to
enabling participants to trade quickly and efficiently
with their global counterparts, whilst avoiding the
negative consequences of regulatory arbitrage.” says
Wayne Pestone, Chief Regulatory Officer, at FXall.
However, where relatively rarely traded and
unstandardised NDF currency pairs are traded in local
emerging markets, less tightly regulated regimes will
most likely still apply.
Meanwhile vendors providing trading platforms for
institutional, global clients have some challenges to
overcome. “The biggest challenge we are going to have
[in the new regulatory environment] is configuring a
multi drop copy capability and sending it to enough
people who are interested in that trade,” says Jonathan
Woodward head of Asia-Pacific at FXall. “For example,”
he says, “if you had some American money domiciled
in Hong Kong but then traded with a Singaporean
bank and cleared with SGX you are going to need to
report that to authorities in the US, Singapore and
Hong Kong. So, instead of just giving the client some
straight through processing you have to think, “where
else do they want us to drop this information so that
they comply with any future regulations?”
What quickly becomes clear from this is that
multibank portals or electronic communications
networks (ECNs) that have global capabilities to
connect with CCPs, clients and regulatory authorities
wherever they are based, have a pivotal role to play.
Which is not to say that single bank platforms do not,
because they may provide additional, more specialised
and less standardised services to their clients. However
interoperability is vital. No portal can afford to be
an island or its clients will quickly migrate to where
communications to all relevant parties to its activities
are easiest, most efficient and lowest cost.
So, for example, at Nomura, Mark Croxon who is
executive director, prime services and global product
manager for OTC clearing, says the objective is, “to
build a clearing house agnostic service across products,
asset classes and regions. That does present some
challenges in terms of ensuring the connectivity to
each of those clearing houses and venues. There are
challenges with getting the plumbing set up, although
there are a number of vendors who can help with this.
You may also have a connectivity unit internally that is
there to set up and maintain some of the connections.”
Minimising systemic risk remains at the core of
the various efforts to develop OTC clearing. “The
intention of the legislation is to reduce systemic
risk by making OTC markets and counterparty
risk management more transparent. Specifically
around risk management, it is about having the
collateralisation and default management processes
prescribed and the margins and default fund
contributions relating to those positions being posted
and being held up front at the central clearing house.
Furthermore rules in the US, and incentives from
a regulatory capital perspective under Basel III, are
leading to segregation of those funds risk and the
exposure to significant institutions defaulting,” says Croxon.

FX options
While regulatory guidance on the requirements for
NDF clearing have been relatively straightforward
there is still missing detail as regards FX options.
“While NDFs are relatively simple instruments
to clear in theory, FX options pose some logistical
issues that still need to be sorted,” says Chip Lowry
of Currenex. “One issue is around auto-execution at
expiry. In the listed world, auto-exercise is handled by
the clearing house and is a standard process. Because
OTCFX options are not standardised instruments,
the question of who decides execution remains open.
There is an ongoing dialogue between end users of
these contracts and clearinghouses about this issue.”
“The other issue to be tackled,” he adds, “is
guaranteed settlement. Industry authorities such
as The Committee on Payment and Settlement
Systems (CPSS) and the Technical Committee of the
International Organization of Securities Commissions
(IOSCO) have proposed that clearing houses
guarantee the actual FX settlement of an exercised
option. As the amounts involved can be quite large,
clearing houses are not yet comfortable with this
concept. This issue is fundamental to OTCFX options. Without agreement on this topic, I doubt
we’ll see FX options cleared in the near-term.”
“Whilst a general framework [for which products
will be eligible for clearing] has been provided by the
Dodd-Frank Act in the US and EMIR and Mifid II in
Europe, there has been no decision on the final rules.
The challenge for industry participants is to make
preparations that are as future-compliant as possible.”
says Pestone, “The industry knows that change is
coming but is in need of clarity around what, exactly,
these changes will be, and when and how they will be
implemented. As such, it is important to prepare for
every eventuality.”
For the time being it is expected that the rules under
both EMIR and Dodd-Frank will be in place during
2012. Institutions required to comply still lack the
clarity to build the required systems. The timeline,
which began with post-2008 crisis G20 talks looks like
extending some distance yet and it seems likely that
compliance will not become mandatory until 2013.
Market participants are in general sanguine about the prospects for their businesses and are taking what
steps they can to ensure that they will be ready to offer
compliant services to support their clients’ needs. The
greatest fear is that regulations will either mismatch
across various jurisdictions - Europe, the US, the
major financial centres of the Far East - and that they
will be implemented at differing times. Both of these
could cause competitors to avoid regulatory constraints
perhaps by relocating their operations to unregulated
centres. In the end however, as with so much of the
post-crisis regulation that has emerged from Brussels and
from the US, there is a certain inevitability surrounding
global compliance. The FX market will probably have
no choice about whether or not to comply with OTCFX
regulations eventually. Going forward the game is about
minimising the effects and costs of regulation through
the lobbying efforts of bodies such as AFME, SIFMA,
ASIFMA and others and then ensuring that full clearing
and transparency requirements will be met when the
regulations take effect.

MiFID II, EMIR and Dodd-Frank - where are we now?

For the first time the Markets in Financial Instrument
Directive (MiFID) will cover market trading of
OTC derivatives. London-based law firm Linklaters
advise, “All trading in derivatives which are eligible
for clearing and sufficiently liquid will be required to
move to either:
• Regulated markets;
• Multilateral trading facilities (MTF); or
• A specific sub-regime of organised trading
facilities, which must fulfil (as well as general
requirements for organised trading facilities,) the
following criteria:
o - Provide non-discriminatory multilateral access
to its facility;
o - Support the application of pre and post-trade
o - Report transaction data to trade repositories;
o - Have dedicated systems or facilities in place for
the execution of trades.”
Pre- and post-trade transparency requirements will
relate to all derivatives trades wherever they are
MiFID II proposals were published by the European
Commission on 20th October 2011. Consultants
Deloitte say, “Given the timeframes set out, it does
not seem likely that the G20 deadline for the trading
of standardised derivatives on electronic platforms by
the end of 2012 will be met.”
The UK Financial Services Authority (FSA) advises
that European Markets Infrastructure Regulation
(EMIR) “follows, and facilitates within the EU, the
commitment made by G-20 leaders in Pittsburgh,
September 2009, that:
“All standardised OTC derivative contracts should be
traded on exchanges or electronic trading platforms,
where appropriate, and cleared through central
counterparties by end-2012 at the latest. OTC
derivative contracts should be reported to trade
repositories. Non-centrally cleared contracts should
be subject to higher capital requirements. We ask
the Financial Stability Board (FSB) and its relevant
members to assess regularly implementation and
whether it is sufficient to improve transparency in
the derivatives markets, mitigate systemic risk, and
protect against market abuse.”
The European Parliament finalised its input in July
of this year. Currently EMIR is being fine tuned
in a “trialogue” process involving the European
Parliament, the Economic and Financial Affairs
Council (ECOFIN) and the European Commission.
It is expected that this will be concluded in the first
quarter of 2012.
“The [Dodd Frank] Wall Street Reform [and
Consumer Protection] bill will – for the first time
– bring comprehensive regulation to the swaps
marketplace. Swap dealers will be subject to robust
oversight. Standardised derivatives will be required to
trade on open platforms and be submitted for clearing
to central counterparties. The Commission looks
forward to implementing the Dodd-Frank bill to lower
risk, promote transparency and protect the American
public”, Gary Gensler, chairman of Commodity
Futures Trading Commission (CFTC).
While CFTC has finalised certain parts of Dodd-
Frank it is not expected to have defined the precise
rules for FX derivatives until the first quarter of 2012.

Keeping it Real

Filed in: , gold, stamp, art, wine, tangible, asset, collectibles, investment

The attraction of tangible assets

View the text version of this client publication

Text version not available

Stock market investing 101 part 3

Filed in: , tax, fund managers, ftse, etf, stock market, stocks, trader, income, isa

Before starting to invest in stocks and shares it is as well to decide why and how. The right strategy can help investors through thick and thin because no one said stock market investing was an easy ride.

View the text version of this client publication

Before starting to invest in stocks and shares it’s as well to decide why and how. The right strategy can help investors through thick and thin because no one said stock market investing was an easy ride.

In our first two articles we looked at why the stock market exists, what the costs and benefits are, how to go about researching stocks and how to get to grips with some of the key terms and concepts. But why invest at all? What is your goal?

A key reason that investors have returned to the stock market after the crash of 2008 is that leaving their money with a bank or a building society yields them nothing. In fact worse than nothing, because even the best savings rates at around 3% produce a loss in real terms with inflation running at a higher rate than that. So investing in stocks that produce dividend income at more than 4% looks attractive and they may also produce capital growth if their share price rises.

But remember “caveat emptor,” the motto of the London Stock Exchange – “the buyer beware.” Neither the dividend nor the capital gain are certain. So it is worth considering which investment strategy to use to lower the risk and/or increase the return.

Day trader
For some, stock market investing is a sort of sport. They engage in it with great intensity, prepared for the thrills and spills of fluctuating prices. Sometimes they win and sometimes they lose. There are plenty of people who claim to have made money buying and selling shares in quick trading, holding their shares for a few days, hours or even minutes before selling to reap a profit as the price rises. There have also been plenty of people who have lost money too. Day trading is a strategy requiring great dedication and plenty of research and analysis of the market and the trends that affect it. This may be for you or it may not be.

Investing for income
Investors in search of a steady stream of income and with less of an appetite for trading may choose to invest in stocks that pay a steady half yearly or quarterly dividend. They are not kept awake at night worrying whether share prices will move against them but they also need to be aware that dividends can be cut or cancelled altogether. Recent investors in BP, Royal Bank of Scotland, Lloyds Banking Group and Northern Rock know this only too well.

Investing for income is a valid strategy but it is as well to hold a variety of stocks to spread your risk. Indeed one way to do this is to buy a tracker fund, one that invests in stocks within a particular stock market index such as the FTSE 100 or the FTSE All share. And a good, cheap way of doing this is to buy shares in an exchange traded fund or ETF. These are quoted on stock exchanges just like the shares that these funds invest in. It’s important to read the prospectus for the ETF you’re considering investing in, to make sure of its terms and whether it provides income or whether the dividends on the fund are reinvested. An appealing aspect of ETFs is that shares in them can be bought and sold at any time the market is open and apart from the dealing costs, there are no other fees to pay. Managed funds incur management charges and need studying carefully. They are valued much less frequently and getting out of a fund is not as quick.

DIY or employing a manager
Whether to buy individual stocks or funds is an important decision to take and you can of course buy some of each. But it also raises the question of whether it might not be better to hire someone else to manage your money for you.

Stockbrokers, independent financial advisors (IFAs), banks and fund managers offer such services in one form or another. Stockbrokers in particular may offer “discretionary” services. If they are “execution only” they merely carry out instructions that you give them, buying, selling and holding the stock for you. A discretionary service is one where you agree with the broker his terms of reference – how much discretion you want him or her to use - and they report back to you periodically on the results they have achieved from investing your money for you. Make sure you understand their charges and when they are payable. Inevitably there are able brokers and not so able ones. It’s as well to research them in advance by searching the web, speaking to friends and reading their prospectuses and reports.

It’s also worth spending time thinking about how to avoid paying tax on your hard earned investments. After all, most people will be investing income on which they have already paid income tax and national insurance contributions. So what are the options and allowances?

Firstly, remember that each individual has a capital gains tax (CGT) allowance of £10,100 each year. So if your gains from buying and selling shares are lower than this figure in any tax year then you can avoid paying CGT.

Stocks and shares ISAs are a second option. The over all ISA limit for this year is £10,200, which can be invested in a cash ISA up to £5,100 with the balance in stocks and shares. Alternatively the entire allowance can be invested in stocks and shares. Again, stockbrokers, banks and IFAs will all advise you or offer you stocks and shares ISA arrangements. Go to a comparison web site such as or and do your homework or terms, conditions and costs. The great thing about ISAs is that you (and also your partner) get a new allowance every year and they save you paying income tax or CGT on your profits.

Lastly, consider a SIPP. Self invested personal pensions insulate you from taxes and also benefit from receiving a cash tax credit of 25% of the amount you invest. If you’re a higher rate taxpayer you will also get an additional tax break via your tax return.

Unlike ISAs however, although you can trade in and out of stocks within a SIPP you can’t take your money out until you retire. There are also management and dealing charges to take into account. There is a lot that is good about opening a SIPP, but just make sure you read the terms and conditions carefully so you understand the restrictions they impose as well as the benefits they offer. The investment options of buying individual stocks, funds, ETFs and discretionary investment services are usually available to SIPP investors

Above all, once you have digested the possible choices, checked the prices and charges and considered your strategy, take your time. Yes you may miss some investment opportunities but the chances are you will be able to seize others as they come along. Some of the most successful investors, such world famous Warren Buffett, take their time and invest long term in companies they understand and which have scope for growth over the long term.

Active, passive or both?

Filed in: , hsbc, etf, ftse100, active, passive

Two very different investment approaches. What are the pros and cons and can they work in harmony for investors?

View the text version of this client publication

Text version not available

Building BRICS: India

Filed in: , tax, hsbc, emerging market, infrastructure, fund, investment, india

The numbers, skills and hard work of its people have driven India’s emergence as a major global economic force. This looks set to continue, positioning the country as an investment destination with distinct attractions.

View the text version of this client publication

Building BRICS: India
The numbers, skills and hard work of its people have driven India’s emergence as a major global economic force. This looks set to continue, positioning the country as an investment destination with distinct attractions.

While European and North American economies have struggled to achieve growth, India has been a consistently high performer over recent years. Economists at Moody’s, the rating agency, log India’s record of growth since 2006 as falling in the range of 6.7% to 9.6% annually, with the lowest of these figures covering the period from 2008 to 2009, when the western world was plunged into ␣nancial crisis. Looking ahead, Moody’s projects 8.8% GDP growth this year and 8.1% next year. HSBC Global Asset Management expects growth of at least 7% of GDP over the decade to 2020 in the Indian economy (compound annual growth rate – the year-on-year increase over the period).

Not everything in India’s economic garden is rosy, however. For the last three years, the country has been wrestling with government debt at around 77% of GDP.* Public sector ineciency, particularly in gathering taxes, is rosy however. For the last three years, the country has been wrestling with government debt at around 77% of GDP.* Public sector ineciency, particularly in gathering taxes, is not helping matters. Generally, income levels among India’s vast population are low, and “inadequate physical and social infrastructure,” as Moody’s puts it, could hamper economic development going forward.

But then, this is an emerging market. What attracts investors to India are its prospects for growth and development. One of the key features of India, versus other emerging economies such as China and Russia, is the rapid development of its internal market rather than its exports: thisisgeneratinghugeamountsofincomeforsomeofits growing domestic businesses.

“The rise of the consumer in India – there’s a lot of demand due to higher incomes and aspirations – is a key driver of economic growth,” explains Sanjiv Duggal, manager of the HSBC GIF Indian Equity Fund.

“For example, a particular pocket of opportunity is in passenger car sales… in the financial year ended March 2010, passenger car sales in India grew at their fastest pace in six years, up 25% to 1.53 million units. In addition, the housing market is forging ahead, enjoying strong demand due to a major shortage of quality housing, and we are continuing to find opportunities amongst the under- owned real estate sector. There is also a strong government focus on improving healthcare, education and training, and physical infrastructure.”

Sanjiv Duggal adds: “Growth in per capita income means that India is near the point where we can expect consumption to take o sharply. The nation’s demographics, with its young population, will also continue to bolster economic growth.”

In this regard, the country has a rapidly increasing, affluent middle class that now numbers around 200 million; roughly equal to the entire populations of Germany, France and the UK added together. And these people are buyers of goods and services that are sourced or delivered from overseas, as well as from the domestic market: indeed India is now reckoned to be among the ten largest retail markets in the world and growing fast.

At the same time, the Boston Consulting Group (BCG) has pointed out in its latest New Global Challengers report that India is home to 20 of 100 companies that are based in rapidly developing economies but are contending for global leadership in their fields of operation. They include firms such as United Spirits, the world’s second largest forging business, Tata Consultancy Services (TCS), Asia’s largest services and business process outsourcing company, and Bajaj Auto and Mahindra & Mahindra the automotive equipment makers.

So the question facing investors is how to share in the growing prosperity of such Indian companies. HSBC’s Sanjiv Duggal is cautious: “We believe when it comes to investing in India, a strict and disciplined approach is a must. Like any emerging economy, while the potential for growth is robust, investors should be prepared for some volatility, which can be caused by a number of factors.

“For example, the government’s approach is one of many layers, peppered with bureaucracy. The reforms that are needed become a tug-of-war between vested interests, slowing down badly-needed progress, and any potential reforms could be a potential threat to markets in the short term. In addition, rising prices of commodities such as crude oil and fertilisers, on which it is heavily dependent, could have a negative impact on the economy, while the nation’s monsoon season can always have a negative economic impact by slowing progress.”

Sanjiv Duggal describes buying individual shares in Indian companies as “a high-risk strategy.” He says that the Indian market can be highly volatile, but should be a core part of any growth portfolio: “By going for a professionally-managed portfolio of shares, investors are giving themselves the best opportunity of making decent returns over the long term, with far less risk than if they were to buy into individual companies. For example, the HSBC GIF Indian Equity Fund typically holds between 50 and 70 stocks, and has significantly outperformed the market since its launch in March 2006.”

This fund, incidentally, currently holds almost US$6.4bn (£4bn) in assets under management, making it the largest offshore Indian fund in the world.

The emerging market opportunity ffered by India is considerable. Given the still very low level of per capita income of the Indian population in general, and the scale of poverty and lack of infrastructure across the massive sub-continent, this opportunity is likely to remain attractive for some time to come. The risks involved are also significant, so investors face the challenge of balancing the risks versus the potential rewards on offer.

Turkey: Forfaiting market saviour?

Filed in: , trade finance, banks, forfaiting, trade, bank, turkey

Amid the gloom that has shrouded the forfaiting market for much of the time since September 2008, Turkey has consistently proved to be a source of optimism and deals.

View the text version of this client publication

Turkey: Forfaiting market saviour?

Amid the gloom that has shrouded the forfaiting market for much of the time since September 2008, Turkey has consistently proved to be a source of optimism and deals, writes Richard Willsher

The main drivers for the country’s popularity have been its economic fundamentals. In short it is a classic emerging market. This year it is expected to achieve GDP growth of 6.5%. Although inflation is stubbornly pegged at a little above this level, the country is sucking in foreign direct investment at the rate of $20bn annually.

A recent report by The Economist noted that Turkey is now the world’s biggest exporter of cement, the second-largest exporter of jewellery and is “Europe’s leading maker of televisions and DVD players, and its third-biggest maker of motor vehicles.” While it exports mostly to European countries, it is rapidly expanding export markets throughout the Middle East, Russia and Central Asia.

In October 2010, Moody’s revised Turkey’s sovereign Ba2 local and foreign currency government bond ratings from ‘stable’ to ‘positive’. In November, the rating agency issued a credit opinion that concluded: “The Turkish economy has experienced a V-shaped recovery after the 2009 recession and is currently the fastest-growing economy in the OECD.”

Furthermore, and of particular interest to the western banking and forfaiting community, Moody’s added on 22 November an improved ‘stable’ outlook for the Turkish banking system, stating, “Turkish banks have shown resilience during the recent global financial crisis, as evidenced by their balance-sheet strength, which has been supported by appropriate loan-loss provisioning, a solid capital base, and recurrent earnings generation. Financial sector reforms that were enacted following the 2000-2001 financial crisis set the foundations for the stability of the banking system today.”

Perfect match
Pretty glowing stuff. And it is easy to appreciate that in order to achieve its export led economic growth, the country’s manufacturers have needed to import capital goods, particularly production machinery, as well as raw materials such as minerals that it cannot produce itself. Moreover, Turkey imports substantial quantities of oil to power its vibrant economy. All of these lend themselves to import financing on credit terms that can typically be provided by the forfaiting market.

“Turkish banks are quite used to the forfaiting product,” says IFA board member Sema Zeyneloglu of Rabobank. “They have been involved on the primary side of market for many years and are accustomed to use alternative forms of forfaiting to provide their clients with funding. In addition, many of those banks have their secondary market operations outside Turkey, so they are also familiar with how that side of the market operates. Meanwhile, the volume of trade finance in Turkey has held up well even in the crisis. It may have decreased somewhat, but deals continued to be done.”

Deferred payment letters of credit (LCs) probably account for the largest value and deal volume, in particular big ticket Middle East oil import LCs and those relating to steel and scrap metal. Inevitably these are short term, varying from 30 days to one year in duration.

However Muzaffer Aksoy of ABC International Bank in Istanbul notes that his bank is financing imports of capital goods with tenors of up to 36 months at present. He expects that terms are likely to push out to five years before too long, with traditional ‘10 x 6’ promissory note structures being used.

Capital-goods imports typically originate from Germany, Italy and Switzerland and bankers and brokers in those countries confirm that Turkey has been a main source of new trade business over a number of years. In terms of guarantors or issuers of notes, the government-owned banks, such as Halk and Vakifbank, and the private banks Akbank, Isbank, YKB, Garanti are popular.

Risk and pricing
As yet, the market is very limited for the corporate risk, but Akbank’s Istanbul-based Vice President for financial institutions, Altug Ülker, confirms that some Italian exporters have accepted short-term notes issued by strong corporate names without the support of a bank guarantee. These are, however, likely to be sold back to Turkish banks in the secondary market, it ought to be said.

One very large feature of the primary and secondary market in Turkish risk is bank fund raisings via syndicated loans. Some argue that this sort of financial transaction is not ‘real’ or ‘pure’ forfaiting. Nonetheless, it represents an elephant in forfaiting’s parlour that can’t be ignored.

And, in many ways, trade in syndicated loans conditions the pricing of trade deals and vice versa. Altug Ülker notes that lately, following the Irish crisis, Turkish pricing has increased as holders of Turkish bank loans aim to sell before their year-end. However, he expects pricing to tighten in the new year.

All agree that the outlook for Turkish paper is quite buoyant for the foreseeable future. Zeyneloglu is confident that Turkey will remain a mainstay of the forfaiting market. “It is one of the traditional markets from which I would expect to see a continued, regular flow of business. The banking system is quite sophisticated and Turkish banks are very well known in the international banking environment and there are always buyers that are happy to buy Turkish bank risk.”

ABCIB’s Muzaffer Aksoy expects pricing to come down as more banks become buyers of paper, a view shared by Akbank’s Altug Ülker, especially as the country’s sovereign credit rating continues to strengthen.

In summary, with uncertainty over the Irish crisis and widespread fear of contagion from the sovereign debt crisis in Europe, markets may not yet be ready to branch out to embrace more exotic country risk, longer credit terms and tighter pricing.

But in credit terms as well as geographically, Turkey sits between Europe, the Middle East and the CIS countries. For this reason, it is well placed to continue supporting the forfaiting market with both trade deals and syndicated loans for some time to come.

Deals are definitely back

Filed in: , barclays, corporate finance, mergers and acquisitions, baker tilly, charles russell, rice associates, lehman, buy-out, corporate

It’s been a long haul but 2010 has seen the return of mergers, acquisitions and buy-outs and the outlook for 2011 is positive, writes Richard Willsher.

View the text version of this client publication

Deals are definitely back

It’s been a long haul but 2010 has seen the return of mergers, acquisitions and buy-outs and the outlook for 2011 is positive, writes Richard Willsher.

In the ␣rst nine months of the year the global volume of announced mergers and acquisitions totalled jus over US$ 2 trillion (£1.24 trillion), according to research from Dealogic. That was 22% ahead of the same period in 2009. But signi␣cantly both in the bigger picture and locally, it was in the third quarter of the year that the market really began to be con␣dent. Worldwide, Q3 saw announced deals amounting to US$792 billion, (£492 billion) 55% up on the third quarter of 2009.

Closer to home the UK accounted for 24% of all European M&A during the ␣rst nine months of the year, which may have been boosted by the weakness of Sterling versus the Dollar and the Euro. Also, out of a UK total of US$140 billion (£87 billion) however, US$21.5 billion (£13.34 billion) was accounted for by GDF Suez’ bid for British company International Power.

More striking is the volume of UK buy-out activity. “The overall value of UK buyouts in the ␣rst nine months of 2010 reached £13b,” reports Nottingham University’s Centre for Management Buyout Research (CMBOR). “[this was] more than double the total value of buyouts for the whole of 2009 (£5.6b).”

Commenting on these numbers Christiian Marriott, a Director at Barclays Private Equity, said, “Con␣dence is returning to the private equity buyout market with private equity deal ␣ow dominating the overall M&A market in the UK in the ␣rst half of this year and an increase in consumer-related transactions. With several large deals in the pipeline, we might see the year ending at near 2008 buyout levels.”

If this is the overall picture, how has this been re␣ected in the activity in the South East of England? We asked several local deal doers for their perspective.

“It has been a year of two halves in many ways,” says Andrew Clayton, Reading-based head of corporate and structured ␣nance for the Thames Valley and South East for RBS. “In the ␣rst half we saw several deals in the upper mid-sized corporate market. These included Pets at Home, Card Factory and Camelot that were all quite substantial. It wasn’t until later in the year that deal ␣ow in the mid-market, in the £25 million to £75m range, really developed momentum. For example we’ve seen deals for United House, the social housing ␣rm, which we funded with Lloyds Development Capital and Leaders, the lettings business where we worked with Bowmark Capital. Now, with six weeks to go to the end of the year I would say that our work in progress is now as strong as its been for the last two or three years.”

Nonetheless advisors such as accountants and solicitors say that deals are still taking a long time to complete. Bank approvals for funding propositions are taking longer and the processes are more rigorous than prior to the 2008 credit crunch and the collapse of Lehman Brothers. But at least the system isn’t as petri␣ed as it was.

“We are now seeing a lot more activity,” says Richard Somerville, a director of Rice Associates, the Wokingham-based accountants and business advisors. “There are a lot more exit strategies for business owners who are talking about buy-out possibilities whereas a year ago there was no point in even talking to the banks.”

At solicitors Charles Russell, Oxford- based partner William Axtell says, “We have de␣nitely seen an upward trend in terms of corporate ␣nance activity this year. Charles Russell have seen a decent amount of sell and buy side M&A, private and public fundraisings including three initial public oerings (IPOs) earlier this year. However, in relation to M&A, the availability of funding is still problematic and there is often a mismatch between sellers and buyers in terms of value.”

But taking a rather dierent tack Andrew Killick of accountants Baker Tilly points out that banks are “now doing their job properly in the way they assess risk.” He stresses the importance of understanding how to present a case for funding to a bank or private equity house. “You need to look at it from the funder’s point of view rather than just the perspective of the business that is seeking the ␣nance.”

This approach has stood Baker Tilly in good stead and has enabled them to complete a number of deals in the year to date. He says that there is no shortage of cash, for example among private equity houses and that good businesses with strong propositions will always be able to ␣nd the funds that they need.

Looking ahead to next year there is general optimism among the corporate ␣nance community. RBS’ Andrew Clayton says, “While we may complete two or three more deals before Christmas, because processes are taking longer I’m expecting more completions in Q1 next year. I think it will be quite busy but also it is likely that some of those transactions which we’ve been discussing this year may come to the market in the ␣rst and second quarter.”

Jonathan Hughes of Leumi ABL, the asset based lender believes that in 2011 there are likely to be more non-core disposals and strategic acquisitions now that the cycle looks as though it has reached the bottom.

At Charles Russell, William Axtell’s view is cautiously optimistic. “We think that 2011 will continue on the same upward trajectory that we have seen in 2010. Although global economic conditions remain choppy, recent GDP ␣gures suggest that a steady recovery is underway. As con␣dence grows along with the recovery we see corporate ␣nance activity increasing and we are well positioned as a ␣rm to capitalise on this.”

At Rice Associates, Richard Somerville says, “I think the banks are going to need to get back to lending next year. They’ve weathered storm, beefed up their balance sheets, garnered their deposits and will be keener to lend. Yes, I’m optimistic.”

All in all not a bad outlook. It’s been a rough ride but 2010 may go down in corporate ␣nance annals as the year the recovery really took root. If so, 2011 ought to be the year when deals ␣ourish and bear fruit, despite all the talk of double dip and austerity.

SIFIs - under control yet?

Filed in: , banks, insurance, fsa, basel, fsb, sifi, regulation, g20, bis

It’s more than two years since the collapse of Lehman Brothers and the financial crisis that ensued. Richard Willsher asks whether the regulators are any further ahead with reining in the ‘systemically important financial institutions (SIFIs)’ that could threaten the world’s financial system?

SIFIs – under control yet?

It’s more than two years since the collapse of Lehman Brothers and the financial crisis that ensued. Richard Willsher asks whether the regulators are any further ahead with reining in the ‘systemically important financial institutions (SIFIs)’ that could threaten the world’s financial system?

What are SIFIs?
This is a simple enough question on the face of it. The Financial Stability Board (FSB), the super regulator coordinating the work of national and international financial regulators and standard setting bodies, defines SIFIs as financial institutions whose ‘…disorderly failure, because of their size, complexity and systemic inter-connectedness, would cause significant disruption to the wider financial system and economic activity’. In other words organisations that are too big to be allowed to fail. But who the SIFIs actually are is a matter of great conjecture and the FSB is keeping its cards close to its chest.

When the Financial Times on 29 November last year reported a list of 30 SIFIs – see list at the end – that included the big banks in the major economies plus six European insurance industry giants, the FSB was not best pleased. A year later the UK Financial Services Authority (FSA) chairman and FSB member Adair Turner said in a speech to insurance regulators in Dubai that the FSB did not believe insurance firms should be on the list because they didn’t pose systemic risks like the big banks. The FSB says it will issue its list of SIFIs next year.

So where are we now?
The Seoul summit, according to a letter to G20 leaders from FSB chairman Mario Draghi, marked ‘...the delivery of two central elements of the reform programme… to create a sounder financial system and reduce systemic risk globally’. These were ‘a materially strengthened global framework for bank capital and liquidity, and a comprehensive policy framework to address the moral hazard risks associated with institutions that are too big (or complex) to fail.’

The first of these was the Basel III framework produced by the Basle Committee on Banking Supervision of the Bank for International Settlements (BIS). It sets out recommendations for increased capital and liquidity buffers for central banks to implement with the banks under their supervision.

These are due to start to be implemented on 1 January 2013 and the process completed by 1 January 2019. In the meantime there is almost daily a report from a bank or banking representative organisation or pressure group or commentator arguing that Basel III will have damaging effects on one bank or another or on the business that banks will able, or inclined, to undertake. In terms of ‘delivery’ at Seoul the acid test will be what happens if there is a threat to a SIFI between now and 2019? Moreover, what if the threat did not arise from the same banking problems that caused the 2008 crisis?

The idea of addressing the moral hazard element of the reform programme is that ‘too-big-to-fail’ institutions should not in future be bailed out by the taxpayer. The FSB has come up with a five-point action plan:

  * ‘improvement in resolution regimes’ which means having a bailout contingency plan to sort out the mess without damaging the financial system and without turning to the taxpayer
  * an even more stringent set of rules than Basel III for SIFIs, so that they can absorb losses and which reflect the risks that they pose to the global financial system
  * tighter national supervision of SIFIs
  * stronger standards for core national financial infrastructures that can prevent knock-on effects of the failure of individual institutions
  * a ‘peer review’ to be carried out by the FSB to ensure ‘effectiveness and consistency’ of national regulatory measures to start by the beginning of 2012.

National and international regulation and supervision
One of the key problems facing the FSB and the other supra-national bodies such as the BIS and the International Monetary Fund is ‘the weakest link’. Unless all governments and their regulators use the same standards and degree of stringency in their supervision there will be a risk that a particular institution in a particular jurisdiction may trigger a domino effect should it be stressed or fail. Moreover, a weak supervisory or regulatory environment may result is so-called ‘regulatory arbitrage’ where financial institutions may spot loopholes they can exploit for their greater profit. For this reason internationally coordinated super-regulation is the goal.

But it is not an easy one to achieve. There are some, for example in the USA, who criticise the FSB for being unelected and dominated by European banking representatives. They argue for greater autonomy for US financial institutions, which ought to set alarm bells ringing in light of the manner in which the sub-prime crisis came about and was led by US investment banks creating risk capacity by selling toxic debt packages to the world’s banks and other investors.

For this reason perhaps, another key plank in the FSB’s action plan is to reduce the dependency on credit rating agencies. According to the Draghi letter, ratings are ‘hard wired’ into the debt markets such that when a rating agency changes a rating it produces ‘mechanistic market responses’. This is regulator speak for herd behaviour, which may lead to over reactions and panics in the markets.

In the elliptical way that the dialogue between regulators and politicians about regulating the financial system seems to work, the FSB has made its set of recommendations to the G20 leaders and they have accepted them. The process of regulating the financial system in order to avoid a future Armageddon is grinding on but it is long way from being concluded.

Indeed it may never be; new risks and perils are certain to arise, which will need to be addressed as they occur. The SIFIs are core to the entire financial system and how to tackle and control them is still the subject of debate and, in large measure, experimentation. It has taken two years so far and the chances that the world financial system can ever be made shatterproof, let alone by 2019, still hangs in the balance.

Richard Willsher is a freelance journalist

30 possible SIFIs

Bank of America Merrill Lynch
Goldman Sachs
JPMorgan Chase
Morgan Stanley

Royal Bank of Canada

UK groups
Royal Bank of Scotland
Standard Chartered

Credit Suisse

BNP Paribas
Société Générale


Mitsubishi UFJ
Sumitomo Mitsui

Banca Intesa

Deutsche Bank


Insurance groups
Swiss Re

This list appeared in the Financial Times on 29 November 2009

Stock Market Investing 101 part 2

Filed in: , banks, tax, shareholder, ftse, shares, investing, bp, stocks, pe

"At close the FTSE was up 100 points on the day. Blue chips held up well despite profit taking and gilts taking a bashing.” Any the wiser?

View the text version of this client publication

Stock Market Investing 101 part 2

“At close the FTSE was up 100 points on the day. Blue chips held up well despite profit taking and gilts taking a bashing.” Any the wiser?

As with most matters connected with financial services, when you invest in stocks and shares you find that relatively simple concepts are wrapped up in jargon that seems designed to cloud and confuse.
A good lesson to take on board therefore, is not to invest in anything you do not understand, or which has not been properly explained to you. However, at the same time, it is important to make the effort to get to know the language and do the research, in order to be well enough informed, to be able to make an investment decision.

Companies quoted on the stock exchange are broadly grouped together for ease of reference and comparison. For example health care, industrials, oil & gas and utilities among others. If we take a look at the banking sector, it does not take long to figure out which of the major high street banks’ shares are worth more and which pay dividends.

But share prices are just the tip of the iceberg. Unless we are going to take a complete shot in the dark we need to reach an understanding of the company we are considering investing in. First stop is the company’s annual report.

These are mines of information about what companies do, where, how and why they do it. Bear in mind that they only provide a picture of the company as it stands at the end of the company’s financial year. Quoted companies are also obliged to produce half yearly and quarterly results as well; these are worth looking at too. The key financial reports are: the balance sheet which records what a company owes or is owed, and how much cash it had in the bank at the end of the period; the profit and loss account or income statement, which shows how much money it earned and spent in its activities; and the cash flow statement, which shows what the company did with its cash during the year.

Reading and understanding financial statements takes time and practice. However, looked at in conjunction with the written statements in the annual report and especially the notes to the accounts, it should not take too long to figure out what the company does and how it is faring. Remember that apart from being a document required by law, an annual report is also a sales document for the company. For this reason it should only ever be one source for our research, especially as it is largely backward looking and therefore out of date by the time it is produced.
Fortunately there is a vast amount of other information available in print and online such as, Interactive Investor Citywire and a great many others whose job it is to generate new stories about companies. There is also a lot of research produced by stockbrokers, rating agencies and banks; all useful as sources to a greater or lesser degree. However, all should be treated with scepticism because none of them get all of it right all of the time and usually they have some kind of agenda. But if you research enough, and keep up-to-date with the latest news on the companies you are interested in, you will be in a better position to decide what is in your best interest as an investor.

Reading through the research, some terms and ratios come up repeatedly. What do they mean? “Earnings per share” (EPS) is a common one. It is arrived at by dividing the net profit, the “bottom line” shown in the profit and loss account, by the number of shares in issue. This indicates how much money the company is generating for its shareholders. “Price/earnings ratio” or PE, another measure, is arrived at by dividing the current price of the share by the EPS. This number, also referred to as the multiple of earnings, alongside EPS, is useful to compare with those of other companies to see which is producing the best result for the investor.

This does not mean that companies with low EPSs or PEs are necessarily bad investments. Perhaps they have room for growth, perhaps companies in their sector tend to have low EPS and PE ratios. If the PE is very high it suggests that the company’s shares are expensive, some hi-tech stocks are like this, but their potential for growth may be very great, like a Google or an Apple for example.
There is no substitute for getting to know a company, its products, how it conducts itself, whether it values shareholders, how it behaves towards its other stakeholders, whether it pays its management in proportion to their abilities and what its strengths, weaknesses, opportunities and threats are. But, other important considerations are things like the state of the economy as a whole, inflation, unemployment and, if they buy or sell goods or materials abroad, the effect that exchange rates may have on their costs or revenues.

For example, if you were to look at a graph of the share price for just about any company quoted on the London Stock Exchange covering the last five years, in almost every case you would notice a massive price fall following the collapse of Lehman Brothers, the New York investment bank, on 16th September 2008. It was a moment of panic in the financial markets when investors sold their shares to salvage their cash. Fortunately disasters of this sort do not happen too often, but this example does show how factors outside a business can radically affect its share price. No company is an island. All companies ply their trade within local, national and international economies, which affect them for better or for worse.

The same approach should be taken with all companies; do your research. Spend time studying the investment opportunity until you understand it and feel confident that you have reviewed as far as possible the risks involved and whether or not the likely return is fair compensation for taking that risk. No one can read the future with any great degree of certainty. So at times, as with any investment, even leaving your money with the building society, you have to make your decision. Because stuffing your cash under your mattress is probably not a worthwhile option!

Stock Market Investing 101 part 1

Filed in: banks, tax, shareholder, shares, stock market, investing, bp, stocks, isa, sipp

Richard Willsher shows, how with a little homework and a bit of cash, anyone can learn how to trade

View the text version of this client publication

Stock Market Investing 101 part 1

Richard Willsher shows, how with a little homework and a bit of cash, anyone can learn how to trade.

On 6th March 2007 Royal Bank of Scotland shares were worth 602 pence each. By 20th January 2009 their price had fallen to just 10 pence and the government had had to step in and rescue the bank.

Lesson number one, investing in shares can be a rough ride. On the other hand, if you had bought your RBS shares on the day they bottomed out then by now, as the price sits at 49p, you would have more than quadrupled your money in not much more than 18 months.

Why have a stock market?
This may not be quite as dumb a question as it sounds. The original reason is to enable businesses to raise money though issuing shares. By buying them, investors become owners of these companies, in exchange for various benefits, which we’ll look at in a moment. However if the management of the business you invest in does not do a good job, does not make profits or grow the business, the shareholders may receive no benefits at all and may lose their money.

Therefore a key concept is that owning shares means sharing risk. And that is also why companies issue shares on public markets; to get shareholders to share risk or reduce their own. When a company issues shares it may use the capital it raises to grow its business. But it may also represent a big payday for the existing shareholders of the company, a time for the existing shareholders to cash in their chips. For them the stock market represents an“exit.” The new investor needs to decide if this means the company has really run out of steam and that its best is already behind it.

Some shares pay no dividend at all. Take a look at BP in this table. It formerly paid dividends at roughly the same rate as Royal Dutch Shell but because of the explosion at its Macondo well in the Gulf of Mexico it suspended its dividend payments. Others pay no dividends because they have no profits or they prefer to retain profits to grow their business. If their businesses do grow and there is demand for their shares then their shareholders may be well compensated by….

Price growth; the reason many investors choose to invest in shares. Let’s look at the same shares again:

Not very impressive. In fact, in the case of BP shares, pretty disastrous. Other, faster growing companies may see their share prices grow very rapidly in a short space of time. But there are several lessons to learn from this. Firstly, this is only a snapshot of the price progression since the beginning of 2010. If, for example, the similar snapshot were taken for the first 9 months of 2009 the result would be quite different, because the stock market as a whole reached its nadir in March of 2009 following the financial crisis. Secondly, prices go down as well as up. Thirdly, buying and selling shares at the right times is vital for achieving profits. Fourthly, it pays to invest in companies you understand and can reasonably expect to do well but… The unpredictable happens.

Buying shares involves costs as well as benefits. Firstly, dealing costs. These vary depending on which broker you use and can be as low as £6 per trade but as much as £15. Use comparison sites such as www. and savings-and-investments/ guides/stockbrokers- explained/the-cost-of- stockbrokers-compared/ to check on this. Such sites will also indicate administration charges payable to brokers for looking after your shares.

There will also be stamp duty to pay at a flat rate of 0.5%, which will be deducted by the broker. Then dividends will be taxed at 10%, 32.5% or 42.5% depending on your over all taxable income. Capital gains tax is payable on gains above the annual personal CGT allowance, which is currently £10,100. All told it can be expensive as compared with the profits made, although if the shares are held in a Stocks and Shares ISA or a Self Invested Personal Pensions, at least the investor can avoid the income and capital gains taxes. Charges are also disproportionate for smaller deals. The bigger the
trade, the lower the percentage cost.       

What Do share prices mean?
What moves a share price up or down can be divorced from the performance of a company. For example, in the case of Royal Dutch Shell, its business has not changed much since the beginning of the year yet its share price has been affected by events over at rival oil major BP.

Press reports, notes put out by stockbrokers’ analysts, the buying or selling behaviours of large shareholders, the general state of the economy and sentiment can all affect prices; quite apart from any positive or negative news from the company itself. The investor has to make up his or her own mind about an investment and not be swayed too greatly by the views of those who provide the noise surrounding the stock market. In a later article we will look at how to analyse stocks, what various ratios mean and how to arrive at buying or selling decisions.

One early decision to take is whether to invest in individual company shares, buy a basket of shares in the form of an index tracker or whether to let a fund manager look after your stock market investments for you. We will look at these in a later article too but for the time being something you might like to try is running a dummy or virtual portfolio. There are a number of websites, publications and iPad or phone apps that let you play around without having to spend any money. Try looking at The Financial Times, Interactive Investor The Share Centre or Hargreaves Lansdown This is fun but don’t forget that unless your goal is to be a day trader, buying and selling shares all day long, with all the stress that that involves, you will probably
be better off taking it slowly, analysing carefully what you want to invest in and waiting till the time is right to make your purchases or sales. There is no hurry. If you miss one opportunity,
there’ll be another along sooner or later; just keep your (virtual) cash and wait.

Next month Richard Willsher breaks through stock market jargon and examines how economy, inflation and exchange rates affect share prices

Diamonds are Forever

Filed in: london, war crime, sierra leone, ivory coast, ingle & rhode, boodles, commodities, africa, angola, hirsh

When the media spotlight fell on the recent war crimes’ trial of Liberia’s former president Charles Taylor it illuminated ethical concerns over the origin of diamonds. Has it made their sparkle much less attractive?

View the text version of this client publication

Diamonds are Forever
Richard Willsher

When the media spotlight fell on the recent war crimes’ trial of Liberia’s former president Charles Taylor it illuminated ethical concerns over the origin of diamonds. Has it made their sparkle much less attractive?

“Blood”, “conflict”, “war”, “hot” or “converted” diamonds are those used to finance war and conflict. Angola, Ivory Coast, The Democratic Republic of Congo (formerly Zaire), The Republic of Congo (Congo Brazzaville), Sierra Leone and Zimbabwe are all countries that have been reported to be sources of such stones. Until 2003 when the Kimberley Process Certification Scheme (KPCS) was introduced under United Nations General Resolution 55/56, there was no system to assure buyers of rough diamonds that they did not originate from war zones.

The KPCS set out a series of warranties for consignments of stones and established principles by which the diamond industry was to regulate itself. These include, among others, only trading with counterparties that provide KPCS declarations on their paperwork; not buying diamonds from suspect sources and not assisting in buying or selling diamonds from such sources. But while the KPCS has been largely successful, with the exception of two Canadian brands, Polar Bear and CanadaMark, which carry a minute laser engraved serial number, the origins of diamonds cannot be proved.

What of those which came to market before 2003? And how ethical do we want to be? People who dig for precious stones, gold and many other commodities, including oil are often in remote, lawless regions of the world. If human rights, health and safety, the environment and local political regimes are issues we care about, then we would need to examine our conscience before engaging with any of these substances, that are woven into the fabric of most lifestyles across the globe.

Diamonds remain objects of desire and perhaps also worthwhile investments. As Michael Wainwright one of the latest generation of the family that owns Boodles, the 200 year-old London based jeweller puts it, “Items of diamond set jewellery are beautiful things to own and wear and may turn out to be not a bad investment.” He adds that no rate of return can be placed upon such “investments” though the better the colour and the quality the better they fare. That is consistent with other collectable investments such as art, wine and furniture.

There is evidence, published by Antwerp diamond dealers Ajediam that over a period of 50 years the price of wholesale diamonds has consistently risen and produced quite reasonable returns. A visit to is essential however to grasp the detail and very strict definitions of the diamonds which fall within their price trend graph.

Four Cs
Buying cut diamonds boils downs to “four Cs”. The “cut” or quality of craftsmanship used to shape the stone. The colour. White diamonds are most common but as Jason-Paul Hirsh of London jewellers Hirsh points out, other natural colours such as pink, blue and yellow are rarer and can be extremely valuable.

Clarity is the third C and refers to whether there are blemishes within the stone. Fourth is carat, the weight of the stone. One carat equals 0.2 grammes. While it is generally true that the bigger the stone the higher the price, there are certain key price points. A one-carat stone is likely to cost significantly more than one weighing fractionally less than one-carat.

Hirsh goes on to say that diamonds are not like any other commodity; the market has characteristics that do not commend it for investment. “There is a massive stock of diamonds that is not being released. In other words it is being held to keep the price inflated.” The control of the market is largely in the hands of the Diamond Trading Corporation, formerly De Beers, which has agreements in place with producer countries such as Russia, Canada and Australia. “The second reason is that diamonds have been artificially made since the 1960s and the manufacturers are getting better at it. This will also have an effect on the market that no one can really predict.” He adds however, that those rarer pink and other natural coloured diamonds can produce good investment returns as supply cannot meet demand.

The investor still needs to square his or her ethical concerns. A jeweller with a specialist, ethical approach is Ingle & Rhode, based in London’s West End. This firm uses fair trade gold and buys its diamonds direct from producers rather than through wholesalers.

David Rhode points out that the greatest investment returns are likely to come from diamonds that form part of highly collectable pieces of jewellery. Such pieces might be from a well-known designer such as Cartier and may have been owned by celebrities in the past. Such jewellery fetches high prices at auction.

Investing in diamonds is highly subjective and requires a lot of background knowledge and good advice. Diamonds do not pay interest and need to be securely stored and insured, both of which cost money. But they can be passed from generation to generation and they are also easily transported. This explains why refugees have often taken their stones and jewellery with them and left their more cumbersome possessions behind. Diamonds have many appealing features and are an asset class that many treasure, despite the uncertainty of their origin and of the investment returns they may produce.

Golden Opportunity?

Filed in: hsbc, etf, gold, american eagles, world gold council, bullion, commodities, investing, britannias, kruggerands

It is easy to invest in gold. Knowing whether now is the right time to do so, is not quite so clear.

View the text version of this client publication

Golden Opportunity?
Richard Willsher

It is easy to invest in gold. Knowing whether now is the right time to do so, is not quite so clear.

Over the last month the price of gold has set a series of new records. At the time of writing, the price set daily in London is US$1,341 or £852.78 per ounce. Looking at the bigger picture, research from the World Gold Council (WGC), which represents the world’s leading gold mining companies, suggests that the long-term trend for the price of gold is upward. However, as the graph shows, it is not necessarily a smooth ride. Between 1980 and 2000 the price shows a marked downward swing.

Given the rate at which the gold price has risen lately, investors may be asking themselves whether they should buy some; but why would one want to? Charles Morris, Head of Absolute Return at HSBC Global Asset Management (UK) Ltd has some answers. “You don’t buy gold to become rich,” he says. “You buy it to preserve wealth. At a time when we are in a wealth destruction cycle, gold comes into its own. The case for gold is that it is real money and if there is any problem in the financial system then that gold will become very valuable indeed. There are lots of things to worry about out there and there are still some long-term problems in the economy and in the financial sector. We want to own things that can survive these environments; and gold is a very liquid asset.”

How to invest
The easiest way to invest is to buy either coins or small bars. Coins include South African Krugerrands, British Britannias or American Eagles for example. These vary in price depending on the size of the coin and the state of the market at any time. Coins range in size from one twentieth of an ounce to as much as 1,000 grammes, with various sizes in between. They can be purchased from bullion dealers and should not be confused with numismatic coins collected by coin collectors.

Bullion dealers also sell bullion bars, which range from as little as one gramme to 1,000 grammes. A good source of information on this is which lists the details of accredited gold bar manufacturers. To find a bullion dealer for coins or bars, a good place to start is the WGC’s directory at

The WGC adds this useful advice, “Bullion bars and coins are priced on the basis of their fine gold content. However, different premiums may be charged by the same dealer, depending on the availability of each type of bar or coin. You may also want to check, at the time of purchase, how much commission would be charged to buy back any bars or coins should you wish to trade them in the future. Apart from your individual preferences for the way bullion coins and bars look, the premium charged over and above the gold price would probably be the deciding factor.”

Gold accounts and funds
Other ways to invest in gold include opening a gold account. The investor buys gold through a bullion brokerage, which is then held by a bank. These accounts are termed “allocated” or “unallocated,” with an allocated account, the bank stores the gold and the investor has title to it. The bank will charge a fee to cover storage and insurance. Unallocated accounts do not hold specific pieces of gold bullion allotted
to particular clients but clients hold part of a larger quantity. These accounts do not incur the same charges but the bank may reserve the right to lease out the gold.

A third and increasingly popular route to owning gold is to buy a share in a fund that has invested in gold. These can include unit trusts and investment trusts but these invest in the shares of gold mining companies whose prices tend to be influenced by the rises and falls of the gold price. However, as with other share prices, they are also affected by factors that may have little to do either with the price of gold or the performance of particular funds.

Buying shares in exchange traded funds (ETF), which are quoted on the Stock Exchange, provides a more direct link to the price of gold. These track a gold price index and apart from normal share trading costs do not bear any other management charges or commissions which unit trusts and investment trusts typically do.

One of the downsides with investing in gold is that while you hold it, it provides no income; no interest or dividend for example, which other investments do. Therefore whether or not gold is good to invest in will depend purely and simply on its price. Looking at the graph shown above, one question sticks out like a sore thumb: is this the time to invest? Some commentators argue that in real terms, allowing for the rate of inflation, gold is still a good buy. Others, who have charted the gold price in relation to previous recessions, say that the price tends to bubble in these periods and then fall back and that this may be happening now.

For sure there will be price fluctuations whenever you buy. Gold is an ungoverned market where supply and demand determine the price. Right now there is plenty of demand but how long this may persist is anyone’s guess. In the final analysis a couple of facts about gold are enduring, one is that it has been prized by human beings for millennia and this looks unlikely to change just yet. Moreover, gold is generally in short supply and becoming increasingly difficult to mine or recover by recycling. These support the case for investing in gold, but as with so much successful investing, timing has a very big part to play.


Filed in: germany, abs, ifa, kfw, forfaiting, berlin, ipex, greek, china, thyssenkrupp

Berlin may have been the venue for this year’s annual IFA Conference, but Germany has even bigger matters to celebrate. Richard Willsher speaks to German bankers about the country’s spectacular export-led growth and the role of trade finance.

TFR Germany-October 10

View the text version of this client publication

Berlin may have been the venue for this year’s annual IFA Conference, but Germany has even bigger matters to celebrate. Richard Willsher speaks to German bankers about the country’s spectacular export-led growth and the role of trade finance.

On 9 November 1989, the checkpoints along the Berlin Wall were opened for good, followed by the signing of the Treaty of Unification on 3 October 1990. Since then, 3 October has been celebrated in Germany as Tag der Deutschen Einheit – German Unity Day.

It has been a long haul, but the German government has succeeded in carrying through a major, long-term vision for the future of a united Germany.

The same, perhaps, can be said of their economic management. Despite bearing the pains of integration and, more recently, the financial crisis, bank rescues and being called upon to play the lead role in bailing out the Greek economy, Germany has been working hard at its recovery that has been largely, though not entirely, export-led.

The result: in the second quarter of this year the economy grew 2.2%, the fastest quarterly rise since reunification. And as The Economist reported on 13 August, it is China, among other emerging markets, that is buying a lot of German products. For example, sales of Mercedes cars to China tripled in the year to July and ThyssenKrupp, the steelmaker, has raised its outlook for year after better than expected demand from the automotive and engineering sectors.

Germany’s trade finance bankers have played their part. In fact, they have been rushed off their feet. “The German banks are doing fantastic business,” says Silja Calac, Head of Trade Risk Management at Unicredit in Munich.

“Our forfaiting volume has grown. It began with the crisis. The years 2008 and 2009 were good for us. First, income increased considerably because the pricing went much higher and now the pricing is going down but the volumes are over-compensating for this decline,” says Calac.

She adds: “Our volumes have continued to grow in 2010. In the first half of the year, bank guaranteed forfaiting increased much more compared to the first six months of 2009. Small and medium-sized enterprises (SMEs) in Germany were hit by the crisis and feel a greater need to make their businesses safer and get cash immediately, and forfaiting can provide that.”

Fortunately, many German corporates have a long familiarity with forfaiting, which therefore forms part of their financial planning.

Volume and profits
Former IFA board member and senior specialist in trade finance at Commerzbank in Frankfurt, Waltraud Raderschall, agrees. “I don’t think that any of us can complain about the volume and profits in the business. I wouldn’t say that it is booming but we can see any amount of business, any time of the day.”

She goes on to describe the state of the market: “From the larger firms there is a huge request for supplier credits down to the smaller SMEs. Then there are the government programmes with the German export credit agency (ECA) providing plenty of insured possibilities. There has also been a change in the policy of the private risk insurance companies. The self-retention portions have often improved, depending on the risk covered. Then there are the risk limits within the banks to cover political and commercial risk. Combine all of these and we are at a very interesting moment because everything is emerging at the same time.”

Supporting the export-led recovery has not been all plain sailing for German trade financiers however. “Trade finance is essential, even for SME business,” says Bernd Sooth, Vice President of Financial Institutions Trade and Commodity Finance at IPEX Bank in Frankfurt, “but there is a gap between the potential of the market and the willingness among the banks to provide support,” says Sooth.

He adds: “Businesses need more from the banks, but they can’t provide all the services that customers need. This is due to the risk policies of the banks due to the fact that there have been huge mergers and much consolidation within the banking sector…. That is a problem for the SMEs that are looking for new partners in trade finance business because they prefer to work with German banks rather than to seek out
partners in other countries.”

Stephan Schneider, who heads structured export finance at BHF Bank in Frankfurt, notes that there are currently discussions ongoing in Berlin to try to alleviate the problems faced by SMEs. One proposal, for example, is that insurers and ECAs could improve insurance provisions for small companies’ trade debts, which would enable them to more easily discount them with banks that do not have banking lines in place for such small firms.

The consolidation of the banking market and the stringent controls on lines and limits has created space for other players to enter the market – not just smaller, non- bank forfaiting houses, but also firms keen to structure asset-backed securitisations (ABS). “We see new products which are competing, but which are not really different from forfaiting. Since I would call forfaiting a technique to liquidate illiquid assets, such new products are variations of forfaiting. ECA-covered supplier finance, electronic platforms and non-guaranteed supply chain finance are all part of the ‘German way of forfaiting’,” says Calac.

“Forfaiting has evolved a lot over the last few years adapting to the more sophisticated requirements of our customers and to new technological possibilities,” she continues, “supply chain finance structures through electronic platforms are such a variation of forfaiting. However, since the beginning of this year we have seen growing competition from ABS structures for our supply chain finance products. As this activity had been very strongly deleveraged following the financial crisis, securitisation teams are now looking for new and relatively safe assets. They seem to find them in trade finance, offering structures to the bigger corporates whereby they buy up all of their trade related assets, put them in a conduit and by this method offer corporates cheaper funding.”

Meanwhile, Raderschall says that banks are trying to learn the lessons of the crisis, though some things have been adjusted. “There is confidence here. In the old days a client would just show you the deal. They wouldn’t consider any other alternative; they would just do it. But now people shop around and they are met with different policies, different possibilities. That is why we say that there is an increase, but also change, in the way business is being done.”

Looking to the future, Calac concludes: “I think German industry has a good time ahead of it. There is strong technical knowledge and excellence that goes into German exports. Germany has benefited from increased investment in heavy equipment by overseas customers after a reduction in investment in various markets during the crisis… We will continue to expand our trade finance activities to support exports and imports. We hope regulators will appreciate the importance of trade finance for the German economy and will accept the argument for preferred capital allocation rules for trade finance, which is jeopardized by the new regulatory environment of Basel II and III.”

Sooth agrees: “For the future I think there will be growth, but I think it will be tight.”

For the time being, there is plenty of business to go around and the traditional trade finance banks can celebrate the country’s 20th anniversary and its strong export-led economic performance. Longer term they have to grapple with the consequences of Basel III and come to terms with stringent profitability criteria, but that will be another story.

Sconto Pro Soluto

Filed in: forfaiting, banking, turkey, china, export, finance, iran, italy, simest, discount

You don’t need to be around for long before you become aware of how influential Italian forfaiters are in the forfaiting market. The obvious question to ask is, why?

TFR Italy-November 10

View the text version of this client publication

Sconto Pro Soluto*

You don’t need to be around for long before you become aware of how influential Italian forfaiters are in the forfaiting market. The obvious question to ask is, why?
Richard Willsher

These are not great days for Italian forfaiting, but the market could be on the turn. “A fair percentage of the Italian exports of capital goods is made up of machinery and equipment, supplied by medium-sized companies to medium- sized buyers in emerging markets,” says Giancarlo Parente of Simest, the Italian government entity that provides export-credit interest support programmes. “The average size of export contracts does not lend itself to the use of syndicated buyer credits, which are too complex to structure and to handle. The simplicity and speed of forfaiting is, therefore, particularly welcomed by Italian businesses,” he adds.

Enrico Seralvo, Managing Director of Intesa Soditic in Milan, adds that forfaiting has been in use in Italy for decades and remains as relevant as ever. He recalls a time when accessing export credit insurance cover through Italian export credit agency (ECA) SACE was much less efficient than it is today. Moreover, in those days it was not possible to assign SACE policies without recourse. Therefore forfaiting, especially involving banks operating outside of Italy, was the most efficient way of ensuring Italian exporters could avoid the payment risks of offering medium-term credit in support of their equipment sales.

Troubled times and changing terms
A lot has changed since those golden days when interest rate subsidies were richer than they are today, but forfaiting remains relevant, says Parente. “Over the past decade the forfaiting scheme has supported roughly a yearly average of €2.3bn of business,” he says. Yet Italy has been through troubled times over the past couple of years, along with all of the other major economies of the western world.

The years 2008 and 2009 both witnessed declines in exports of Italian capital goods. This year has seen a modest increase, although the strength of the euro against the US dollar is not helping. Paolo Jelmoni of Treviso, Veneto-based brokers and advisors Reginato & Mercante is moderately optimistic that this will improve, as is Raffaele D’Alo of Eufintrade in Lugano, Switzerland.

“Today the market is very depressed,” says D’Alo. “However, it seems that something is moving and there is some increase in exports to China, Turkey and elsewhere in the Far East, albeit that these transactions are supported by short-term letters of credit. And I have to say that there are a lot of requests for ‘silent confirmation’ or discount of usance letters of credit issued by Iranian banks.”

This represents a general shift away from traditional discount of promissory notes and bills of exchange in favour of deferred payment letters of credit (LCs). Many of these are simply discounted by local Italian banks and held in their books until maturity.

Paolo Jelmoni says that banks in some of the larger emerging markets have plenty of liquidity and are therefore tending to assist their importing customers with local facilities. This means that Italian exporters may simply be paid at sight, without the use of LCs or medium-term financing.

In addition, he notes that Italian exporters are increasingly requesting capacity to discount corporate names without the support of bank guarantees. This also tends to impair the liquidity of the market, as there are fewer counterparties to buy such paper. In particular, banks are increasingly constrained by tightening capital and liquidity regulation.

Moreover there is increasing competition from SACE. Jelmoni notes that it has become much more efficient and aggressive. It can now give approval for medium-term credit cover in the space of a week, which makes it a staunch competitor for traditional brokers of forfaiting deals.

New demands
Nevertheless, Eufintrade’s Raffaele D’Alo says that he remains optimistic about the future development of forfaiting. “Based on my own experience, I have personally seen several crises in the market. Each time the question arises, ‘will forfaiting survive?’ But we are still here talking about this product and the number of participants at the IFA Annual Conference increases year after year. I do believe, however, that the market should change its approach towards corporate risk transactions, because they represent the highest percentage of the enquires that we see from Italian exporters.”

So while it looks as if the nature of the demand for forfaiting support has changed, the forfaiting technique itself remains as popular in Italy as ever. There, as in the rest of the international banking and trade finance community, the long shadow of the 2008 crisis still darkens the picture. Whether tighter credit terms will now be a fact of life as the demands of Basel III take hold, or whether forfaiters will find new ways to do business, we will have to wait and see.

But the chances are that Italian forfaiters, and transactions structured to support exports of Italian goods, will continue to be significant features of the international forfaiting market, as ever.

Richard Willsher is a financial journalist and trainer, perhaps best known for the seminars that he conducts with the IFA. He can be contacted by emailing

For more information about the International Forfaiting Association see: or e-mail

* In English: ‘discount without recourse’

Lending to SMEs

Filed in: , banks, sme, small business, bank lending, invoice discounting, business angels, funding circle, crowd funding, fsb

There is plenty of evidence to show that businesses are seeking out alternatives to bank funding.

View the text version of this client publication

Lending to SMEs
There is plenty of evidence to show that businesses are seeking out alternatives to bank funding, writes Richard Willsher

In its August “Trends in Lending” report the Bank of England states: “Contacts of the Bank’s network of Agents [throughout the UK] noted that credit conditions for smaller businesses remained tighter than for larger corporates…” A two-tier market in bank funding is very real. “Some major UK lenders,” the Bank adds, “reported that spreads on lending to larger corporates continued to fall, but by a diminishing amount. Spreads on lending to small and medium-sized enterprises were little changed.”This explains why small businesses are finding their funding where they can, away from traditional overdrafts and term loans.

A spokesperson for the Federation of Small Businesses says that many smaller businesses are put off going to banks for credit because of extra charges that may be levied, such as arrangement fees or set up charges. This serves to increase the real cost of borrowing. “Our members [also] say that they fear that if they go to their bank to ask for a new loan or an extension to their overdraft it may trigger a review of all of their financing arrangements.”

Keeping it personal
Instead, small businesses often fund their businesses out of personal savings, with many new businesses being set up with redundancy money. This is a trend that may well increase in coming months of austerity. In a recent episode of BBC’s Dragons’ Den one of the founders of Zigo, a bicycle- mounted baby carrier business, said he had invested $1.3 million of his own money in the business. The Dragons were dumbfounded. Not every entrepreneur has that much personal wealth to put in, most need to look elsewhere, but where? The FSB says that friends and family are a very common source of working capital as well as equity. Credit cards are also commonly used as a ready source of cash, though it can turn out to be very expensive.

Joining the crowd
Another small scale source of borrowing, though that is not what it was set up to do, is the online lending and borrowing exchange Zopa, http:// Giles Andrews Zopa’s CEO says: “It is almost certain that some borrowers are using their Zopa borrowings in this way.” He adds that that is not necessarily of great importance to Zopa because borrowers are assessed on their ability to repay the debt, regardless of what they are going to do with the funds. The attractions of Zopa are easy to see. The borrower can probably borrow the funds more cheaply than through a bank, although only up to £15,000 and they may like the idea that the funding….is directly supplied by a range of small depositors, not by a large bank.

There is definite appeal to what in the US has come to be called “crowd- funding.” Zopa-like but recently set up to provide business funding is Funding Circle, http://www.fundingcircle. com/. It provides unsecured loans of between £5,000 and £50,000 at fixed rates for up to three years.

Traditional but alternative
Although invoice discounting and factoring accounts for something in region of £14 billion of outstanding advances at any one time, as Kate Sharp, chief executive of the Asset Based Finance Association, the invoice discounters and factors trade association, explains it is still perceived as being an “alternative” source of business funding especially among those “brought up on overdrafts and business loans.” However she goes on to point out that in providing finance directly linked to the sales of a business, invoice discounting maps the ebbs and flows in fortunes of a business.

Another source of financing is Finance South East (FSE). With offices across the South East of England, chief executive Sally Goodsell explains, “Many of our borrowers are young entrepreneurial companies and technology businesses that are looking to grow. We are open for business and we do some of the lending that the banks have simply stopped doing; for example, cash flow lending to growth hungry businesses. We are not here to finance lifestyle or steady state businesses. We are looking to lend to and invest in companies that are ambitious… They are often knowledge based business that are scalable and are looking to expand beyond their home markets.” Such funding may also attract additional funding from the banks once FSE is seen to be involved.

Don’t forget the angels
Although they are mainly interested in equity investing, business angels often provide more than just that. Angel investing expert Chris Clegg, who provides training for business angels, notes that many provide debt as well as equity. Indeed when a BBC Dragon says he is prepared to put a sum of money into a business, those funds may be partly in the form of equity and partly in the form of debt. Angel debt
funding may take the form of preference shares or may be convertible to equity under given circumstances.

There are several non-bank sources of funding which can suit the circumstances of particular business. What may worry the banks is that when a business taps such alternative sources of funding its managers may question just how much they really need banks involved in their business in the future, when the price can be so high and the terms so onerous.

Modernising the IFA

Filed in: , trade finance, forfaiting, ifa, bank lending, banking

In his day job Paolo Provera is General Manager of ABC International Bank in Milan and sits on the bank’s management committee. As IFA Chairman he is leading the association into a challenging future.

View the text version of this client publication

Modernising IFA – interview with IFA chairman Paolo Provera
Richard Willsher

In his day job Paolo Provera is General Manager of ABC International Bank in Milan and sits on the bank’s management committee. As IFA Chairman he is leading the association towards a challenging future.

Richard Willsher IFA is now 10 years old and you have been associated with it during much of that time. Could you explain how its role and character has changed during the past decade?

Paolo Provera     I first became a member in 1999 with my previous employer. Since then I have been chairman of the Southern European Regional Committee, then when I joined the Board in 2005, I acted as Head of Regions, then Treasurer and now Chairman of IFA itself. During that time IFA has been through a great deal of change, reflecting change in the forfaiting market but also in the wider trade finance and banking sector. We’ve always changed with the times and are now facing new challenges.

Richard Willsher What are those challenges?

Paolo Provera At the same time as I became Chairman at last year’s Annual Conference, four new members joined IFA’s board. It was important that we guaranteed the policies and direction set by the previous board and carried on their good work.

As a trade association we do not want to grow, as other associations do, by allowing non-trade finance members to join IFA. We recognise however that over the last 10 years forfaiting as a discrete activity has diversified and, thanks to the initiatives taken by IFA, forfaiting has become more familiar to all the trade financiers. Now many, and probably most of our members are involved in wider trade finance business of which forfaiting techniques play an integral and important role.

Consequently, while retaining our brand and identity, we will be announcing at this year’s conference an expanded role for IFA together with a new message to support our familiar logo. The main thrust of this is that IFA will recognise more fully its place in the broader, global trade finance community rather than be limited to forfaiting only. One example of how the IFA’s role has evolved is the way it dealt with the Kazakhstan banking crisis. The involvement of Sean Edwards, for example, demonstrates that IFA is not only about forfaiting.

Richard Willsher Is IFA’s proposed co-operation with BAFT-IFSA part of this strategy?

Paolo Provera BAFT-IFSA is the global financial services association formed by the merger of the Bankers’ Association for Finance and Trade (BAFT) and the International Financial Services Association (IFSA). The co-operation that we hope to establish with them would be, hopefully, a big step forward for us, as we move from strength to strength. We will also be fortunate enough to have Donna Alexander, Chief Executive Officer BAFT-IFSA, speaking at the IFA Annual Conference in Berlin in September, when members will be able to learn more about the organisation and its position on trade finance including forfaiting.

Richard Willsher In setting the agenda for this year’s Conference you’ve taken a different tack than in previous years. What was behind this?

Paolo Provera Bearing in mind the crisis which we’ve all been through and which is still very fresh in our memories, the board wanted to make this Conference one that would address some of the practical issues that confront forfaiters and trade financiers in their day-to-day working lives.

So, for example, for the first time there will be a presentation giving valuable tips on how to formulate a credit application. For many attending the conference, especially after the crisis, making an application to gain credit committee approval for a new transaction can be a daunting and perhaps disappointing experience. Therefore this presentation will therefore address an issue of direct, practical relevance to the way we do our jobs.

Another of the presentations will deal with issues of funding and pricing transactions. Again, the crisis has radically affected the funding environment in a way that none of us have experienced before or even imagined prior to the collapse of Lehman Brothers in September 2008. And yet, without funding, transactions can’t happen.

Indeed one of the main reasons that clients come to banks to do trade finance transactions is to obtain funding. The other principal reason is to gain coverage for their trade finance risks and our ability to help with this is dependant on the pricing we can obtain. So funding and pricing are both critical factors in members’ ability to get deals done.

A third presentation and the following panel discussion will deal with export credit agency (ECA) coverage versus that offered by the private insurance market. This will also include case studies on both ECA and private market deals. Again this addresses the practical issue of risk coverage and is another example of the practical approach we are taking in setting the agenda for this year’s Conference.

Richard Willsher Finally, looking to the future of forfaiting in the context of the wider picture of financing global trade, how optimistic are you about IFA’s role and future?

Paolo Provera As I’ve said before IFA has to move with the times and that is what we are doing. Our possible co-operation with BAFT-IFSA and also our work with the International Chamber of Commerce on preparing the new Forfaiting Rules make our future an exciting one as we ensure our relevance to the global trade finance community. So we are committed to ensuring we remain worthwhile to our members as well as true to our origins.

Where there’s risk there’s money

Filed in: , risk, foreign exchange, forex, euro, market, dollar, currency, yen, reward

Markets thrive on risk and the rumour of risk. But risk seems to be seeping away from the foreign exchange markets and it's becoming more difficult make money trading currencies.

Where there’s risk there’s money

Richard Willsher

Markets thrive on risk and the rumour of risk. But risk seems to be seeping away from the foreign exchange markets and it’s becoming more difficult make money trading currencies.

According to latest data from the Bank for International Settlements, turnover in foreign exchange trading is around US$1.5 trillion a day. Analysts reckon that this probably dipped last year by about 10 to 20 % in the wake of the euro. Nevertheless, even allowing for double and even triple accounting, it ought to be possible to make good profits in what has been described as “the world’s biggest vegetable stall.”

But that it seems that it’s becoming more difficult to do and the euro is certainly a factor. “The Euro has become a major component in our markets and has replaced the Deutschemark as the major European currency,” says Roger Poynder, UK president of the ACI, The Financial Markets Association. “Whilst there is still a certain amount of interest in the legacy currencies such as Deutschemark, French Franc, Italian Lire and Spanish Peseta this is mostly driven by maturing commitments of corporate clients… The majority of business that addresses European Risk is transacted Interbank in EURO and therefore already ignores the specific country risk that the individual legacy currencies provided.”

The euro has taken its place alongside the US$ and the Japanese Yen as the world’s most traded currencies. Trading between these currencies is predictably the largest and most frequently traded and while no one is alleging that dealing rooms are on their uppers, several macro factors have stripped away risk from these markets as Jim O’Neill, senior currency economist at Goldman Sachs explains,

“The single biggest factors are inflation stability and convergence. Inflation has continued to be low and converged in many parts of the world to the same level. The forex market thrives when inflation is low and diverging and there are obvious economic discrepancies between various parts of the world. They allow the leverage community [such as hedge funds] and proprietary traders to make bets on which way the odds are going. These days with the world economy in so much better shape it’s not so easy to do that.”

He adds, “If we continue with this fantastic world economic environment the FX markets will be more difficult. If inflation were to pick up, especially in the US we could see the old style market coming back and the hedge funds might, for example, rediscover their appetite.”

A further factor in narrowing trading spreads is the availability of information. Not only are vast amounts of economic, financial, political and other data available now as never before but a good deal of it is free to large numbers of people. The Web is increasingly the delivery channel and therefore to be able to differentiate a view of future currency movements or to establish competitive advantage through superior research is more difficult to do. While not impossible forex analysts admit that their market has become more efficient.

Nonetheless there are countries and indeed whole regions where volatility of political and economic drivers do allow for wide variations in currency pricing. In particular emerging markets and the smaller OECD countries. Citibank, the longstanding and undisputed leader in volume foreign exchange trading says it trades in 140 currencies. Most of these would be classed as “emerging market currencies.” There are no figures available to demonstrate how much Citibank and others make in such trading although the assumption, and it may be an erroneous one, is that they do well at it or they wouldn’t still be in the market.

Goldman Sachs for example reckons that its research capability allows it to profit in such markets. But as Jim O’Neill says it is not without its perils, “It’s very symmetric. It’s great when everything’s going well but it’s not a great game when you’re not. Which is all a function of equity markets and short term rates… If you’ve got really good research, you can still use that to take positions. If you are right 55% of the time or more you’ll do fine but I would say it’s got harder to do. “

Emerging markets plays could however become threatened in years to come if the blue-sky thinkers’ dreams come true. They argue that Asian markets could take on a single currency, just as Europe did. Added to which the first tentative steps have already been taken in “Dollarising” Latin America. Could this happen and what would the effects on the foreign exchange markets be?

“Following the introduction of the EURO, there has been renewed focus on the idea of a single Asian block currency,” says the ACI’s Roger Poynder. “Economists in the region however do not see this as a realistic prospect in the near future. The ‘rules of engagement’ would require a convergence of the various economies, and probably political views as well. Latin America faces similar challenges of discipline if they hope to achieve Dollarisation. The USA will require both political and economic strictures if they are to sanction such a move and unilateral Dollarisation does not appear a viable option.”

But then nor did the euro look viable until comparatively recently. So may be their could be a distant threat from this quarter to foreign exchange trading profitability. But a greater and more realistic threat seems to be the increasingly large regulatory fly in the ointment.

New capital adequacy rules are currently being considered and among them is the idea that a charge against capital should be made for operational risk such as that of forex settlement. In other words traders might be charged capital against their positions.

The issue then becomes one of return on capital. Is it more efficient for a bank to earmark its capital for forex exchange or for some other activity? And it is worth recalling that the majority of forex trading is carried out for arbitrage or speculative purposes, as much as 95% of world market turnover according to one analyst. Over the last couple of years while stock markets have raged banks of often chosen to invest in equities rather than forex.

The conundrum for banks has for more than a decade been how to comply with regulation and make money. But if you remove risk you also remove the scope for generating returns. In this respect there is good and bad news for the forex market just about to break.

Continuous Link Settlement (CLS) when it arrives next year will offer the market a system of settlement which will be virtually risk free; discounting system failure of course… What it will mean is that trades will be settled real time, on what amounts to a cash-for-cash basis and this will aid banks in managing their collateral positions more efficiently. The good news then should be that containing operational settlement risk should free up capital for other purposes, if a new Basle Accord agrees that is. On the other hand if risk is removed this should mean that margins will be pared even further. The BBA for example speculates that this will produce differential pricing in the market, low for those with CLS settlement , higher for those without it. Overall it seems likely that risk will reduce and consequently profits will fall further.

Eradicating risk and reducing the market to high volume and low volatility makes it ideal for electronic trading. As we go to press the electronic hosting system has been announced by seven of the world’s leading banks in addition to other services such as CMC, Volbroker, and others which already exist. Added to which as banking mergers proliferate dealing rooms are likely to decrease in number. While traders will be asking themselves if there will be jobs for them, banks will be questioning whether they can make money in the business. In the current analysis the nature of banking risk may already have changed and have become one of how much banks are prepared to invest in software in order to buy a marketshare of uncertain worth.



The West Side Story

Filed in: , sme, heathrow, small business, london, property, business, location

As a business location West London is bigger and more powerful than you may think.

View the text version of this client publication

The West side story
As a business location West London is bigger and more powerful than you may think. Richard Willsher of The Business Magazine explains

The next time you rail into Paddington or drive the M4 or M40 you might like to consider this. The six London Boroughs of Brent, Ealing, Hammersmith & Fulham, Harrow, Hillingdon and Hounslow with their 1.4 million people have a population greater than Birmingham’s and an economy bigger than Frankfurt’s. Three quarters of a million people work there at 67,000 businesses and the region contributes £32 billion each year to the nation’s economy. Within the area lie Heathrow, the world’s busiest international airport and Park Royal, which is Europe’s largest industrial estate. Vital statistics to die for if you’re looking to attract businesses and investment to your backyard.

Yet the noise surrounding London as an investment location is dominated by Docklands’ towers, the City’s financial services hub, the East End’s Olympic ambitions and the West End’s swanky squares. But if travelling to meet your colleagues or business associates in, say, Hong Kong, New York or Silicon Valley is important to you, where would be a more convenient location for your office, Hackney or Hillingdon? Just for the record, you can’t fly directly from London City Airport to any of these places but Heathrow serves 160 destinations around the world and offers 23 flights a day to the Big Apple alone.

Closer to home business organisation West London Business (WLB) calculates that within a 150-mile radius of West London there is a market of 20 million people. It is not surprising that many of the companies that are located in its 20 or so business parks or along the main transport arteries are service businesses that supply this population. Heathrow Airport alone through which more than 67 million passengers move annually provides jobs for 70,000 according BAA, which owns the airport.

Ian Nichol, director of the West London Alliance, which aims to promote the economic, environmental and social well being of the West London community, says: “West London offers businesses a range of unique strengths and particularly interconnectivity with national, European and international markets. Which is why many company headquarters or other office investments have been made in West London. It is also increasingly attractive to high-technology companies including IT and biomedical businesses because of its skilled labour force and locational advantages.”

WLB’s deputy chief executive and head of investor development Russell Harris says: “West London continues to attract new international investors from Europe, North America and Asia, whilst many of its existing major businesses have committed their future to the area. Just look at the Canon Europe decision to grow their HQ presence at Stockley Park. In the past few months we have also seen a number of high profile moves from central London to West London. These include, shopping channel QVC moving to Chiswick Park, the drinks company Diageo moving its London HQ to Park Royal, and GE Capital moving to its own building, the Ark in Hammersmith, following in the footsteps of media company Open TV, who moved there last year. To support future investment in West London, we will launching a number of area and sector investment propositions at MIPIM 2010, the world’s largest property and investment show in Cannes in March, where West London will have a presence on the London stand. These will help remind people of the strength and momentum we’ve always had in the West London economy. They will outline how strong the creative and media, ICT, bio/pharma, food and drink, transport and logitics sectors are, as well as giving vital information to potential occupiers, and investors and developers considering new opportunities”.

Although large and well-known companies like GlaxoSmithKline, Heinz, Adobe, IKEA and many more have premises in West London, perhaps what is not so well appreciated is just how many small business are located there. Roughly a third of the jobs, that’s 250,000 of them, are at SMEs.

All told, West London presents an impressive business case and has a critical mass of economic activity that on its own dwarfs that of many of Europe’s major cities. So the next time you scythe your way from the west toward central London spare a thought for the economic miracle that you are passing through. Without it London would be a very different city indeed.

Useful contacts:
The West London Investor Development Team:
Russell Harris 020-8607-2500

The West London Alliance

Business banking in a time of change

Filed in: , banks, sme, small business, bank lending, banking, cruickshank, competition

Ten years ago the Cruickshank Report looked at competition in the banking industry and concluded that there was ‘market concentration in favour of big banks’ in respect of SME banking services. Has anything changed?

View the text version of this client publication

Business banking in a time of change

Ten years ago the Cruickshank Report looked at competition in the banking industry and concluded that there was ‘market concentration in favour of big banks’ in respect of SME banking services. Has anything changed? asks Richard Willsher of The Business Magazine

Well not much according to the Federation of Small Businesses. They quote research from late last year that says that 83% of small business banking is in the grip of Lloyds, RBS, HSBC and Barclays. This leaves a variety of much smaller providers sharing the remaining 17%. The effect of Lloyds’ acquisition of HBOS was to concentrate the picture further, removing Bank of Scotland from the list of also-rans.

This is something that concerns the current Lib-Con coalition, and in particular Vince Cable’s Department for Business, Innovation and Skills. “We remain steadfast in our position that businesses should be treated fairly, charged appropriate terms and have reasonable conditions associated with borrowing,” the Department commented to The Business Magazine. “It is absolutely crucial to the economy that banks rebuild relationships with their customers and restore confidence to the market that they are able and willing to lend.”

The Department continued, “The Government has set up the Independent Commission on Banking, headed by Sir John Vickers, to consider the future of banking. This commission will consider the structure of the UK banking sector, and look at structural and non-structural measures to reform the banking system and promote competition with a view to ensuring that the needs of banks’ customers and clients are efficiently served.”

Meanwhile banks say they are willing to lend but that many smaller businesses are not willing to borrow. Larger corporates are borrowing, according to the Bank of England but many of those also have access to the wider capital market, which is denied to smaller businesses so their funding needs may not be as desperate.

It is against this background that either through government intervention or through new competitors coming to the market we may see developments in business banking over the coming months and years. One direction that this may come from could be Santander. With Abbey and Alliance and Leicester - both with business banking offerings when separate banks - now under its wing, it is keen to make its presence felt. “Our business is to understand our customers’ business as this is the only way we can provide real shape and real substance to the offer we make,” says Vanessa McCormack, Santander’s regional director “We respect the unique nature of each and every business in the Thames Valley region and we believe that developing strong long-term relationships is mutually beneficial. That’s why our relationship directors maintain an ongoing dialogue with their customers in order to provide bespoke support when it is required, both through the good times and the bad.” This, in urbane banker-speak, may well be fighting talk.

Santander will not be the only bank looking to grow its share of the market but it is, remember, one of Europe’s largest and has the resources as well as a significant and growing footprint in the UK.

Businesses will be watching this space with a keen interest to see how the battle shapes up. Added to the likely deflationary effects of the Government’s austerity measures which may adversely affect a large number of businesses and their bankers, a new shake out in the banking sector may well be just around the corner.

Summer games

Filed in: , banks, mergers and acquisitions, bids, humour, m&a

It’s a high summertime of holiday pleasures and sports. And there are so many games we could play.

Summer games

It’s a high summertime of holiday pleasures and sports. And there are so many games we could play writes Chrys Ball.

For example we could consider what chances there are of Wimbledon champion Goran Ivanisevic becoming prime minister or even king of Croatia. Then Tiger Woods has got to be hole-in-one for US president as some stage, hasn’t he? And turning our thoughts to domestic sportsmen, what’s happened to that nice Lord Coe who used to hover like a raven at the shoulder of that little bald chap with the attractive wife… What was his name Conservative Party chap, you know the one I mean…?

But speculation over which vacuous Conservative is to take the next step along his (or her) way to achieving his (or her) life long ambition is a very boring game. Let’s play something else to while away the long summer evenings.

I know, how about “buy the bank?”

In this game the pieces are all the British banks that have little or no competitive advantages or unique selling propositions and which are listed on the London Stock Exchange. There’s plenty of them, just read their names from your daily helping of junk mail. And all you have to do is guess who’s going to buy them.

The government, “accepting the findings and recommendations of the Competition Commission and the advice of the Director General of Fair Trading,” has set some new rules for this game lately so let’s recap.

It would be a foul, says the government (“accepting the findings…etc. etc.) if the result “would reduce competition in the markets for personal current accounts and banking services for small and medium sized enterprises, with the adverse effects in both markets of higher prices to customers and reduced innovation.”

In rough terms if your answer would result in four banks holding 77% of personal current accounts, or the deal you suggest means that one bank holds 27% of them, than that would not be a valid play.

Right then off we go. First question, who’s going to buy that huge, that massive, that whopping Barclays?

Too big for another big British bank to buy. So what do you reckon? The first major British clearer to be bought by a foreign bank since HSBC bought Midland? Who’s big enough, has little overlap in the UK domestic banking market and would relish Barclays foreign exchange and fund management businesses?

I know, what about Citibank? You say it could be a German or French bank do you? Alright, fair enough. This is all idle speculation anyway so only the future will tell us which of us is right or wrong.

Question 2 – National Australia Bank looks hungry. It could be quite exciting to guess which one of the building societies it could snap up like a Northern Territories’ croc swallowing a dingo?

I’ll go for Alliance & Leicester I think. That’s because it could clamp its jaws around Girobank, which is a really big handler of cash for the retail sector. That’d give it leg up into UK high street banking. And then the Aussies could perhaps thrash A&L’s boring mortgage business into some kind of shape just by ushering in some commonsense antipodean lending and customer service practices which would bring it into the 21st century.

Then there’s Standard Chartered. We haven’t had any bid speculation and rumour about that for a while. Such a great ex-colonial franchise to bolt on to some willing party. Why, we could bolt it on to Barclays or may be LloydsTSB; now there’s an idea.

Mind you although Standard’s shares are about 300p below their 52 week peak, it’s looking a bit expensive with a price earnings ratio of about 26 – that’s double that of Lloyds or Barclays. But a frisson of emerging markets turmoil ought to knock Standard’s price back to buyable levels.

But that still leaves several former building societies on the shelf. Who’d want to buy them?

What am I bid for Bradford and Bingley and Northern Rock? Market shares ripe for the taking or are they not yet fruitful enough to pick?

I reckon a bank with a strong credit rating capable of cheapening their cost of funds in the capital markets could bring some increased profitability to these mundane home lenders. The once mutuals can’t put up their prices because they’re locked into a permanent price war with their competitors so they have to lower their costs of doing business.

Then do away with branches altogether. Make an online offering to the mortgage market and raise the funds in the bond markets. “Over our dead bodies,” I hear the directors cry. C’mon guys, there’ll be a better profit related bonus scheme of course. We’re talking global banking industry here.

But whatever happens we customers must bring pressure to bear on the remaining banks following all this industry consolidation. We must do something to prevent them being given silly names.

HBOS. What sort of name is that for us customers to carry around on our cheque guarantee cards as a result of the merger between Halifax and Bank of Scotland? So unimaginative and jarring to the ear. At least Egg or Cahoot or IF have a certain zappy irrelevance to them.

There is nothing exotic about the initials H B O S. At least with HSBC there’s a waft of oriental charm and promise of riches that arises from the name “Hong Kong and Shanghai Banking Corporation.”

Given the vast sums of money you can charge as a brand consult to big corporations, I would like to offer myself as one who can turn a word or two into a successful name. For a six-figure sum, in pounds Sterling, it can’t be that difficult to come up with something.

“Bank of Halifax” would be politically incorrect. And anyway there may already be one in Nova Scotia for all I know. “Scottifax” sounds like a manufacturer of rolls of paper. Halliscot – like a breath freshener made in East Kilbride. No, I think I’ll put forward “MoneyDream” – “open an account with us and we’ll fulfil all of your financial services aspirations. “CashCow – we’ll lend when your account needs refreshing” – No, no, these are too mundane. Why not “Aspire”, “Challenge” perhaps the more ethnic “Neaps and Pud” “reflecting the culinary heritage of our two institutions.”

Yes, “buy the bank and give it name,” is a game that can help while away hours in Tuscany or the Auvergne while temporarily separated from our desks and from the endearing crunch of Church’s soles on City pavements. It is harmless fun and of course none of these fine upstanding, independent financial institutions will ever really disappear, will they?

How much is e-mail costing your business?

Filed in: , it, business, technology, computing, communications

Can you still remember your delight when you sent your first e-mail? And then again, even better, when you got your first reply? Sadly those joyous days are long gone and instead e-mail is fast becoming a curse of contemporary corporate life, and an expensive one too.

How much is e-mail costing your business?
Richard Willsher

Can you still remember your delight when you sent your first e-mail? And then again, even better, when you got your first reply? Sadly those joyous days are long gone and instead e-mail is fast becoming a curse of contemporary corporate life, and an expensive one too.

Research by IT specialists Gartner and IDC suggest that up to 40% of e-mails sent in private sector firms are non-work related. This, according to e-mail management software vendor Waterford Technologies, rises to 70% in the public sector.

Waterford’s general manager Richard Kolodynski says, “It seems hardly credible, but a staggering 70-80% of emails sent by staff working in the public sector are personal. Local government employees are big offenders, but the worst email abusers by far are staff working for health trusts and other Central Government departments.”

No wonder then that some private sector entrepreneurs see e-mail, and particularly internal e-mail as threat to their business culture and profitability. When John Caudwell banned internal e-mail at his 335-store mobile phone retail chain Phones4u he reckoned it would save him £1 million a month in lost time. “I saw that email was insidiously invading Phones 4u so I banned it immediately,” said Caudwell.

This contrasts with the vision of arguably the world’s greatest living entrepreneur, Microsoft’s Bill Gates. In his 1999 book, Business @ The Speed of Thought he draws on a number of case studies, including reference to his own company, to show how e-communication is speeding up business processes and eradicating paper to the great benefit of some of the world’s leading businesses.

In fact many more companies have followed Bill Gates’ lead, recognising that e-communications have become the lifeblood of their businesses. And the latest news from Phones4u is that although the internal e-mail ban had some excellent effects such as eradicating 70% of personally generated e-mail messages it was not practical to abolish e-mail altogether. What the company has decided to do is to develop a thoroughgoing policy to define what is and what is not acceptable use of e-mail.

Moreover Phones4u never attempted to ban external e-mail because it was a crucial tool in communicating with customers, suppliers and those parts of the company based overseas. But if internal e-mail wastes time and money it pales into insignificance as compared with the effects of externally generated e-mail and risks that it poses 24hours a day 365 days a year.

Customer-profiling software company NCorp has conducted research that has produced some startling numbers. 6.3 million junk e-mail messages are read at work, in the UK everyday. They say that this equates to 500,000 lost man-hours of working time each work and costs UK plc over £300 million each year in lost productivity.

How accurate such numbers can be is difficult to verify but think about the state of your own inbox when you return from a two-week holiday. How many messages are waiting for you? How many are worth reading? How many are remotely relevant? How long does it take you to go through and delete them? Multiply all that by every person in your company and that’s the size of the problem. NCorp reckons that a 1,000-person company would need to employ three full-time staff to filter out the spam e-mail received over a one-year period. And the problem seems to be growing day by day.

As it stands at the moment, legislation governing the sending of unsolicited marketing e-mails is patchy and inconsistently drawn and applied from country to country, despite the obvious fact that e-mail is one of the most international means of communication. In the UK for example new regulations took effect on 11th December 2003 as the UK’s implementation of the European Directive on Privacy and Electronic Communications. The penalty for breaches is a fine of up to £5000.

On the face of it this sounds like government getting tough but the measures are widely regarded as lacking real punch. Firstly, they merely price the spammers entry ticket, should he or she get caught and prosecuted. Secondly, they have no international effect and large amounts of spam are generated outside of the legislation’s jurisdiction, for example in the U. S. Thirdly, the legislation applies to individuals and not to companies. The problem of corporate junk mail has not been addressed.

Meanwhile the cost of spam does not take account of the risks posed by viruses, worms and other e-mail borne software threats that can wreak havoc with internal systems and external service providers; all of which costs time and money. The Corporate IT Forum, an organisation which represents 140 of Europe’s largest IT departments including 50% of companies included in the FTSE 100 and 250 indices, reckons that the average cost of the Welchia / Blaster viruses and worms which hit the UK in August was £122,000 per company. This was calculated with reference to the cost of man time and necessary related expenditure.

A further area of risk and of cost, which many companies have yet to fully appreciate, is the legal obligation highlighted by recent corporate scandals in the United States. On the one hand company executives’ inappropriate behaviour and in some cases malfeasance was freely evidenced in e-mail exchanges, often to the cost of those executives themselves as well as their employers. At the same time there is an increasing body of law which defines what records and archive material of e-communication must be stored as part of best corporate governance practice. It will be surprising if legal requirements of this sort do not tighten with time and give rise to additional costs whether in terms of the cost of storage, of software, of compliance as well as of legal consequences in due course when incriminating evidence is discovered in such archives.

The situation is crying out for regulation and in the absence of any over-arching legal or other regulatory framework it comes down to businesses themselves to apply their own internal ethics and implement their own controls.

E-mail definitely begins at home and companies involved in producing e-mail control software are, not surprisingly, in the forefront of getting companies to think about their e-mail policies and how they control internal generation of e-mail as well as filtering in-coming spam.

The Corporate IT Forum, suggests various best practice measures:

  * Asking staff to allocate specific times to deal with emails
  * Minimising the proliferation of internal spam by a) avoiding the forwarding of attachments, b) use of organisation-wide information broadcasts and c) unnecessary copying-in of others.
  * Using intranets for internal communications
  * Promoting the mature use of email as a key business tool

What is clear is that companies cannot afford to be as free and easy with e-mail as they once were. E-mail is clogging up the time and processes of businesses rather than helping them run more smoothly. Ask yourself some questions: how much of your time and how much of the time of your staff and of your organisation is taken up with dealing with unnecessary e-mail? Can you and/or your organisation afford to it ignore this? Whose job is it to sort this problem out? Once the answers to these questions are clear then you may be well on the way to avoiding wasting time and money on e-mail whether internally or externally generated and making the best use of this marvellous communication tool.

Auditors in a spin?

Filed in: , corporate finance, business, accounting, italy, auditing, parmalat

Parmalat is likely to go down in history as Italy’s, and probably Europe’s Enron. Its impact will reverberate through political and financial circles for years to come and not least among audit firms.

Auditors in a spin?
Parmalat is likely to go down in history as Italy’s, and probably Europe’s Enron. Its impact will reverberate through political and financial circles for years to come and not least among audit firms, writes Richard Willsher.

Italy is one of the few jurisdictions in the world to have adopted a policy of audit rotation. The principle that auditors should be replaced periodically by another firm or at least another audit partner in order to ensure probity and that any wrongdoing is brought to light. Some would argue that such a policy didn’t work too well in the Parmalat case where skulduggery is alleged to have gone on for some time. Others, such Dottore Lino de Vecchi a council member of the Consiglio Nazionale dei Dottori Commercialisti (CNDC) the Italian Chartered Accountants body, argues to the contrary.

“From the Parmalat case we can see that some kind of audit rotation is a good thing. Deloittes was the newly appointed firm that took over from Grant Thornton in June 2003. Once they had had time to understand the situation they raised doubts and that started the process of discovery.”

He adds that, from his personal point of view, rotation is common sense. “If you know someone is coming along after you to check up on you and you know you are going to have to respond to them then the chances are that you will pay more attention.  At the same time if you know you are going to move on at the end of your period as auditor then you will be less inclined to close one eye on anything not totally above board. After all if you work with the same people at the firm you are auditing year in year out there is a risk that you become over familiar.”

EU confrontation
Meanwhile a battle is brewing in Brussels. Among proposals being considered by the European Commission is a suggestion that might require member states to adopt compulsory rotation either of lead audit partners on a particular account every five years or of the audit firm every seven years.  Perhaps unsurprisingly the Big Four accounting firms are resisting such a move. When asked for a view for the purposes of this article however PriceWaterhouseCoopers and KPMG declined to comment.

“To maintain the same firm in the job is completely useless,” comments Dottore De Vecchi. “And at the same time top audit partners don’t review the accounts anyway.” He goes on to say that one of the arguments auditors make against rotation is that it is expensive for the client for each new audit firm to have to get to know the business it is auditing. But may be it is a worthwhile expense if it prevents a scandal of Parmalat proportions although, he continues, there is little or nothing the auditors can necessarily do when faced with wilful wrongdoing as is alleged in the Parmalat case.

One change which came into effect in Italy in 2003 and which does seem to have been effective is the so-called “principle 600.” This requires that the main audit firm audits not only the largest part, i.e. 51% of the business by sales but also by importance to the business. In the Parmalat case pressure was applied by the Commissione Nazionale per le Società e la Borsa (CONSOB), the Italian securities regulatory commission, to observe the requirements of principle 600 as a result of which incoming lead auditor Deloitte took over a greater part of the Parmalat audit from Grant Thornton and in particular that of offshore funds located in Cayman Islands about which there was something of a black hole as regards information. Deloittes is reported to have shed light on these controlled offshore activities whereas Grant Thornton is alleged to have accepted without too much further investigation what little they received by way of information from Parmalat.

The future?
The question of what Italy and the European Commission will do next about audit discipline is likely to take sometime to answer. As we go to press submissions and deliberations are continuing in Brussels. In Rome two parliamentary commissions are currently examining a so-called “final text” of a legal draft which unifies several pieces of previous legislation and which will incorporate new, more stringent regulations for auditors in the wake of Parmalat.

In its submission before a commission comprised of representatives from both houses of the Italian Parliament on 20th January this year CONSOB made proposals that included greater powers for itself to revoke companies’ appointment of auditors. There was also a proposal to separate audit and other advisory roles performed by the same firm a la Andersen / Enron and increased powers to suspend auditors pending further investigations of possible malpractice.

The Italian parliament has so far delayed the debate and approval of the new legislation a couple of times but insiders understand that approval is thought likely before the European Elections on 12th-13th June this year.

In conclusion, audit rotation seems in the opinion of Italian experts to have been effective in brining to light the alleged wrongdoing at Parmalat, however others will still argue that it wasn’t able to do so soon enough.

Cloud cover

Filed in: , small business, it, technology, computing, cloud, corporate

Cloud computing is what you want it to be. So what can it be?

View the text version of this client publication

In brief: how cloud computing can be used by different types of businesses, including two case studies.

Building BRICS: Russia

Filed in: , hsbc, shares, natural resources, equities, russia, rating, bric, investment

While the natural resources of the world's largest country may play a key role in Russia's status as a member of the exclusive BRIC fraternity, don't be fooled into thinking of it as a one-trick investment pony.

View the text version of this client publication

One of a series of four BRIC investment articles to appear in HSBC’s “Liquid” client magazine.

Don’t bank on it

Filed in: financial director, euro, payment, eu, sepa

The Single European Payments Area was supposed to offer a more efficient payments system. But six years on we have yet to see the benefits.

View the text version of this client publication

This article is a summary of the state of play in the setting up of the Single European Payments Area.

Deals and lending slow to recover

Filed in: sme, corporate finance, aim, credit, buy-out, corporate, lending, deals

While there is widespread acceptance that higher taxes and public sector spending cuts are on the way, the big issue worrying businesses right now is constrained bank funding.

View the text version of this client publication

Deals and lending are slow to recover

While there is widespread acceptance that higher taxes and public sector spending cuts are on the way, the big issue worrying businesses right now is constrained bank funding, writes Richard Willsher.

It all depends who you are. The Bank of England’s April 2010 Trends in Lending publication and its Credit Conditions Survey for the first quarter of this year indicate that bank lending to larger businesses is increasing and the cost of borrowing falling. This is corroborated by the Association of Corporate Treasurers’ spokesman Martin O’Donovan who says that bigger company credit spreads have fallen and well-rated businesses have been tapping the bond markets successfully for some time now.

However for SMEs the reverse is true. Demand and the cost of borrowing are both increasing while terms are tightening. This is worrying for small businesses because it may inhibit their ability to grow and it was listed among the major concerns of business owners in Baker Tilly’s Owner Managed Business Report published last month.

Across the corporate finance scene as a whole, deals are being done. Researchers Dealogic point out that globally mergers and acquisitions have risen by 15% as compared to first quarter last year. In Europe transactions are being announced although much reduced in number and value as compared to 2006, 2007 and the first part of 2008.

Locally, corporate finance adviser Charles Whelan of HW Corporate Finance says: “We saw a pick up in deals in the first quarter. There is a realisation that we are not going to go back to the heady days of 2007 in terms of pricing and business owners are realising that life has to go on.” He points out that uncertainty surrounding the election has not helped in getting deals done and also there is genuine concern among some entrepreneurs about a potential rise in capital gains tax.

Management buyouts have staged a modest recovery, according to Nottingham University’s Centre for Management Buy-out Research, although secondary and even tertiary buyouts dominate the activity. This suggests private equity and bank funders are merely trading extant deals between themselves rather than putting new money into new buyouts. Christiian Marriott, a director of Barclays Private Equity, comments with some caution: “The strong start to the year ... may not necessarily signal a sustained resurgence in the UK buyout market, rather a more gradual recovery over the next few years as confidence returns.” A widely held view is that private equity houses are flush with cash raised for investment in 2006 and 2007 but are either not yet sufficiently confident to invest or unable to raise the leverage that they need to fully fund new deals.

There is some positive news from the banks themselves however. “There were not many [merger and acquisitions] transactions last year though we saw quite a few refinancings,” explains Mark Frettingham, HSBC’s head of corporate banking at the bank’s South Corporate Banking Centre. “Now most of those have been done and we are seeing more buoyancy on the M&A side .... We are seeing more players coming back into the market as confidence and optimism improves.” He says that vendors are less inclined to hang on to get top pricing for their businesses and that transactions are happening where there is a compelling imperative for them to do so. He does however sound a note of caution over those businesses that are dependent on public sector contracts where the outlook may be uncertain.

At Lloyds Banking Group, Andrew Fish, corporate finance director for the Thames Valley and the south east, says that although credit decisions on transactions are taking longer to come through, loans are now beginning to be made against cashflow. This is in contrast to the secured lending that many banks have insisted on since the financial crisis. “What I’m finding is that well-managed businesses have managed to maintain their profitability throughout the downturn and are now pretty well placed .... If they have managed to maintain their profitability and cashflow over the past three years then we can have confidence that they can carry on over the next three or four years.”

In late April Lloyds announced that it had provided a £4 million loan facility to AIM-listed Alliance Pharma to assist the firm growing organically and through acquiring additional product lines. But while doing such deals Fish says post- election uncertainty and the sovereign debt concerns could still knock business confidence.

For smaller firms the going is particularly hard. Adrian Alexander, Mazar LLP’s corporate finance partner, notes that bank lending usually has to be secured and leverage ratios have fallen. Banks, he says, won’t look at buyouts at the moment. “As far as M&A is concerned there are more buyers than sellers but strategic trade buyers with cash to spend are in a strong position.” He says that despite the recession there are fewer distressed businesses for sale than expected.

Alexander’s colleague Andrew Baxendine who covers the south coast including Southampton, Poole and whose territory stretches as far as Bristol reiterates that secured lending is certainly the flavour of the month. Generally lenders are looking for long-term contracts in industries such as property maintenance, the health sector and environmental testing, where cashflow looks certain for several years ahead. Businesses that tender for one-off contracts, healthy and well run though they may be, are finding it very tough to raise funding from banks. On the whole acquisitions have been small and few and far between but he emphasises that he frequently comes across well-managed businesses that are doing well despite the difficult trading conditions of the past couple of years. “On the whole the business climate is not too bad in our area”, he concludes.

All in all corporate finance in the region is emerging from a period in the doldrums. The larger, more creditworthy businesses are finding it easier to raise funding and buy businesses but for SMEs it is much more difficult. Banks and advisers are reasonably positive in their outlook but uncertainty over what the new government might bring and how business will be affected suggests that transactions are unlikely to pick up significantly until 2011.


Risky business

Filed in: , risk, risk management, personal investment, portfolio, investment

Risk assessment for private investors. This article appeared in HSBC's Liquid client magazine in spring 2010

View the text version of this client publication

No investment is entirely free from risk, and the size of the potential reward is usually determined by how much risk an investor wants to take. So have you thought about how much risk you might want to shoulder with your current and future investments?

Cash is definitely still king

Filed in: , trade finance, forfaiting, trade, forfaiting guidelines, cash

Some argue that forfaiting is a treasury product with trade finance added on to provide a margin. Rough, ready and perhaps cynical as this definition may sound, funding has proved more crucial to forfaiters over the past six months than probably ever before.

View the text version of this client publication

A discussion of the importance of funding in the forfaiting market in the wake of the 2008 / 9 financial crisis.

Training with purpose

Filed in: , trade finance, forfaiting, trade, ifa, risk, international forfaiting association, forfaiting guidelines, risk management, training

As forfaiting becomes more widespread and the rules become more formal, training becomes more important.

View the text version of this client publication

The article discusses the importance of training in the rapidly changing global forfaiting market.

Outlook 2010 Still crystal ball gazing?

View the text version of this client publication

The outlook for business and for restructuring and recovery in the 2010.

In brief:
Recession formally ends • General election to determine the course of government tax measures • Rates of inflation, interest andgrowth all low in 2010 • More insolvencies, more
unemployment likely

Baker Tilly Owner-Managed Business (OMB) Report 2010

Filed in: banks, sme, tax, small business, bank lending, growth, confidence, credit crunch, political risk, owner managed business

Baker Tilly spoke to 200 directors of owner-managed businesses (OMBs) in early 2010 to gather their opinions of what the current economic climate means for the nation’s OMB community. We asked our respondents about a range of issues, including the outlook for sales, margins and profits, their employment plans, perceived threats, risks and opportunities for growth.

View the text version of this client publication

Report overview
A majority of owner-managed businesses expect to increase sales in the next 12 months. They are confident, for the most part, that they can maintain their gross margin and increase operating profit.

This demonstrates a distinctly more optimistic outlook than our last report 12 months ago when the economy was in the depth of the recession. This seems to suggest a consensus view that the worst is over now.

However, business owners and directors have some very real concerns, particularly surrounding the risks of a downturn in demand, a lack of credit to support their business plans and that increased tax, tax complexity and regulation may damage their businesses.

Therefore while they are generally positive and upbeat about their business prospects for the next year, they remain apprehensive about how the economic climate may yet impact them. They are also concerned that government may pose new challenges for them in the act of cleaning up the debris, after the worst financial crisis to strike the business environment in the last three quarters of a century.

One step closer

Filed in: trade finance, forfaiting, ifa, international forfaiting association, uniform rules for forfaiting, uniform customs and practice for documentary credits, payment, urf, ucp

Uniform Rules for Forfaiting have moved a step closer following the third meeting of the Drafting Group in late January 2010.

View the text version of this client publication

One step closer

Uniform Rules for Forfaiting have moved a step closer following the third meeting of the Drafting Group in late January.
Richard Willsher

Following a third meeting of the Drafting Group in London in January, Uniform Rules for Forfaiting (URF) are a step closer. Dubbed the
UCP of forfaiting, the new rules are likely to affect everyone involved in the market.

Although a delivery date for a set of global rules to act as a standard for forfaiting is not cast in stone, the committee has in mind a broad target date of autumn 2011. However, Drafting Group Chairman Don Smith emphasises that, “We are working towards a quality product, not to a predetermined deadline just for deadline’s sake.”

The Drafting Group is comprised of ten members, five each from the International Forfaiting Association (IFA) and the International Chamber of Commerce (ICC). The ICC is the body which, among other things, publishes the Uniform Customs and Practice (UCP) for Documentary Credits, which has been the bible for letter of credit (LC) transactions since it was first conceived in 1933, and which has been though a series of revisions since then.

Based on market practice
URF does not have more than three-quarters of a century of evolution to build upon, but it does have as its basis three documents produced by the IFA over the past six years that were firmly grounded in long-term market practice.

The Introduction to the Primary Forfaiting Market, the IFA Guidelines [for the secondary forfaiting market], and the User’s Guide to the IFA Guidelines form the foundations for the rules, which will be quite different in style. This is because the Drafting Group has decided at the outset that they will not be written as an educational document, nor will they take the form of a commentary on the previous documents. Moreover, it is worth bearing in mind that they will be rules, not law, the same in status as UCP.

The aim is to keep it simple, using language that will enable words and concepts to be easily translated. “It comes down to a question of the language of the business,” says Smith. “This is one of the things we’re focusing on. As we work through writing the rules we use the language of the business. We want to ensure that we are not creating new terminology; that we are working with things that are acceptable to users in the business already. And while this is aimed at those already involved in the business, it will also be of great assistance to facilitating the future development of those new to it.”

In addition, the aim of the rules is to be of use to all market participants. “We are taking an approach of one set of rules for both primary and secondary markets. So the secondary market should benefit from having rules for the primary market. and the primary market should benefit because it will make instruments more readily saleable in the secondary market,” adds Smith.

Another of the key benefits the rules can bring is in the context of disputes. Although they are not laws and transactions will continue to be subject to governing law, they can provide direction to regulators and to courts. “Courts are generally willing to lookat rules of practice, particularly if those rules of practice have been incorporated into the transaction,” says Smith. “So if there is a transaction and it says ‘subject to Uniform Rules for Forfaiting’ and there is a disagreement and this ends up in litigation, I would expect that courts would look for assistance and guidance wherever they can find it. And if a transaction subjects itself to the URF, that they will go to the URF to see what it has to say.”

Looking ahead to the conduct of the market itself, it was one of the clear intentions of both The Guidelines and the primary market documents to provide guidance to newcomers to the forfaiting market. The Rules will codify market practice just as UCP has long done for LCs.

Smith believes that they will help facilitate a degree of standardisation of transactions that derive from areas such as the emerging markets of the Far East and elsewhere and so enable them to be structured and sold into the secondary market more easily.

He adds: “A good, solid set of rules should also lead to improved pricing for clients because not every deal has to be a one-off, start-from-scratch deal. This provides the facility to bring new products to the market in a regular, standardised manner, and the market will know that it is subject to URF and that a number of points have already been considered by the primary forfaiter.”

Another key benefit will be certainty. Removing uncertainties from the way in which transactions are structured, where risk lies and who is responsible for it, will promote the adoption of forfaiting by a wider banking community that is concerned with risk management. This may, in the long term, mean that larger transactions can be constructed with confidence and that turnover in the market will increase.

This is why URF will be welcomed by forfaiters and those who make use of the market to provide or receive medium-term trade credit. And this also suggests that, therefore, everyone in the market is likely to be affected by new rules of the type that have long lent discipline to the large, global LC business that is a well-tried and tested staple on the trade finance menu.

Richard Willsher is a financial journalist and trainer, perhaps best known for the seminars that he conducts with the IFA. He can be contacted by emailing

For more information about the International Forfaiting Association see: or e-mail

Forfaiting -  the last ten years

Filed in: trade finance, forfaiting, ifa, international forfaiting association, crisis

A look back at the events and challenges of the past decade in forfaiting.

View the text version of this client publication

Forfaiting -  the last ten years

Richard Willsher looks back at the events and challenges of the past decade in forfaiting.

The International Forfaiting Association’s (IFA’s)Rome conference from 2nd to 4th Septembert coincides with the Association’s 10 anniversary. It also coincides with the current financial crisis. But the history of forfaiting over the past decade has been one of encountering and overcoming one predicament after another.

“Every crisis has had an impact on the market,” says Waltraud Raderschall of Commerzbank AG. “For example, major events or reschedulings led to definite changes in documentary requirements for deals originated in the area concerned. They may also be the reason why market participants sometimes would look twice at documentation evidencing the claims they intend to purchase on a discount without recourse basis.”

These are just two examples Raderschall refers to from a forfaiting career that spans more than 20 years. As she prepares to step down from the IFA’s Board at this year’s conference after a six-year stint, she notes that the result of dealing with each period of turbulence in the market has been one of learning and adapting to new aspects of the business.

It became clear, however, with the arrival of new market participants who did not necessarily appreciate the way business had traditionally been carried out, that the forfaiting community had to decide whether it would become externally regulated or whether it would do the job itself. This led to the secondary market IFA Guidelines being drawn up. And though, adds Ms Raderschall, they are not used as they were originally intended, they have become a valuable point of reference.

IFA’s influence
The IFA itself has achieved much of what it was established to do ten years ago. Among other things, Article 2 of its 4th August 1999 Statute lists the aims of the Association as being to, “promote good relations amongst its members and to provide a basis for joint examination and discussion of questions relating to the forfaiting business; to issue rules and make recommendations regarding the conduct of such business; to provide services and assistance to participants in the forfaiting business”. All of these things it continues to do.

Market participants note that over the years the forfaiting market has seen a variety of instruments become popular and then lose their appeal. A number of standard instruments, including supplier credit structures, discounted letters of credit and promissory notes, book receivables, promissory note facilities and bundling transactions have came into vogue – and subsequently waned in popularity. But in the current crisis, there has been a definite withdrawal from more creative structuring and a return to letters of credit (LCs), once again. Some see this as a negative development.

Sal Chiappinelli, CEO of SFC Swiss Forfaiting, based in Zurich, laments this change in the market place. As he also prepares to bring to an end his six-year IFA Board term, he says that the move has enabled large banks to dominate because they can act as issuers or confirmers or advisors of credits. Their fees are assured and there is less scope for smaller, more agile and, perhaps, more creative players to perform a role in the market.

Meanwhile, he adds that the insidious influence of injunctions preventing payment being made under LCs has had the effect of weakening the strength and integrity of the credit instrument, as a number of forfaiters are currently finding to their cost. In this regard, he supports the recent co-operation between the IFA and the International Chamber of Commerce, which may lead to the establishment of rules for conducting forfaiting including, hopefully, receivables arising from deferred payment LCs.

Global reach
Geographically, forfaiting has continued to spread and embrace new areas of the world. There has been a continuous stream of new risk countries, additional sources of transactions and budding local forfaiting marketplaces. It has, for example, been ten years since Charles Brough, who heads forfaiting and trade finance in Asia/Pacific for UniCredit Markets and Investment Banking, moved to Singapore to start a forfaiting desk. Since then, Singapore has steadily grown into an active marketplace in its own right, spanning the Asian theatre.

Brough notes that in his early days in South-East Asia, half of the business he saw derived from financing Japanese exports to neighbouring countries. South Korea became an active market but then waned, as did Japan. But Chinese exports then became the principle driver for the market from about 2002 onwards.

He confirms that, for the time being, new business in the region, as in other parts of the world, almost exclusively takes the form of deferred-payment LCs. And he and others watch the current developments in both Kazakhstan and the Middle East with some concern as the consequences of the most recent crisis buffet the market.

But some things have remained constant throughout the past ten years. According to Waltraud Raderschall, the market remains small, but by no means exclusive. And it is still the case, in her view, that market participants are willing to help each other with education, in sharing information and getting through difficult times.

The IFA’s education seminars and annual conferences have extended this trend by enabling networking and new contacts to be made. This bodes well for the future and, as happened over the past ten years, the market will continue to adapt to events on the world stage and learn to do business in the changing environments they bring about.

What a difference a year makes.

Filed in: forfaiting, ifa, international forfaiting association, kazakhstan, lehman, 2009

A look back on a traumatic year for forfaiting and trade finance – and to the challenges that lie ahead.

View the text version of this client publication

What a difference a year makes

RICHARD WILLSHER looks back on a traumatic year for forfaiting and trade finance – and to the challenges that lie ahead.

There has rarely been a more difficult start to a year. 2009 opened in the aftermath of the collapse of Lehman Brothers and the paralysis of the financial markets that followed. Those first months of the year were very difficult ones for trade finance in general and for forfaiting in particular, yet, as the year closes, the picture seems much brighter.

It is noteworthy that during the year, the forfaiting market has shown an overwhelming preference for deferred, trade letters of credit. Financial, non-trade transactions with innovative structures and non- traditional documentation took a back seat. Trade finance was the name of the game.

“Although the deep crisis in the banking sector appears to be over, many banks are still going through difficulties, even now,” says International Forfaiting Association (IFA) Chairman Paolo Provera. “However, turnover in trade finance at a lot of institutions has increased during the year. While trade finance staff have, in general, been reduced across the board there has quite clearly been a need for banks to support their trade finance customers. Consequently, trade finance specialists are now in demand to support exporters. There is a demand for know-how. For these reasons 2009 has turned out, in the end, to be a good year for trade finance.”

The bounce back has been more pronounced in North America. “In the New York market we’ve had a terrific year,” says Brendan Herley, President of The Association of Trade and Forfaiting in the Americas (ATFA). “In this hemisphere in general, the leading banks, such as Bank of America, Bank of Montreal, TD Bank, Banco do Brasil, Itau and Santander, have beaten their budgets.

“Even the medium-sized players such as Mashreq Bank and National Bank of Pakistan have had a good year in the US by servicing their trade finance clients. Overall, a number of players have come back into the market as liquidity has increased. And they’ve started to fund transactions again, rather than being unfunded participants. In the past few months the liquidity premium that all banks were confronted with has reduced to almost insignificant levels,” he says.

In Asian markets it has been a similar story. “Margins are falling, especially in Singapore,” says IFA board member Charles Brough, Director and Head of Forfaiting & Trade Finance (Asia Pacific) for UniCredit. “There is a general view that Singapore margins are lower than other places because there are too many banks here, competing with each other for a limited amount of business. During 2009, the situation has loosened up and people have come back to doing trade finance. More banks are prepared to take trade risk now than they were.”

All good news, but Bernd Sooth, who leads trade and commodity finance at Frankfurt-based KFW IPEX-Bank, strikes a note of caution. “2009 was a challenging year for trade finance. A few very important markets in Eastern Europe crashed and, therefore, the appetite of risk management reduced for trade finance. The most important example was the Kazakh situation where the trade finance ‘golden rule’ looked as if it would be broken. Fortunately, BTA Bank has granted preference to ‘true trade’ finance debt. This is good news for trade finance and, for the moment, the overall market has become less stressed.

“However, Dubai may cause us problems again. It could lead to a further crisis because a lot of money has been lent by the banks. The past few weeks have been better and margins have come down a little bit and the appetites of the international players seem to be increasing. But I’m not really sure how the events in the Middle East and North Africa region will affect this,” says Sooth.

The events in Kazakhstan have been closely monitored by the IFA. In particular, the IFA’s Deputy Chairman and Legal Advisor, Sean Edwards, has played a vital role tracking developments with Alliance and BTA.

The recent completion of the Alliance trade finance adjudication process and the publication of BTA’s restructuring term-sheet show differing approaches to the treatment of trade finance creditors, with BTA behaving arguably less favourably towards them.

But in both cases the emphasis has been on showing that the financing is attached to identified imports or exports. The protection of trade finance’s preferred status may well have far reaching and positive consequences for the way in which trade finance is regarded by banks and regulators in future. Nevertheless, Dubai now casts a shadow over the financial markets with consequences, as yet, unknown for trade finance in 2010.

“For trade and commodity finance, 2010 will also be a difficult year,” continues Sooth. “The market may still be limited, and the capital and availability of liquidity at some financial institutions may also be limited. They may have to do some provisioning again and raise a bit more equity to have a buffer next year. I think, therefore, that the market will remain tight. I think that the first half of the year will be tough again.”

However, Sooth foresees good structured-trade finance opportunities for exports of soft commodities from Brazil, in particular, and suggests that European Union exports to China and India could well make the second half of 2010 very interesting for banks involved in trade finance in the EU.

Interestingly, Brough’s UniCredit forfaiting and trade finance team is moving from Singapore to Hong Kong next year, endorsing the hopes and expectations of many surrounding increased trade flows in and out of the People’s Republic. He stresses that trade finance banks will continue to have strong interest, post- Kazakhstan, in financing real trade. ‘Synthetic’ trade transactions will play a more limited role than in the past, believes Brough.

Not surprisingly, Herley is also bullish about the outlook for 2010. “As far as ATFA is concerned, the market will grow. We’ve got a lot of momentum because more and more people in the mid-sized corporate world need trade finance solutions. So the number of players in the trade finance market will increase. I would also add that the Chinese [banks] are here to stay and people should take note if they haven’t done so already.”

IFA chairman Paolo Provera concludes by saying that he sees trade finance increasing in 2010 as confidence grows among exporters enabling them to grow their overseas sales. “2010’s Berlin conference in September will be the big IFA event of the year, the first since the end of the crisis. The outlook is positive for exports, if negative for credit. Trade finance and forfaiting are still alive, despite the crisis…”␣

HSBC World Selection News

Filed in: latin america, hsbc, france, asset management, uk property, equities, asia, global, funds, fund

A newsletter for investors in HSBC's World Selection Fund

View the text version of this client publication

This issue contains a description of this multi-asset, global fund. There are individual articles on Latin America, UK Property, Asia and France. The article entitled “Impossible Dream” was not written by Richard Willsher.

MEAG:  risk management culture par excellence

Filed in: risk, fund managers, insurance, asset management, risk management, credit rating, simcorp, meag, reinsurance

MEAG, winner of the SimCorp StrategyLab Risk Management Excellence Award, is a risk management firm both by design and by culture. We spoke to Dr. Peter Schenk, MEAG’s Head of Investment Controlling, to learn about its approach to risk.


View the text version of this client publication

MEAG:  risk management culture par excellence

MEAG, winner of the SimCorp StrategyLab Risk Management Excellence Award, is a risk management firm both by design and by culture. We spoke to Dr. Peter Schenk, MEAG’s Head of Investment Controlling, to learn about its approach to risk
Richard Willsher

Among asset managers, MEAG may well be the envy of its peers. It manages more than €180 billion of assets, yet suffered no direct damage in the financial crisis.This is almost certainly due to the risk management culture at the firm and its heritage as part of Munich Re.
All but €8 billion of the assets under its management are from Munich Re companies and, as Dr. Peter Schenk explains, insurance companies do things differently. “The assets of insurance companies have to behave differently than assets belonging to other types of investors. The assets must back the liabilities of the insurance company. What is more, life insurance company assets have to be structured completely differently than those of a composite insurer or firms that reinsure storm risks. The risk content and asset behaviour mean that they have to match, or approximately match, this liability structure. Any deviation has to be de- liberate. This means that when you manage assets for insurance companies, you have to talk about risk. The liabilities are risks. Insurance companies deal with risk. Munich Re’s mission statement is ‘We turn risk into value’. So that’s where we start from. We have to understand the investor’s risk concept.”

While many other fund managers may be under greater pressure to focus on return, MEAG’s primary focus is on risk. More particularly, it has to understand very clearly the ‘riskless position’ of the investor. But what is risklessness? “For a private individual it may mean cash in a drawer to pay for tomorrow’s pizza,”says Dr.Schenk. “For an insurance company that knows, or expects from its models, that it will have to be able to pay certain claims in a year’s time, or, in life insurance, in 10 or 15 years’ time, your riskless position will not be cash, because relative to the liabilities, the return is quite different. To arrive at this riskless position you have to do certain calculations; you need to look at the asset and liability values at risk. You need processes that will meet the liability structure when it changes. Insured events may or may not occur. Claims may emerge or not emerge.” Modelling but also preparedness for the unexpected are key ingredients of the process. As Dr. Schenk adds without any hint of complacency, “A financial crisis is just another event that makes you think about your risk profile.”

It follows, then, that understanding and calculating risk at MEAG starts at the top of the firm. As well as heading the risk management function at MEAG, Dr. Schenk also plays a role in the integrated risk management function of Munich Re as a whole, where he reports directly to its chief risk officer. As an indication of the scale of the Group-wide risk management task, it is worth noting that in the half year to 30 June 2009, Munich Re generated gross premium income of €20.7 billion. Any new investment decision that is taken involves the full participation of the risk management function; it has to pass the risk management test.

“It is very important to remember that there always are two perspectives in our decision processes: the front office per- spective and the risk perspective, which are taken equally into account,” explains Dr. Schenk. “In order to come to a well- balanced decision, the people with an allocation idea must know that they will be confronted with risk perspectives. An example where we see this working in practice is our ‘New Product Process’. When an attractive new investment idea comes out in the market, the front office may be thrilled with it. The investor may be thrilled as well, because it may be a good instrument to reflect its liability profile. But we will only take up on it if we on the risk management side agree. We have to be able to understand the product. We have to be able to adequately model it in our systems. We have be able to access the data we need to feed our models, so that the output they give us is in the form of useful information.”

However, it would be a mistake to paint the risk management function only as an obstacle to doing business. The risk management culture has evolved much further than that and according to Dr. Schenk, “There are conflicts, but we have found ways to deal with them as a routine. What is necessary is intense com- munication and mutual respect. We work together in one building. We meet at lunch. Whenever issues arise, we sit down together and talk about them. We regard our role explicitly as business enablers. We supply the front office with tools that they can use for their allocation and try to assist in finding solutions when dealing with narrow risk limits and other restrictions. It helps if they see that we really do not want to hinder them and that we are not always risk averse, but that we also try to find ways for them to take on risk.”

Dr. Schenk sets out the first principles of MEAG’s risk management operation. The internal data has to be up to date and complete. It has to be stored correctly and securely so that all holdings are known at any time. The details of holdings must be transparent. The methods and processes for handling the data have to be able to transform it into information that is useful and can flow into the decision-making process. To achieve these things MEAG uses a centralised data backbone that includes SimCorp Dimension. These features are the basic building blocks, but it is dealing with the unusual situations that defines the risk culture at MEAG and tests how effective it is. As Dr. Schenk elaborates, “When special situations emerge, when there is a crisis or new business opportunities – something un- usual, you have to have all this data, and the processes and governance rules must be set up perfectly. And you need a risk culture that is able to change to another gear; to move into crisis mode, if you like. Then, when you do, the culture of the firm ensures that everybody really likes to work with each other. Everybody keeps a close eye on the risk system, but the gap between it and the special situation can only be bridged with communication and action, with everybody really doing not only what is in their job description, but whatever is necessary at that moment.” As Dr. Schenk adds, “This is a ‘top-down issue’ because everyone appreciates that understanding, managing and controlling risk is vital to our business and our decision-making process.”

It is also key to the process that the risk management function is staffed in a way that matches the demands of the business in all its complexity. For example, Dr. Schenk himself has a background in mathematics and computer science and holds a doctorate in economics. He notes that his colleagues in the Risk Management department are an interdisciplinary team. There are econo- mists, people with technical computer science backgrounds, but also physicists. In addition, the company sponsors them to gain Professional Risk Managers’ International Association (PRMIA) qualifications. Intellectual rigour and professional competence are essential prerequisites.

However, part of MEAG’s success in the current financial crisis is owed to the 2000-2003 equity bubble, which sharp- ened the firm’s resolve to enhance its risk culture. As Dr. Schenk explains, “We looked at everything: at what worked and what didn’t work so well. The problem is always interfaces between different departments; between the asset manager and the investor. And there we learned some lessons. One was that we really intensified communication. We intro- duced a mandate management concept which ensures that the tactical asset allocation not only fits MEAG’s view of the market, but also the investor’s overall situation. One example of what this concept entails are the regular asset/ liability management meetings now held between investors and MEAG. Another is the elaborate risk management process with well-documented tasks and areas of responsibility. Every objective that an investor has is quantified and cor- responding risk triggers are defined. When a risk trigger is activated, a predetermined process starts. This process always has to do with distributing and exchanging information, meeting together and deciding. Our processes now encourage people to make decisions.”

Today, for example, risk modelling, stress testing and reviewing and revisiting the stress tests and models on a regular basis are vital processes. And transparency is the sine qua non. It is one of the chief reasons that MEAG avoided the worst of the crisis, as Dr. Schenk points out: “If you have transparency, you can quickly manage an asset’s risk. You can sell it or hedge it faster than your competitors perhaps. Nobody could ever understand what a CDO of CDOs was, because you couldn’t drill into the data that really exposed the risk. If we were to buy these products and somebody asked us, “What is your exposure to US real estate, or to British credit cards?,” we couldn’t see the answer. We wouldn’t have the data. So we either wouldn’t permit such instruments at all, or would at least classify them as ‘non- standard’, which leads to strict limitation in volumes and special pricing and reporting rules.”

So in the bigger picture, considering the raft of new controls and measures currently under discussion, and in light of MEAG’s experience, is Dr. Schenk optimistic that products that are not sufficiently transparent will be banned or sufficiently de-risked in the future, so as to not pose a threat?

“It is not black and white, but altogether I’m not optimistic. Buy-side needs and sell-side creativity will always lead tointeresting constructions that somehow manage to comply with existing regulation. So it will always be the task of individual companies’ risk management to make a judgement about the degree of transparency,” he says. “The other thing is systemic risk. To prevent this we would need a global risk management system. A global risk management system means global data pools, a global early warning concept and global risk management processes linked to these warnings. This is now being thought about and discussed in all kinds of forums, but the challenges are huge. I think the desire is there, as well as the basic willingness to collaborate, but it will be cumbersome to arrive at concrete decisions and to accept jointly shouldering the pains risk management brings with it. I think the train is moving in the right direction, but if it is to reach its destination, many components have to interlock, and many parties who have not worked together so far will have to do so in the future. It is complicated, global, and there are lessons to be learned along the way. It might take a long time.”

Dr. Schenk concludes by saying that while the world has probably learned how to avoid another sub-prime crisis, it is the unexpected we have to prepare for. “To deal with the unexpected you need global risk management systems, a global risk culture and global risk governance, so that the relevant key persons will sit down together and make decisions, fast.” This, he says, will be very difficult to achieve on a global scale, but for MEAG’s own business, with the highly evolved risk management capability that Dr. Schenk describes, there is plenty of cause for optimism.

Richard Willsher is a London-based financial journalist and former investment banker.


MEAG (Munich ERGO Asset Management GmbH) is part of Munich Re. It provides advice on strategic asset allocation, risk management and asset-liability management, combined with professional investment manage- ment. It manages approximately €186 billion worth of assets on behalf of Munich Re and for third parties, including other institutions and public funds.

Munich Re is the world’s largest reinsurance group. It conducts both insurance and reinsurance business in an integrated model, with premium income of €38 billion, net profit of €1.5 billion and 44,000 employees around the world. ERGO, the group’s primary insurance group, has 40 million clients in more than 30 countries and earned premium income of €17.7 billion in 2008. ERGO offers a range of insurance products and is Europe’s leading health and legal expenses insurer.


The SimCorp StrategyLab Risk Management Excellence Award has been established by SimCorp StrategyLab for the purpose of rewarding and promoting best prac- tise within risk management in the global investment management in- dustry.
MEAG was named the 2009 winner by an international jury including Professor Caspar Rose of Copenhagen Business School, Professor Renée Adams of Uni- versity of Queensland, Professor and Director of SimCorp Stra- tegyLab Ingo Walter of Stern School of Business (NYU), and SimCorp‘s CEO, Peter L. Ravn. The assessment was based on MEAG’s achievements and devel- opments in the field of risk management in the period from 1 August 2008 to 31 July 2009.
SimCorp StrategyLab is the independent research arm of SimCorp. Read more about SimCorp StrategyLab and its Risk Management Excellence Award at

Credit ratings: IT in the spotlight

Filed in: risk, solvency ii, it, asset management, credit rating, rating, fitch, schroder, moody's

When Schroders Investment Management received a rating upgrade, the strength of its technology platform was a key factor in the rating agency’s opinion.

View the text version of this client publication

Credit ratings: IT in the spotlight

When Schroders Investment Management received a rating upgrade, the strength of its technology platform was a key factor in the rating agency’s opinion.
by Richard Willsher

In November 2008 Fitch Ratings revised the London-based asset manager’s rating from M2 to M2+. It noted, “The rating also factors in the extent of Schroders research resources and the solid risk management framework. The addition of the ‘+’ modifier emphasises strength in the company’s investment infrastructure and the technological platform with notable progress being made in data management and integration (...)”2.

Other recent upgrades where Fitch made specific reference to technology as a determining factor included Groupama Asset Management, RFM Investment Management, Rothschild & Cie Gestion and Robeco.

That Fitch should include technology in its set of five rating categories3 - company & staffing, risk management & controls, portfolio management, investment administration and technology - is not altogether surprising. As Andrew Cox, partner, and head of regulatory capital at actuaries and consultants Lane Clark & Peacock explains, “Data and information is the oxygen of any kind of insurance or asset management business. If you don’t know what business you’re running then how can you expect to run it well or to react to changing environments and situations? The ability to know what your business is and to know what your business is doing quickly is, we think, vital. And that in the end comes down to IT systems, most of all because there arevast amounts of information that any asset manager will need about all the holdings of different individuals, contracts that they’ve got in place etc. So the ability to be able to turn that vast amount of very detailed information into usable and useful summaries in a matter of days rather than weeks is pretty important.”

Moody’s InvestorsService takes this into account when evaluating and assigning its Investor Manager Quality ratings. “Moody’s believes,” it explains, “that the successful operation of an investment management firm relies also on the ability of the firm to set up an appropriate investment infrastructure, including the use of real-time portfolio management systems and various external data service providers to deliver targeted levels of portfolio management, accounting, shareholder services, and legal/control functions. In this area, face- to-face discussions are reinforced by on-site reviews.

It is also recognised that the failure of IT operations could threaten an investment management company’s ability to manage and monitor efficiently its offerings and provide adequate client services. For this reason, while stopping short of an assessment of enterprise-wide operations risk, we review the content and frequency of back-up systems as well as the tests of reliability of the key information feeds.”4

A spokesman for Standard & Poor’s notes that, “For financial institutions ratings, technology is not a major area of focus [for us]. Rather, we are more interested in the broader enterprise risk management of the firm (risk governance, credit risk etc.) and the degree to which senior management can answer our questions and present credible, timely management reports. Within this, we do also focus upon operational risk, which is important to asset managers, for example disaster recovery, how management monitor operational risk etc.”

The rating agencies then do not offer themselves as detailed analysts of data systems and technology platforms. It is quite clear however that they do attach a significant degree of importance to the technological underpinning of an asset management or fund management business when apportioning ratings. With hindsight it was inevitable that IT’s role in risk management and capital adequacy would become more important, even before the financial crisis beginning with the US sub-prime fiasco. Information and the efficiency of systems lie just below the surface of the criteria of Basel II for non-life business and Solvency II for insurance and asset managers with a life insurance aspect to them. There is a strong emphasis on risk management and controls and on operational risk in Basel ‘Pillar 1.’ And quality information and robustness of systems falls within the view of regulatory oversight in ‘Pillar 2.’

The stakes however have become considerably heightened in light of the recent volatility in financial markets. Anything other than a rapid response to marking assets to market and speedy quantifying of positions poses a reputational risk to an institution.

“Both Basel II and Solvency II are, in the end, about risk management,” says Andrew Cox, “and the first step to managing risk is identifying risk. The only way you do so is by knowing what your business is doing, what risks it’s running and what its exposures are and this derives from the IT system. There at the heart of it a good data system is a pre- requisite for good risk management.” He goes on to say that the UK’s Financial Services Authority is particularly keen to focus upon the integrity of data.

“From my personal experience in working with clients to help them with both regulatory capital and Solvency II,” concludes Cox worryingly, “it is remarkable how difficult it is to get information or even to find someone who actually understands what the information means. There is a lot of room for improvement. Different companies are at different levels. Above all people must not think that this is a solved problem.”

With the current pressure from regulators, pressure from markets and pressure on the models applied by rating agencies in arriving at their ratings, it looks inevitable that IT will be further thrust into the spotlight. Ratings criteria will have to place increased emphasis on technology, even more than they currently do and anything less will again draw criticism of the rating agencies themselves. In the rating process there will be winners and losers. Ratings will go up or down depending on how flexible, scalable, robust and quick their systems are in the way they respond to the stresses placed on their asset managers’ businesses.

Richard Willsher is a London-based financial journalist and former investment banker.

2     “...Schroders has achieved key milestones in its London operations with respect to its technological platform following implementation of SimCorp Dimension as the main accounting and repository tool. Risk management routines have been responsive to the volatile market environment and included heightened surveillance of certain risks…”.
3 ‘Reviewing and Rating Asset Managers,’ Fitch Ratings report, 29th May 2007.
4 ‘Approach to Evaluating and Assigning Investor Manager Quality Ratings to Asset Management Companies’, Moody’s Investor Service, 31st August 2005.

Preparing for UCITS IV

Filed in: fund managers, asset management, ucits iv, funds, ucits

European Parliament approval for the Undertakings for Collective Invest- ment in Transferable Securities (UCITS) IV has been greeted with enthusiasm by trade bodies and the asset management industry as a whole. Now everyone is asking how it’s going to work. This article gathers views on what industry professionals think the UCITS IV future may hold. by Richard Willsher

View the text version of this client publication

Preparing for UCITS IV

European Parliament approval for the Undertakings for Collective Invest- ment in Transferable Securities (UCITS) IV has been greeted with enthusiasm by trade bodies and the asset management industry as a whole. Now everyone is asking how it’s going to work. This article gathers views on what industry professionals think the UCITS IV future may hold. by Richard Willsher

If UCITS IV fulfils its promise then the package of measures it ushers in could make a very real difference to scope, scale and organisation of fund management in Europe. The European Funds and Asset Management Association has described it as ‘a new milestone in the creation of an effective single market for investment funds’. And its president, Mathias Bauer commented, “Efficiency and confidence are crucial if the investment fund industry is to remain competitive, in particular under thecurrent difficult market circumstances. UCITS IV will enable asset managers to deliver these efficiency gains, increase confidence in the existing UCITS framework and help promote the UCITS brand even more…”

Jarkko Syyrilä, of the London-based Investment Management Association is similarly upbeat. “The new directive,” he says, “will simplify the regulatory environment; create cost savings through economies of scale; give greater choice of investment funds to investors; and increase investor protection by making sure that retail investors receive clear, easily understandable and relevant information when investing in UCITS funds.”

Market practitioners agree that it will have significant effect on the market. “I think it will,” comments Adam Fairhead, global head of product development at HSBC Global Asset Management. “The master feeder arrangement could encourage a lot of consolidation of funds thereby cutting costs. The management company passport could lead firms to domicile all their resources in a single location instead of having them spread about. Fund mergers cross border should certainly be easier though there is no solution on the tax side, which is important.”

He adds that the structural change that UCITS IV will bring about will mean that businesses may alter the way they set up and organise their fund management operations though not what products they sell to investors or the way the sell them.

Jamie MacLeod CEO of Skandia Investment Group says that his firm “very much welcomes the variety of new initiatives being pursued with the development of the UCITS IV regime. However,” he continues, “while we have noted [a number of ] benefits… and the desire of regulators to work more closely together, there remains a lack of detail… The result is that we cannot make business decisions until these proposals have been fully worked through…”

Indeed many firms have a number of wide ranging business decisions to make regarding how they are structured, locally, cross border in Europe and globally. Aegon Investment Management among a number of others, is in the process of reorganising its business into a global asset management structure and Helen Webster Aegon’s head of products says that UCITS IV provides her firm with some of the tools to do so. At Standard Life Investments Phil Barker who is head of European Business Development adds that it will help reduce costs and help increase efficiency.

Richard Pettifer KPMG’s director of investment management identifies three key areas that firms will now be focusing on. The first is where to locate their principal management company. The second is where to put their master-feeder agreements and thirdly, where will fund administration be carried out?

Pettifer queries whether Luxembourg and Dublin will continue to grow as centres for all or some of these activities. Or will, for example, firms with head offices in say Frankfurt, London or Paris, place their management operations, and master-feeders in those centres and transfer fund administration to low cost centres elsewhere, such as, he suggests, Poland or India?

The counter to such suggestions lies in the deep pools of expertise and excellent regulatory environments that Dublin and Luxembourg already have in place. To replicate that elsewhere would take a great deal of time and cost. Moreover these two centres will compete tooth and nail to hold on to all aspects of asset management work because of their significance to their local economies both in terms of income and the employment of human resources.

Meanwhile before many firms can begin to address such issues KPMG’s Pettifer goes on to point out that they need to better understand their existing businesses especially where they are spread across several locations around Europe. “Just preparing an inventory and understanding their own cost structures will be a challenge for some firms,” he says.
In summary, UCITS IV’s impending implementation addresses a number of longstanding industry issues. But it also raises a number of structural and strategic questions that many firms are not yet necessarily well positioned to answer. Meanwhile those that are, could be best placed to seize valuable first-mover advantages in the new, Europe-wide investment management market.

UCITS IV – Key features
UCITS IV ushers in several measures intended to promote grater efficiency in pan-European management of funds:

␣␣ Management Company Passport – A management company located in one country will be able to set up and run a fund in another (A fund’s nationality will be determined by the country where it has been authorised);
␣␣ Supervision – a management company will be subject to the supervision and regulation of the country where it is based;
␣␣ Notification Procedure – quicker, more simplified regulator-to-regulator communication;
␣␣ Key Investor Information – to be simpler than the existing ‘simplified’ prospectus;
␣␣ Mergers – framework governing both domestic and cross-border mergers between funds;
␣␣ Master-Feeder Structures – allow funds to build economies of scale across borders.

UCITS IV – Timetable
Following approval by the European Parliament, the remaining timetable is clear and is unlikely to change:

␣␣ Level 2 detail is currently being worked through and Directive is due to be issued in summer 2010;
␣␣ Member states to adopt and implement rules which should be effective through the EU by 1 July 2011;
␣␣ Economies of scale across borders.

Richard Willsher is a London-based f inancial journalist and former investment banker.


The highly improbable

Filed in: risk, nassim nicholas taleb, catastrophy, improbable

Book review of Nassim Nicholas Taleb's "The Black Swan"

View the text version of this client publication

Bookshelf: The highly improbable
Date: 11-Jul-07 Richard Willsher, World Business

The world is a risky place - but by using the right tools we can reduce the uncertainty.
The world is a risky place. Its very nature is that it is subject to unexpected and catastrophic events. Yet, by using the wrong tools to assess risk, we choose to convince ourselves that things are less risky than they are.

The great thing about Nassim Nicholas Taleb’s The Black Swan is that it teaches us to look at risk and uncertainty in a different way, using approaches that distrust standard means of calculating or estimating risk. The idea of the black swan is that once it had been discovered, it highlighted how fragile knowledge and information had been among those who thought swans were always and necessarily white simply because they had never seen a black one.

Taleb defines a black swan as “something that lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries extreme impact and third, in spite of its out-lier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Much of the early part of the book is devoted to attacking states of mind and, more particularly, statistical techniques that ignore or insulate us from black swan-like phenomena. These belong to the province of ‘Mediocristan’, which is “dominated by the mediocre, with few extreme successes or failures” where “no single observation can meaningfully affect the aggregate”. This is an unrealistic place: in reality, life in general and business in particular are located in another country altogether, one called ‘Extremistan’. Here, “the total can be conceivably impacted by a single observation”.

It may be a weakness of the book that the author spends much of his time reasoning in the abstract and that too many pages are devoted to close, bookish argument. The busy business reader may lose patience and cast the book aside. Instead, I recommend you just skip the bits that bore you (and Taleb suggests as much himself from time to time) and cut to the chase. Just think: 9/11, Katrina, tsunami, sudden death among people you know, and the dominance of a Microsoft or a Google in their separate fields - all phenomena that virtually no one saw coming and if they had, did little or nothing about.

The point about Microsoft and Google is that black swans are not just negative phenomena, but also positive ones. If you arrange your business or your investment portfolio in such a way that it can benefit from black swans, should one float into your field of operations, then you can achieve extraordinary results that are way off the radar of ‘business as usual’ if your bet comes off.

The author unleashes his eccentric wit on lesser mortals from time to time, including bankers (“we humans have the largest cortex, followed by bank executives, dolphins and our cousins the apes”), analysts, economists, other philosophers, journalists, book reviewers and business executives. “Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom and the ability to shallowly perform on harrying schedules.”

This is one of those books that one is likely to go back to because it frees one from the shackles of standard thinking and institutionalised ways of estimating risk and reward. Moreover, the book’s disdain enables one to engage in healthy scepticism about the merits of being a corporate suit. The Catch-22, of course, is that black swans are unpredictable and so by definition we will never be able to anticipate their appearance and their impact. But this is to miss Taleb’s point. This is not a book about reading the future.

“We are quick to forget,” he writes, “that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.” For Taleb, life itself is the result of a series of acts of chance, the outcome of a coincidence of uncertainties. So if in measuring uncertainty, you ignore accident and unpredictable - and sometimes very large - deviations from the norm, then it is “like focusing on the grass and missing out on the trees”.

This is an exciting and frightening state of mind to live with. It is not comfortable, but in business terms it is to live in the real world rather than that circumscribed by planning and risk analysis based purely on looking into a rear-view mirror.

The Black Swan: the impact of the highly improbable, Nassim Nicholas Taleb, Allan Lane, £20, ISBN: 0-71399-995-0.

The highly improbable

Filed in: risk, black swan, nassim nicholas taleb, catastrophy, improbable

Book review of Nassim Nicholas Taleb's "The Black Swan"

View the text version of this client publication

Bookshelf: The highly improbable
Date: 11-Jul-07 Richard Willsher, World Business

The world is a risky place - but by using the right tools we can reduce the uncertainty.
The world is a risky place. Its very nature is that it is subject to unexpected and catastrophic events. Yet, by using the wrong tools to assess risk, we choose to convince ourselves that things are less risky than they are.

The great thing about Nassim Nicholas Taleb’s The Black Swan is that it teaches us to look at risk and uncertainty in a different way, using approaches that distrust standard means of calculating or estimating risk. The idea of the black swan is that once it had been discovered, it highlighted how fragile knowledge and information had been among those who thought swans were always and necessarily white simply because they had never seen a black one.

Taleb defines a black swan as “something that lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries extreme impact and third, in spite of its out-lier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Much of the early part of the book is devoted to attacking states of mind and, more particularly, statistical techniques that ignore or insulate us from black swan-like phenomena. These belong to the province of ‘Mediocristan’, which is “dominated by the mediocre, with few extreme successes or failures” where “no single observation can meaningfully affect the aggregate”. This is an unrealistic place: in reality, life in general and business in particular are located in another country altogether, one called ‘Extremistan’. Here, “the total can be conceivably impacted by a single observation”.

It may be a weakness of the book that the author spends much of his time reasoning in the abstract and that too many pages are devoted to close, bookish argument. The busy business reader may lose patience and cast the book aside. Instead, I recommend you just skip the bits that bore you (and Taleb suggests as much himself from time to time) and cut to the chase. Just think: 9/11, Katrina, tsunami, sudden death among people you know, and the dominance of a Microsoft or a Google in their separate fields - all phenomena that virtually no one saw coming and if they had, did little or nothing about.

The point about Microsoft and Google is that black swans are not just negative phenomena, but also positive ones. If you arrange your business or your investment portfolio in such a way that it can benefit from black swans, should one float into your field of operations, then you can achieve extraordinary results that are way off the radar of ‘business as usual’ if your bet comes off.

The author unleashes his eccentric wit on lesser mortals from time to time, including bankers (“we humans have the largest cortex, followed by bank executives, dolphins and our cousins the apes”), analysts, economists, other philosophers, journalists, book reviewers and business executives. “Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom and the ability to shallowly perform on harrying schedules.”

This is one of those books that one is likely to go back to because it frees one from the shackles of standard thinking and institutionalised ways of estimating risk and reward. Moreover, the book’s disdain enables one to engage in healthy scepticism about the merits of being a corporate suit. The Catch-22, of course, is that black swans are unpredictable and so by definition we will never be able to anticipate their appearance and their impact. But this is to miss Taleb’s point. This is not a book about reading the future.

“We are quick to forget,” he writes, “that just being alive is an extraordinary piece of good luck, a remote event, a chance occurrence of monstrous proportions.” For Taleb, life itself is the result of a series of acts of chance, the outcome of a coincidence of uncertainties. So if in measuring uncertainty, you ignore accident and unpredictable - and sometimes very large - deviations from the norm, then it is “like focusing on the grass and missing out on the trees”.

This is an exciting and frightening state of mind to live with. It is not comfortable, but in business terms it is to live in the real world rather than that circumscribed by planning and risk analysis based purely on looking into a rear-view mirror.

The Black Swan: the impact of the highly improbable, Nassim Nicholas Taleb, Allan Lane, £20, ISBN: 0-71399-995-0.

Exporting our way out of recession

Filed in: trade, recession, export, cbi, overseas

It sounds like a plan. Seize the moment while sterling is weak and boost income to the nation’s coers, in this, our hour of need. But it takes more than ␣ne Churchillian sentiments to sell goods abroad, writes Richard Willsher

View the text version of this client publication

Exporting our way out of recession

It sounds like a plan. Seize the moment while sterling is weak and boost income to the nation’s coers, in this, our hour of need. But it takes more than ␣ne Churchillian sentiments to sell goods abroad, writes Richard Willsher

The plan itself was set out in the third report from the Business, Innovation and Skills Parliamentary Committee published on January 12 entitled “Exporting out of recession.”This resulted from the Committee’s enquiry begun in February 2009. One of the highlights of the enquiry was the submission of Lord Jones, formerly leader of the Confederation of BritishIndustry(CBI). Hesaid:“I will tell you that the only way this country is going to get out quickly is to trade its way out of it. If Britain was a company I would be saying, ‘The fundamentals are okay, you’re not going to go bust, but this is going to be bloody’.”

The report’s recommendations listed 22 dierent areas and initiatives from the public sector that together would create an “export culture”. Among these, UK Trade and Investment and the Foreign and Commonwealth Office were praised for their work but the gist of it was that they and other areas of government could do more.

But even if all the suggested initiatives were to be put into action they wouldn’t bear export fruit overnight. And it is worth remembering that though the pound remained weak for much of 2009, the huge trade in goods de␣cit in November of £6.8 billion had worsened to £7.3bby the end of the year. Things had not it seems improved much by early February when David Kern of the British Chambers of Commerce was quoted in London’s Evening Standard as saying: “Given the favourable international environment for British exporters, with a competitive sterling exchange rate and global growth edging up, our overall trading performance is not strong enough…”

There have been some causes for optimism however. The ␣rst is that sterling has weakened further. As of March 8, it stood at 1.50 to the dollar and at 1.10 against the euro. A month earlier a survey from the CBI revealed: “Small and medium- sized manufacturers are starting to bene␣t from the relative weakness of sterling, with overseas orders stabilising after seven quarters of decline ...”

Further, a European Business Trends report compiled by BDO LLP found: “The weak pound has fuelled the UK’s export market to such an extent that British exporters are more con␣dent about future export growth than their counterparts in the Eurozone ...”

However as exporters have been telling us in the course of compiling this international trade feature, one weak currency doth not an export recovery make.

Many companies with overseas sales also have to shoulder increased input costs, for example from buying components or raw materials priced in dollars. The second issue is that if they are pricing their goods in sterling it is not easy to simply hike prices. Our largest trading partners, the EU in particular, have problems of their own to wrestle with. Invoicing in euros or dollars is more bene␣cial as it disguises the currency gains made by exporters when they translate those currencies into pounds. But as exporters will tell you, it’s swings and roundabouts. Over time margins can be richer or tighter, you have to go with the ␣ow to an extent and maintain reasonably stable prices in overseas markets.

A key misunderstanding is that exporting to the BRICs and other emerging markets is the great panacea. In fact UK exports to Brazil, Russia, India and China, though they are growing fast, do not account for much of the total. In the region of 75% of UK exports are sold to Europe and North America. That leaves a relatively small proportion to the rest of the world.

Another consideration is the fact that battered businesses need to recover their own balance sheets. As the BBC’s economics editor Stephanie Flanders points out in her “Stephanomics” blog of February 23, exporters are likely to be more inclined to earn fatter margins when they can rather than cut prices to boost sales. That makes good, more pro␣table, business sense.

Looking into the future, the big question mark hanging over UK trade is what will happen after the election. Though shadow chancellor George Osborne mentioned “exports” three times in his February 24, Mais Lecture at London’s Cass Business School there was no substance or detail. “We have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports,” he said, but this sounds more like the starter to an A-level economics question than a policy statement.

What is clear from speaking to exporters is that instead of bluster and vague political statements, exporting our way out of recession is all about real companies selling real goods and working the hard yards to their overseas customers’ doors. That is what our export success stories demonstrate. Yes the weakness of sterling is helpful but it is by no means the whole story.


International trade case studies

Filed in: it, recession, business, medical, healthcare, research, digital, transcribe

Case studies of companies in the South-east of England that are achieving success in overseas markets

View the text version of this client publication

Small market enjoys global potential

Scientifica manufactures a specialised product that is arguably the best of its kind in the world. Consequently, although its market is niche, it is also global, writes Richard Willsher.

Its equipment is used in electrophysiology – the study of the electrical properties of cells and tissues. It measures minute changes in voltage or electrical current. This is of vital interest to medics and researchers working in neurosciences and investigating diseases such as Parkinson’s and Alzheimer’s or seeking to understand the functioning and processes of memory. But the measurements are exceptionally precise. The company’s equipment can direct a probe into a cell to an accuracy that is on the scale of 1/5,000th of the width of a human hair.

The company, with research, development and manufacturing operations in Maidenhead and headquartered in Uck␣eld, east Sussex, began manufacturing
its own equipment 10 years ago. Over the next several years it developed a customer base among the top universities and research establishments throughout the UK but took its time before entering the international marketplace.

“We wanted to make sure our market in the UK was stable and the products that we were designing and producing ourselves were long-term reliable,” explains Mark Johnson, Scienti␣ca’s joint managing director and co-founder. “That way we could ensure that we could sell them into distant markets and be con␣dent that we could provide the technical support and back up.”

But because scientists and medics from dierent countries are investigating similar problems, the demand among them for such equipment was bound to be pretty much the same.

“Researchers face the same challenges wherever they are in the world,”says Johnson. “We have designed our products with focused help from our customer base. We really involve our customers to produce equipment that is as near perfect to meet their needs as we can make it. Also being relatively new boys on the block as compared to some of our competitors, we’ve been able to see what they’ve done and learn from them.”

Therefore Scienti␣ca understands its market very well and also pays particular attention to the excellence of its equipment and the uniqueness of its capabilities. “Our market may be 100,000 people worldwide. This is quite small but because of this we can identify our potential customers quite easily. And because they often collaborate and are a very close community of people, if you do a goodjob–andwedoagreatjob– they recommend our products to their friends and colleagues in their own countries and in others,” he continues.

His company now exports 40% of its £4 million of annual sales. Last year turnover grew by 30% and Johnson expects that overseas sales will soon exceed those in the UK. While he is currently focusing on selling into USA, Canada, Japan, China and Australia, Scienti␣ca’s products have already found buyers in Belgium, France, Germany, Israel, Italy, the Netherlands, Portugal, Russia, Scandinavia and Spain.

Scienti␣ca has established itself as the supplier of choice to the world’s neuroscience research community, which is a considerable achievement. It has also demonstrated how a niche product can ␣nd a global market, provided it reaches a thorough understanding of its customers’ needs and aims with scienti␣c accuracy to meet those needs precisely.

Details: Scienti␣ca 01825-749933 www.scienti␣

Digital efficiency grows worldwide
Post recession, many organisations around the world are cutting cost by being more efficient in the way they handle information. A Pangbourne- based business is helping them to do just that.

Winscribe provides Windows- based software for digital dictation, transcription, voice recognition and work␣ow management. The company is typical of many Thames Valley businesses. Its parent company is based elsewhere – in New Zealand in Winscribe’s case – but it handles its company’s sales to markets in Europe, the Middle East and North Africa (EMENA).

“The thing that sets us apart is the intelligent work␣ow,” explains Philip Vian, the company’s CEO for EMENA. “That’s what our software manages. When, say, a doctor dictates a patient’s notes, it’s what we do with the voice ␣le once he’s recorded it. Our system ensures that the voice ␣le is sent to the right transcription team, perhaps with the patient’s x-ray or other patient data, so that it needs the minimum amount of additional work and can be handled swiftly.”

The Winscribe system is used across a variety of dierent types of organisations in both private and public sectors. Healthcare is one, but also legal services, the police and law enforcement and various government departments. In addition to transmission of digital data, Winscribe has developed several speci␣c technical vocabularies so that it can apply voice recognition to the voice recording. This means that the recording is already transcribed enabling a secretary or assistant to merely edit it. This again increases efficiency.

The company has translated its software into French, Dutch, German, Polish and Spanish and has made inroads into those markets. But its big push at the moment is into the Middle East. It has also prepared an Arabic version, which is ␣nding many uses in the region, particularly in the healthcare sector.

“The Middle East is an emerging and very buoyant market for us,” says Vian, “because of the amount of money that most of the Gulf countries are now spending on healthcare. One of the best ways to improve healthcare is to reduce the document turnaround times so that the patients are seen much quicker by the next specialist or they are discharged much quicker.” He notes that “healthcare tourism” is now a booming business in some Middle Eastern countries
as an increasing number of patients from Europe and from Asian countries travel there for treatment. The company’s sales in the region have grown 30% year- on-year.

More than 350,000 people now use the Winscribe system worldwide and this is growing by leaps and bounds as whole organisations embrace more efficient ways to handle their data. In particular organisations emerging from recession are keen to become more efficient without adding sta to their payrolls. Vian says that in this way Winscribe is benefiting from the post-recessionary backwash and the business looks set to grow exponentially as organisations around the world see their peers and competitors becoming more efficient and buying Winscribe’s products in order to keep up with them.

Details: 0118-9842133


Seabourne Express Courier – strength in breadth

Filed in: heathrow, barclays, freight, seabourne, courier

Some businesses owe their success to laser-like focus on a particular niche expertise or seg- ment of their market. With Seabourne Express Courier, it is almost the opposite.

View the text version of this client publication

Seabourne Express Courier – strength in breadth

The recession continues but bad news does not tell the whole story. In the latest in our series of monthly articles we highlight another of the region’s business successes. Richard Willsher of The Business Magazine writes

Some businesses owe their success to laser-like focus on a particular niche expertise or seg- ment of their market. With Seabourne Express Courier, it is almost the opposite.

Seabourne is a holding company for a small group of operations in international express courier and freight forwarding both by sea and air. With headquarters near Heathrow, it has annual revenues of around £30 million and employs 200 people, including at its offices in Belgium, France, Germany, Holland and South Africa. As courier and freight forwarding companies go it is not unique but it plays to its strength in a way that has enabled it to prosper while many of its competitors have struggled.

“We benefit hugely from having an overseas subsidiary in Holland,” explains Nigel Hudson, Seabourne’s finance director. “The Dutch market has always been very good .... There are many major international warehousing companies and central distribution operations there so there is a lot of movement of products. Another factor is that it is easier to employ and pay people in Holland than it is for example in France and Belgium. In that respect it is similar to the UK.”

He adds, however, that one reason why the recession may not have bitten until January this year as far as Seabourne was concerned was because it has such a wide spread of customers. “The courier business as a whole is quite for- tunate in that there is a wide demand to move product and the range of customers is a broad cross-section across all industries. We have cli- ents from printing and publishing, lawyers, the financial markets, IT, recruitment, advertising, marketing – all sorts of industries. Even post 2000 when the IT industry crashed we suffered but fortunately it was only a small element of the sales ledger; there were other customers still there… This time though the recession of the last few months has hit us across the board.”

However before the recession struck, the com- pany had been on the look out to acquire other businesses. On August 1, 2008, it bought the Air Action Group of Companies, which added scale because it operated in similar areas and had offices in other parts of the UK as well as at Heathrow. Here Seabourne played to another of its strengths. “We demonstrated to our ultimate parent, C J Bourne Asset Management, that we could make money. That was an advantage we had over our competitors, we have wealthy backers. However, the company’s bankers, Bar- clays Commercial Bank, has also provided facili- ties and finance when needed and often at short notice. The bank was again critical in the Air Action deal. Nigel Hudson has a strong working relationship with Richard Palmer, his relationship director at Barclays Commercial Bank, and both are in regular contact with regard to the growth and development of the group.”

The availability of finance was critical but it has not been all plain sailing. Hudson says that while the acquisition has enabled the combined operation to generate more cash, it took until January this year to get the two operations under one roof and then a further six months to get a group-wide computer system in place. In addition, management controls have been critical. “We are now more confident that we can fight our way through the recession… We keep an incredibly tight focus on cash through credit control. We make sure that the debtors don’t slip. And we keep a very tight focus on costs as well. This way we should be able to cope with the recession while for other businesses that were already on the brink at the start of the recession it would be a different story.”

He also says that a continuing sales effort has also been crucial. “We rely on sales calls. We see it as a numbers game. The more calls you make the more chance you’ve got. The key to the courier business is new sales and new custom- ers. We incentivise our sales staff so that they can do well if they bring in new business. The way to grow organically is to bring in new business and look after existing customers. Ours is a massive, almost infinite market but you have to get out there and find new clients. Emphasis on customer service and the development of IT has been part of that, making it easier for customers to book and track shipments they’ve made.”

Hudson notes that financial analysis can be key to the well being of many businesses, not just the markets that his company operates in. “You have to look behind the figures in the profit and loss account. Look at the way you do the busi- ness. Look at the margins you’re making. Is the margin the true margin? What other costs are
in there? In our business, can routes or vans be combined, are vans coming back fully utilised? Are they taking the right routes? What is behind the numbers? I think it’s important that the finance department looks at and understands these things and provides meaningful informa- tion to the business.”

For Seabourne Express Courier getting through the recession has been about making the most of its strengths and managing its business rigorously. Its business is not unique but its ap- proach to getting through the tough times sets it apart from its competitors.

Seabourne Express Courier Group International Distribution Centre 01784-222900
Andy Simpson Head of Thames Valley Barclays Commercial Bank 07775-552125


The Dilemma facing every Business in the West

Filed in: employment, baby boom, human resources, business, age, discrimination, retirement

The fast approaching retirement age for the baby boom generation threatens huge knock-on effects for industry resources - not least in areas such as engineering where the average age of employees is much higher. So, can anything be done to alleviate this?

The Dilemma facing every Business in the West
Richard Willsher
11 Feb 2006

The fast approaching retirement age for the baby boom generation threatens huge knock-on effects for industry resources - not least in areas such as engineering where the average age of employees is much higher. So, can anything be done to alleviate this? Richard Willsher reports on the measures being taken to counteract a diminishing workforce
When a report appeared on the BBC’s website that the UK retirement pension age may need to rise, an apparently alarmed member of the public e-mailed the site: “Can anyone tell me what kind of jobs 67-70-year-olds are going to be doing?”

But his concern may have been unjustified. A raft of recent research is now pointing to the need for businesses to retain older workers, and those companies who do not risk losing a valuable human resource.

Year-by-year from now on, the post-World War Two baby-boomers will retire in droves. “Among countries in the European Union,” reports IBM Business Consulting Services - Human Capital Management group, “the number of older workers (50-64 years) will grow 25%, while younger workers (20-29 years) will decrease by 20% over the next two decades. And in the US, by 2010, the number of workers between ages 45-54 will grow by 21%, the number of 55-64-year-olds will expand by 52%, and the number of 35-44-year-olds will decline by 10%.”

The problem of the shrinking workforce is set to affect all members of the Organisation for Economic Cooperation and Development (OECD) with Italy, Japan and South Korea being among the worst affected over the next 50 years. Countries such as Mexico and Turkey will also experience an ageing workforce. Some industries will suffer more than others. Careers offered by certain sectors, such as engineering and oil and gas exploration, have failed to appeal to young people. The Financial Times reported in an article that: “At an estimated average age of 49, half the workforce [in the oil and gas industry in Europe and the US] is expected to retire in the next five to 10 years. The US nursing and teaching professions face a similar demographic crunch, as do aerospace and utilities companies.”

So it is a short leap of the imagination to conclude that the answer is simple; all you have to do is persuade people not to retire. But it is not as straightforward as that. Dr Wesley Payne McClendon, European partner at Mercer’s Human Capital Advisory Services, says that employers are faced with some difficult considerations.

Retaining older staff
While there are undoubted benefits, employees should consider the following:
• pay policies to retain staff may push up wage costs and produce greater pensions and health care costs
• there may be mismatches between salary levels and contributions / performance levels of some long-serving members
• it is often difficult to attract new talent - particularly in public utilities - given the traditional recruitment methods and persona of the industry
• reduced mobility between jobs and lower turnover within enterprises may reduce turnover costs, but it may also make the workforce less flexible
• resentment amongst younger people, who perceive their career paths are blocked or impeded by older generations
• retirement plans may be out of sync with organisational needs (e.g. provisions for early retirement when organisations need to retain the talent)
• there may be low morale among employees financially unable to retire, and
• increased absenteeism due to health-related illnesses and disabilities.


But there are definite upsides to retaining older staff as Dr McClendon also concludes. An organisation can increase intellectual capital, experience and likely technical expertise. Therefore, an older workforce may be more productive given they have more experience. Older workers are much less motivated by career progression and promotional opportunities and, therefore, comprise a more stable workforce.

Consultants such as Accenture, Mercer, IBM, Deloitte and Hewitt - who are all now consulting in this aspect of human resource management - have spotted that many businesses are not aware of the effect of ageing employees on their business. As a consequence, they will have no plans in place to address the loss of skills that will occur as their older workers retire.

“What we are telling clients they should do,” explains Mary Sue Rogers, global human capital management leader at IBM Business Consulting Services, “is the diagnostic which asks when will you have this problem, because every business in the Western world will have it sooner or later. Then what is the strategic plan for how you’re going to deal with it? Certain roles and jobs tend to have a higher age profile than others. So it’s about looking at the jobs you have in the organisation, what skills they require and how ageing and retirement is going to affect them.”

Then, she says, it’s a matter of coming up with creative ways to meet the needs of the organisation by offering older workers incentives to join or to stay with the organisation.
Why creative? Because older workers, while they may be well motivated, loyal and their skills valuable, may not want to work full-time. They may not need to if their finances are well organised or, as they get older, they may find a full week’s work over taxing. It is a question then of coming up with an employment package which is mutually beneficial to employer and employee.

Senior consultant Kevin Wesbroom, of Hewitt Associates, says: “The biggest single win-win is the flexible or phased retirement approach. This is the ability, as far as the individual is concerned, to work less than the full-time work schedule. Typically, individuals might be looking to do three or four days a week, still having a significant involvement where they can. They can use the skills that the employer wants but it suits their lifestyle requirements. As far as the employer is concerned, it suits him because he’s got access to skills and will not have to pay as much for them as for a full-time person. He gets a motivated individual who wants to contribute and, therefore, is good value. Often, older people still have a love for the job and may not be driven by the financial attractions as they are probably more financially secure.”

In its October 2005 report, Tackling Age Discrimination in the Workplace - Creating a New Age for All, the London based Chartered Management Institute (CMI) concludes: “There is demand from employees for more flexible arrangements in relation to retirement. This may take the form of flexible working arrangements - 68% anticipate working part-time towards the end of their career, and 24% of respondents even say that this would be the most important factor in their decision-making on when to retire. However, only 34% of organisations currently offer all older workers the opportunity to work part-time.” An acid test would be for readers of this article to consider whether their firm has procedures of this sort in place. Another would be to cast you mind over your own organisation and imagine what would happen if particular older staff retired and left the business. What would be the impact of the loss of their skills, expertise and knowledge of the business?

The consultants are telling us that balancing the needs of individuals with the needs of employees is the most sensible way forward. Successfully managed, it might, in due course, even render redundant the principle of a statutory retirement age which is looking increasingly inappropriate for all concerned. But that is another story and, in any case, the pace of employers in dealing with the issues of retaining the staff they need is likely to be faster and more effective than waiting for the resolution of politically-charged debates in many countries over public sector pension funding.

Richard Willsher is a financial and business writer with a background in investment banking.


Shattering the Glass Ceiling

Filed in: ftse, ftse100, equality, norway, corporate, women

Norway has used powerful legislation to break down the barrier to women occupying senior corporate jobs. Could this be the way forward for other countries?

Shattering the Glass Ceiling
Richard Willsher
11 Mar 2008

Norway has used powerful legislation to break down the barrier to women occupying senior corporate jobs. Could this be the way forward for other countries? asks Richard Willsher

As of 1 January this year, 40% of board members of Norwegian public limited companies must be female. The legislation, passed in 2005, required that companies had two years to implement the new rules or face being closed down. Then, only 12.8% of Plc directors were female. Now the figure is close to the target, with 85% of companies complying and the remaining ones being given two more months to shape up.

‘This is a question of democracy in Norway, of reaching a balance of participation in society,’ explains Ragnhild Samuelsberg, spokesperson for the country’s Ministry of Children and Equality. ‘This legislation is an important step towards equality between sexes and a more even distribution of power, and of wealth creation in society. This law secures women’s influence in decision-making and in the economy.’

The initial reaction of the Confederation of Norwegian Enterprise, the NHO, to such a draconian approach by the Government was predictably aghast. There were cries of alarm that businesses employing large numbers of people might actually be forced to close just because they might lack a handful of women at board level. Even now, Sigrun Vågeng, the NHO’s executive director, labour market and social affairs, rails against the threat of company closures as a punishment that is disproportionate to the crime, but importantly the NAO is fully supportive of the principle of equality in business.

Vågeng has been besieged by enquiries from the world’s press asking for comment on the measures and she concedes that Norway, a small country with huge oil wealth and with a history of social democracy, may be able to go about things differently than some other countries.

‘Women in Norway have always had a job outside the home. Almost everyone can find kindergarten places for their children. We have a high birth rate and high participation of women in working life. At the same time, the unemployment rate here is less than 2%, which means that all companies are looking for competent, highly skilled employees. When you look at Norway you have to look at our culture and infrastructure, and when you have so little unemployment you look for a high level of diversity in the workplace and you try everything to make sure you get the right person for the job. We desperately need more women in the private sector. We had to do something, so that is why we have turned this legislation into a positive. And even if I am against a quota-led approach and believe that you should be on the board because you are competent, not because you are a man or a woman, I can see that the discussion we have had as a result of this law being introduced has been good for us.’

The issue of women board members has been widely discussed elsewhere, but research carried out by Cranfield University School of Management demonstrates how few women participate at senior level in major listed companies. The Female FTSE Report 2007 finds that only 11% of FTSE100 directorships are held by women, which falls to 7.2% for the FTSE250. Female executive directorships amount to a mere 3.6% of all directorships; 3.9% for the FTSE250. The FTSE100 includes a number of international businesses such as Royal Dutch Shell, Anglo American, Unilever and BHP Billiton, so in many ways it reflects global practice. The picture looks even worse once you drill down into particular sectors. Although, for example, supermarket group Sainsbury’s leads the pack among the FTSE, with three female directors out of board of 10, in science, engineering and technology company boardrooms 92% of directors are male, according to the Cranfield research.

However, there are those who believe that quotas and statistics are the wrong way to go in the first place and that passing laws is not the solution. ‘Legislation is a rather simplistic approach to what is a rather complex issue,’ says Sarah Churchman, a human resource director responsible for diversity and inclusion at PwC in the UK. ‘It’s not about fixing women or treating them in a tokenistic way, it is about making everybody aware of the opportunity cost and the cost to business of ignoring a huge portion of the talent pool. And it is not that women are necessarily being excluded deliberately, it’s the subconscious stuff that prevails.’

Glenda Stone, CEO of Aurora Network, the women’s networking organisation agrees: ‘Quotas belong to decades gone by. If companies are smart and progressive, they are going to understand why a diverse mix on their boards makes good sense… Diversity of perspective, experience and wisdom brings a better product, so a diverse board is absolutely critical.’

‘Employers need to see the business benefits,’ says Marion Seguret, senior policy adviser to the Confederation of British Industry’s employment and diversity group. And she goes on to explain that they also need to understand the risks because if the board is made up of middle-aged, white males, the ability of a business to manage for a future where women among diverse populations are likely to be very significant stakeholders is likely to be impaired.

According to Dianah Worman, adviser on diversity at the Chartered Institute of Personnel and Development, it is the culture of the boardroom that has to change. She says that while women may not know how to work in the boardroom, they may also not be very attracted by such an environment. They may well be looking for a more flexible working environment where they can exercise their talents and also accommodate the other aspects of their lives. Churchman agrees and adds that corporate cultures are often old and difficult to change, so what is needed is not board numbers for women but change that meets expectations that women may have to do interesting, remunerative work that may not necessarily be the main focus of their lives.

So to legislate or not to legislate and establishing quotas in the Norwegian manner therefore misses the point. Joining the ranks of the ‘middle-aged white blokes’ that tend to sit on company boards looks distinctly outmoded. Worman says that a variety of approaches to change are necessary if companies are to tap into the 50% of educated talent that they may be under-using. The development of these processes is an international one and Maxime Cerutti, who is responsible for gender issues at Business Europe, the Brussels-based organisation that represents business confederations throughout the EU, says that each member country has its own approach, while the over-arching lead from the European Commission is to pursue an agenda of equal pay and equal participation in business. Stone summarises the position succinctly: ‘It’s about making work work for those people you want to hold on to.’ And for sure, Norway’s forthright approach has set a lot of people thinking about where they stand on the issue of women’s involvement in the upper echelons of corporate life.

Richard Willsher is a financial and business writer with a background in investment banking.

Innovate or Die

Filed in: it, china, google, kaizen, virgin, apple, innovation, japan

Innovation is no magic bullet. In the highly competitive, globalised business environment of the 21st century, it is not about coming up with just one great product or idea. If a business wants to survive, then new ideas and continuous improvement need to be hardwired to its foundations

Innovate or Die
Richard Willsher
18 Jul 2006

Innovation is no magic bullet. In the highly competitive, globalised business environment of the 21st century, it is not about coming up with just one great product or idea. If a business wants to survive, then new ideas and continuous improvement need to be hardwired to its foundations. Richard Willsher reports

Take three well-known brands: Google, Virgin Atlantic and Apple. They regularly grab the headlines in the business pages and also other parts of the media and, yet, it can easily be argued that these phenomenally successful businesses in very different fields did not start out by doing anything very different from their competitors. Google offered a search engine, but then so did Yahoo, AltaVista and many others. Virgin Atlantic flew passengers across the Atlantic in direct competition with many established carriers. Apple produced computers, and so did plenty of other companies.

What links the three of them is how they went one or more steps further than their competitors, and how they introduced new ideas and concepts that enabled them to vault over their competitors and take market share. Google’s search engine was based on innovative search technology. Virgin Atlantic offered a range of new benefits that others had not thought of (see box below) and Apple continued to occupy the technological and moral high ground as well as, more recently, moving into mobile entertainment with the iPod. Significantly, the iPod was a direction that was new for Apple and it developed a technology that raised the bar well above the then existing offerings, and forced competitors to follow.

“In the travel business, Virgin Atlantic took entertainment to great lengths in economy [class] - not just the choice they offered on the headset, but continual screening of classic BBC comedy on the screen in front (at a time when other airlines offered one film on an eight-hour flight). As if that were not enough, live entertainment - [such as] jugglers on certain flights to New York and back. Perhaps even more interesting was Virgin’s offering in their Business Class-Upper Deck. While most airlines tried to outdo each other on legroom, Virgin’s Upper Class offered neck masseurs, chauffeur-driven limousines, a bar you could sit at in mid-air - they treated you like a real high-flyer…”
Eating the Big Fish by Adam Morgan


All three have continued to innovate since their early days. They have established their reputations by coming up with exciting new things to attract and engender loyalty in their customers. This is not only part of their culture, it is a key characteristic that defines their brands.

So innovation has to do not only with what a business does but the way it does it. In his book, Eating the Big Fish, Adam Morgan explains and illustrates the concepts surrounding challenger brands. He cites Apple and Virgin Atlantic among the most famous challengers. These and others share key characteristics, such as occupying a position of thought leadership, challenging the bigger fish in their market - the larger, richer and/or more established brands like Microsoft or British Airways. Challengers are also slightly quirky, out of left-field, as compared with their bigger mainstream rivals. This, of course, points to continuous innovation in the way that they present and manage their public image.

Ongoing improvement is key to the Japanese management concept of kaizen. This established a method to reach down into every aspect of how a business is organised, particularly in manufacturing, so that every process and job and behaviour is subject to continuous scrutiny. This might mean, among other things, doing something better, faster, with less waste, more cleanly, to produce better quality or to aid the overall teamwork in the enterprise.Kaizen has become woven into the fabric of businesses that are leaders in their markets. And it points to a definition of innovation as being both what the customer sees and also what lies beneath the surface of a product in the way its producer operates its business.

But the need for innovation is more serious than an exercise in management theory or in branding and marketing. At a presentation to businesspeople in Milwaukee, Wisconsin, in March this year, the management guru, Tom Peters, starkly set out the reason why it matters to US businesses in the context of the increasing competitive threat posed by China. “The only way we’re going to survive is to innovate our way out of the box,” he said. “We’re down to one idea, which is innovation.” The thrust of innovation is not merely ideas, it is putting those ideas into action, getting innovative things done. As Jean-Philippe Deschamps, professor of technology and innovation and management at the IMD business school in Switzerland, put it: “It is companies that innovate, not academics.”

And Professor Deschamps points out that some businesses are better at it than others. In the automotive sector, he refers to Ford and General Motors being in a “dismal state” as compared with Toyota, whose work in developing hybrid, fuel-efficient engines has been massively successful. In retailing he compares Marks & Spencer’s traditional offering with highly successful and innovative players such as Zara and H&M. In aviation, the success of the low-cost carriers such as Easyjet and Ryanair stands out against the long-established flag carriers that are weighed down with institutionalised practices and are having to play catch-up in the cheap flight environment. In financial services, on-line banking and insurance providers have threatened the market shares of the high street banks and large insurance companies, forcing them to consolidate or develop on-line channels in response.

When it comes to how companies innovate, Professor Deschamps points to people as the vital ingredient. Especially so in businesses with rigid, institutionalised structures where employees are forced to adopt silo mentalities, caring only about their own narrowly defined part of the operation. This, he says, is particularly prevalent in large financial institutions. This view is shared by Tom Peters, who advocates “loathing systems”. “Treat every enterprise system, every established procedure, as guilty until proved innocent…”

In order to do this, people need to be brought in from outside the business who are, by nature, predisposed to challenging the established order, who bring with them experience from other environments and who do not match the classic profile of existing employees. These people are likely to introduce change and a new way of doing things. Also significant is the extent to which major firms in industries such as pharmaceuticals, medical technology, IT and telecoms often innovate by contracting out their research to smaller, fleet-of-foot firms or acquiring either ideas or businesses that can bring them new products or capabilities. They accept that they cannot produce the sort of innovation they need by themselves, or they may simply redefine themselves as conduits to market rather than, say, researchers into ground-breaking drugs or software.

The end result of accepting the need for continuous innovation is that the size, shape and rationale of traditional businesses have to change and/or be restyled and/or be presented in a different way. The bottom line is that the greatest risk facing businesses is that of not innovating fast enough or radically enough. Standing still is not an option; it is a matter of innovating to survive.

Richard Willsher is a financial and business writer with a background in investment banking.

Endgame at the Exchange

Filed in: deutsche börse, new york stock exchange, london stock exchange, lse, euronext, omx, nyse, instinet, nasdaq

Is it the beginning of the end for local and national stock exchanges?

Endgame at the Exchange
Richard Willsher
01 Jun 2005

Is it the beginning of the end for local and national stock exchanges? asks Richard Willsher

2005 has already witnessed considerable corporate activity in stock markets on both sides of the Atlantic. Not only in the day-to-day nip and tuck of securities trading but in the very structure, technology and ownership of the markets themselves. The London Stock Exchange (LSE) has received rival bids from Germany’s Deutsche Börse and Euronext, the European cross-border exchange. Euronext has also joined with the Milan based Borsa Italiana to bid for MTS SpA, which operates the Italian bond trading platform. In the Nordic area, OMX in March acquired the Copenhagen Stock Exchange to add to its Helsinki, Stockholm, Riga, Tallinn and Vilnius exchanges. The New York Stock Exchange (NYSE) has announced that it intends to merge with electronic trading company Archipelago Holdings Inc. Also in New York, NASDAQ Stock Market Inc said that it had agreed to buy Reuters’ Instinet, the electronic communications network and institutional trading business.

These moves add to, and accelerate the trend towards, integration and consolidation of the world’s securities markets as widely predicted for some time. In 1999, Dr Patrick Dixon, the British futurist and thinker on global change, wrote in a Time Magazinearticle entitled ‘The Future of Stock Exchanges’: ‘There is an unstoppable drive to create a single pan-European exchange’ The industry is in for a huge shakeup’ Global trading around the clock will soon be a reality. We must take hold of the future, or the future will take hold of us’’ Four years and share price crash later, research by IT sector analysts Gartner (1) concluded: ‘Integration and consolidation will transform the roles of financial exchanges, clearance and settlement organisations and market data vendors by 2008.’

Their predictions look to be taking shape and an unstoppable momentum has gathered pace. These radical changes are being driven by pressure in several key areas of operation. The first is the need for greater liquidity. The more securities an exchange trades, the greater its economies of scale and the cheaper it can deliver its services. The second driver is for global reach. A glance, for example, at the stocks listed on the LSE and the origin of new issues over the last decade paints a picture of an international exchange to which issuers from all over the world have come to list their shares and raise capital. Clearly, a country the size of the UK could not on its own sustain an acceptable rate of growth in the number of securities listed on its principal exchange.

A third driver is towards efficiency. Investors, whether they are institutions or private investors, are constantly seeking swifter and cheaper dealing arrangements, as well as higher levels of performance in settlement, reporting and information provision. And this leads to a fourth driver, the need for exchanges to make money through alternative revenue streams. The monopoly services that they once traditionally delivered have been eroded by other providers and other technologies. On-line dealing services are playing the role formerly performed by traditional stockbrokers. Rival settlement systems are fighting for market share. Various information providers are now delivering price information and other data. Stock exchanges have to figure out how to make more money. And all of these fields are not confined by time or geography as traditional local or national stock markets have been.

The big questions are: What are they confined by? Why haven’t we got a single global stock market yet? And can we see who the winners and losers will be in the battle for supremacy?

In Europe, Ralph Silva, a senior analyst at Tower Group, sees a variety of cultural and other barriers to integration, despite the increase in cross-border moves by European stock exchanges, such as the creation of Euronext and bids for LSE. On the one hand, there are difficulties in integrating technology platforms, especially as the quality and efficiency of their systems can differ significantly from one market to another. Local regulation, legal practices, and accounting regimes all inhibit cross-border consolidation. He adds that the preference for using a local exchange, both among companies raising capital and for investors, is a strong driver against full-scale integration. Rather, he sees continent-wide systems providing a backbone for local access being a likely future outcome. A single European exchange is not a realistic option, he believes.

A different game
In the US the game is playing out in a rather different way. Gartner’s David Furlonger and David Schehr wrote in their commentaries on the recently announced moves involving NYSE and NASDAQ: ‘If both mergers go through, the combined companies will control 90% to 95% of all US equity trading. How much does a level playing field promote competition if there are only two players? While it might be logical to open up the market to foreign exchanges, this is not likely to happen as long as the US maintains its highly protectionist attitude towards the equity markets.’ There seems to be little role for any of the US regional exchanges in this scenario other than to seek merger opportunities. They see the end of the NYSE’s ‘outmoded’ outcry trading model, but also see ‘a number of cultural, political, regulatory and technical integration issues [which] threaten the success of this merger [with Archipelago.] In the end, NYSE and NASDAQ will ‘‘tear at each other as a price war develops, each with its own advantages and disadvantages…’

So competition will be fierce on both sides of the Atlantic but not because of the limits imposed by technology, rather because of other intervening cultural factors. And no one can afford to be complacent. The mighty LSE says it is not averse to a merger, which may be code for its recognition that no stock exchange can afford to be an island anymore. In its 7 March statement following the withdrawal of the pre-conditional offer by Deutsche Börse, the Board of the LSE said: ‘As previously stated, the Board believes that a combination, on the right terms, of the London Stock Exchange with another major stock exchange could be in the best interests of shareholders and customers. The London Stock Exchange remains willing to continue discussions with Euronext about the possibility of an offer that fully values the London Stock Exchange and is capable of implementation’‘

We do not yet know which stock market model will win through, although commentators offer a variety of possible successful business models, technology platforms and scenarios. They also have half an eye on the booming Asian markets, where demands for both business capital and accommodation of investor appetites are expected to burgeon. All of the major trading platforms are scouting the region for opportunities to roll out their offerings and scoop the opposition.

So how does a visionary see the future playing out? Dr Patrick Dixon, speaking to the writer last month, says the fundamentals of the situation he described in 1999 have not changed and have not been adversely affected by the intervening bust. What is holding up further consolidation are ‘regulation and emotion.’ ‘We are now in a totally virtual world where we can trade in almost every market using the internet. Multiple listings by large corporations in different markets makes no sense, nor do the regulated hours in different markets. Further fundamental restructuring is inevitable and soon we will be able to buy and sell everything on the internet [including securities] 24 hours a day, just as we can currently do on e-bay.’

It seems, then, that there is an accelerating trend towards global stock market consolidation and integration, but whether this is the end of the beginning phase, or the beginning of the end, still remains to be seen.

(1) The Stock Exchange of the Future by Peter Redshaw, David Furlonger and Ralph Silva. Gartner, 19 November 2003

Richard Willsher is a financial and business writer with a background in investment banking.

Blip, Bubble, Burst

Filed in: ftse100, china, close brothers, warren buffett, private equity, 2007, mortgage

Was this start of a major equity market downturn after the long bull run?

Blip, Bubble, Burst
Richard Willsher
07 Jun 2007

Recent turmoil in global equity markets suggests something is happening, but what? Richard Willsher investigates

In late February the Chinese stock market took a sharp, one-day dive. This set off a series of tumbles in major stock markets around the globe. The FTSE100 fell back by almost 2.5% and the Dow by almost 3.5%. It did not stop there. For several days the international markets had the jitters and continued on a downward path. Was this the start of a major equity market downturn after a long-lasting bull run? Or was it merely a blip, a temporary interruption after which normal index appreciation would resume? Or, then again, was it the first tremor stemming from something deeper and more fundamental beneath the surface of the global economy?

Looking at the trend lines of the world markets, it now seems to have been a mild aberration. Nothing as strong or as potentially cataclysmic as the ‘market adjustment’ of May 2006. And index watchers and stock price commentators can often be accused of market myopia of the type criticised by the veteran world’s greatest investor, Warren Buffett, who has always advocated the long view. But then it all depends where you start to draw your trend line or when you bought your stock.

‘Markets are always vulnerable to major corrections,’ comments Mike Lenhoff, chief strategist at Brewin Dolphin Securities, a UK stockbroker and the country’s largest independent investment manager. ‘And this one occurred very rapidly. It reminded me of the one we saw last May, which was more serious and lasted much longer. But the rebound we saw from that volatility took the market to new highs.’ He is generally upbeat about the buying opportunities that market corrections bring about, but sees markets continuing to be vulnerable, especially in the light of rising interest rates in Europe, including the UK, and in the US, and the drop in the earnings of major corporates after a four-year period of strong earnings growth.

Both of these point towards broader economic performance and factors beyond the immediate sphere of stock market influence. It is some of these issues that could drive a blip to become a more serious burst bubble or trigger a recession, particularly in the US.

For example, rising interest rates in the US have contributed to a severe crisis among those most at risk from over-borrowing. The result: more than 40 lenders, in particular mortgage lenders, to the sub-prime sector have collapsed or filed for Chapter 11 protection from their creditors. The number of personal bankruptcies has shot up. The same is true in the UK where the number of individual voluntary arrangements (with personal creditors) and small business bankruptcies has burgeoned. Unsurprisingly, a number of accounting firms are building up their insolvency practices, while corporate finance houses are gearing up their restructuring teams.

Research by Close Brothers, a leading City corporate finance house with a strong restructuring advisory business, shows that many corporates across Europe are very highly leveraged and that a great deal of this debt is poorly rated, meaning that the probability of default was relatively high to begin with. Andrew Merrett, a director of the European special situations group at Close, says: ‘There is a huge escalation in the amount of debt companies are carrying. Many of these loans are equity by another name, and have been made to borrowers of poorer credit quality. This in itself will cause default rates to rise whatever happens in the wider economy. But, with the upward pressure on interest rates, these structures will be severely tested. And there’s going to be fall-out.’

A similar fall-out looks probable in the private equity industry where, increasingly, higher earnings multiples are being shelled out for business acquired by private equity funds. But, significantly, these deals have also been fuelled by high proportions of debt to equity. There are now concerns among regulators, both in the US and at the UK’s Financial Services Authority (FSA), that the failure of a major private equity deal is now ‘inevitable’. This, the FSA believes, may pose a risk to the banking system, and in November 2006 it published Private Equity: A Discussion of Risk and Regulatory Engagement, listing no less than six reasons why it fears that private equity now poses a significant threat.

Another series of significant events in the private equity sector may be about to occur. Some of the world’s major firms, including Blackstone, Kohlberg Kravis Roberts and the Carlyle Group, among others, are believed to be considering public listings, a sign that may be interpreted as the smart money cashing out at the top of both the private equity boom and the stock market upswing.

Soaring commodity prices may also be ripe for fall. Though when this is likely to occur is uncertain, as commodities analysts speak of a supercycle in certain commodity markets which tends not to correlate with stock market cycles. However, falls in commodity prices would be likely to aid corporates and national economic indicators. In addition, there are some other factors which may work against the risks of downturn too, according to Lenhoff. ‘The good news is that you’ve got valuations in equity markets that are still very favourable… it is not as if equity markets are overvalued… they are still attractively valued. Secondly, you’ve got a lot of corporate activity, a lot of mergers and acquisitions and that has been a very supportive feature behind the strength of equity markets and, indeed, their recovery from that sell-off that we saw at the end of February.’ He adds that both of these factors could be negated by a global recession, however.

Faltering demand
Meanwhile, the US economy is slowing down and massive amounts of debt are fuelling consumer spending, while the US personal savings rate has fallen significantly. Over the last several years it has been US consumers who have driven demand in the US, which is now faltering. However, the Federal Reserve chairman, Ben Bernanke, expressed confidence at the end of February when he said: ‘My view is that, taking all the new data into account, there is really no material change in our expectations for the US economy… we are looking for moderate growth in the US economy going forward’. Remarks by his predecessor, Alan Greenspan, that recession in the US was ‘possible’ appeared to counter this view. A 1 March report from economists at the Royal Bank of Scotland (RBS), entitled Understanding Recent Market Turbulence, commented ‘it is still early days and further volatility is possible given the potential for downside surprises in upcoming US data releases’.

What effect all this will have on investors’ confidence over the longer term, say through the rest of this year, remains to be seen. The RBS report says that investors may become more risk-averse and this will tend to cause falls in equity markets, especially while interest rates are high. Other economists, notably at US financial services group Wachovia and the London-based Schroder Investment Management, have predicted that the US will have a soft landing in 2007 as interest rate reductions cushion the slowdown. Meanwhile, there is one factor above all others that may support markets going forward and that is cash. There are still massive amounts of cash from wholesale investors, from corporates and from the central banks of the Far Eastern economies. At the very least this cash needs a home and, as long as the pressure to invest it exists, the financial markets will be the beneficiaries, whether in equities or, more likely, highly-rated fixed income instruments. This wall of money on its own may act as a substitute for ebbing confidence, at least in the shorter term.

Richard Willsher is a financial and business writer with a background in investment banking.

Centrix success based on principle of divide and rule

Filed in: sme, small business, it, barclays, ftse, recession, credit crunch, centrix, s&p

SME case study for Barclays Commercial

View the text version of this client publication

Centrix success based on principle of divide and rule

Despite some positive statistics, businesses are still suering and unemployment continues to rise. But bad news does not tell the whole story. In the latest in our series of monthly articles we highlight another of the region’s business successes. Richard Willsher of The Business Magazine writes

Newbury-based IT consulting firm Centrix decided to split its business in two in early 2006. This was an important move, especially as its products and services were well suited to the recession that was to follow.

Advising mostly FTSE 100 and S&P500 firms, Centrix Consulting helps its clients look at what their businesses want to achieve and what their IT operations can do to make
this happen. “It joins the two up,” explains Jon Fuller, joint founder and chief operating officer. “It’s about speaking to a business, finding out what they want to achieve
from the business and building the bridge between that and what they can get out of IT. How you plan it, how you organise it, how you organise your decision making and your governance, so you get the right decision made.”

A key aspect of what Centrix is able to bring to its clients is how to save money on their IT budget while making it more effective. “Some of our larger clients haven’t had to worry about money for many years,” Fuller explains, “but now they are thinking that they have to be a bit more practical. And the first thing they want is synergy across their operations and their IT across all parts of their businesses. It’s about IT strategy and at the moment it’s all about cost saving.”

In order to deliver the answers to these questions the firm devised some software that is able to discover and meter all of the IT applications that a firm has in its IT estate. And in larger firms there can often be many thousands of these. Many are often effectively dormant and unused. The software works out who in the firm is using the applications, when and for how long. Once this information is to hand it enables the costs of using the applications to be worked out and so provides the client with the opportunity to make better use of those that are useful to the firm and to discard those that have no purpose. The result is that the firm can prune back its computing usage, making it healthier in the process and cutting cost. The software also enables clients to cut their carbon footprint. Leaner computing means less heat generated and emitted.

Centrix was running its successful business when it decided to make the big split between consulting and developing and selling software. “Now, more than three years on, the consulting side focuses purely on consulting and the software side focuses on selling software,” says Fuller. “There is no confusion. People are not trying to do two things and doing them badly. They are now only focusing on one thing.” And as a package Centrix’ software offering offers two benefits which exactly match the needs of businesses at this very demanding time. On the one hand it saves them money and on the other it enables them to audit their IT operation which, across a number of sectors such as financial services and energy generation and distribution, is now coming in for increased scrutiny from regulators. Fuller says that of the 35,000 users that are now using the product a large proportion have bought it because of audit requirements.

Centrix’ businesses, both audit and software have grown rapidly over the last couple of years while many others have suffered. The company now has 80 employees and expects to take on another 40 in the next 18 months as it grows its sales in the UK and expands into northern Europe and then the United States. Fuller is confident that both sides of the business will do well and that now that Centrix’ software operation has been given its head as a separate firm it can fulfill its vast potential. But what does Fuller think has been the secret to Centrix’ success?

“I think it’s about standing in the shoes of your customer. What does that customer really need at the moment? You need to spend your time researching that. Get very close to your customers. We run executive briefings with the consulting side where people talk about what it is they want to talk about. So we learn more about what it is they need. And on the software side our customers come in to our customer councils and we ask: “What is it you need now? What is it you need next?” It’s like a focus group. We set this up straightaway with the first customers and they like to be a part of this. Once they’ve bought into it, they become advocates of the ideas they suggest and then they can help shape it in the future. It’s not us internally thinking it up and shaping it, it’s coming from the people who actually buy it.”

This sounds like advice that could benefit many firms at this time. It has certainly, according to Fuller, set Centrix on the right path, despite the suffering wrought by the credit crunch and the ensuing recession.
Centrix House 01635-239800
Andy Simpson Head of Thames Valley Barclays Commercial Bank 07775-552125