2010 | World Finance

Embracing market opportunities

Posted on February 17, 2010 by

As a global supplier of transaction services, Neonet’s mission is to simplify global trading, enabling their clients to capitalise on increased trade fragmentation and new technical opportunities. Based in Sweden, the company was established in 1996, with growing operations also conducted across the UK, Italy and Germany, as well as the US.

The company is also one of the pioneers in Direct Market Access (DMA) and transaction services for efficient global trading. DMA is renowned for offering lower transaction costs, lessening the possibility of error or execution irregularities, and being extremely fast and fluid, thus allowing traders to take advantage of very short-lived market opportunities.

“Our trading environment is profoundly different,” explains CEO Simon Nathanson. “It is the excellent combination of execution services and trading technology that makes us so unique.

“For instance, we have developed, in-house, a technology platform that is tenacious and robust enough to be sold as a stand-alone product. Additionally, we have a very skilled set of trading desks that can handle the most advanced of execution programmes, around the clock and around the globe. We own and control our whole infrastructure – from the customer’s front-end, to the exchanges and back; this is something that gives us tremendous flexibility in adapting to the new demands continuously posed by our clients.

“More and more clients are looking for increased liquidity and it is very difficult to get that if you can’t get a consolidated overview of trading in today’s fragmented market. People trading on traditional markets, such as the London Stock Exchange, only see 60 percent of what is available, because 40 percent of the FTSE 100 is traded on other venues. Thus, market participants miss out on a lot of prices.

“Thankfully, Neonet provides the solution as, through our market connections and sophisticated technology, our clients gain an easily accessible and comprehensive solution for trading in exchanges and alternative marketplaces worldwide.”

Neonet achieves this by providing access to the most liquid marketplaces, in addition to by supplying technical solutions that enhance the efficiency of global trading. Neonet XG, the company’s progressive trading technology service, has a strong position, with the trading platform facilitating Best Execution regardless of the marketplace. This software offers clients a full suite of high-performance technology products to ease trading on the world’s leading exchanges and execution venues.

Shifting markets
New marketplaces, combined with changing trading patterns, ever-faster technological progress and market harmonisation, are shifting the underlying conditions for players in financial markets. According to Mr Nathanson, the financial landscape is undergoing substantial change, and clients potentially have a lot to gain from this.

“Traditional exchanges have lost their monopoly following challenges from new, more agile players; banks and broker-dealers (including Neonet) are two of the players driving this development forward.

“Thanks to its combination of trading and software services, Neonet has secured its solid position within this new financial landscape. The greater fragmentation of stock exchange trading is creating new business opportunities for us. In a complex landscape, with many more marketplaces, it becomes increasingly difficult for investors to ensure that they always gain the optimum price for each trade in stocks available on many markets. This is where Neonet comes in, by simplifying global trading and meeting the challenges that fragmentation entails for our clients.”

By integrating exchanges and marketplaces in a uniform manner, the Neonet system facilitates cross-border trading and contributes to high user-friendliness. The company is cutting-edge because it has built a package that makes life easier for its professional clients.

“Neonet offers an overview of European trading and guarantees that transactions are completed promptly, with Best Execution in shares traded on many markets. Our clients are given the potential to rapidly and readily access the most liquid marketplaces. We offer more exposure to our clients, so they get better results, and witness better performance.”

Simply put, Best Execution signifies that Neonet, as a market player, ensure that their clients receive prompt management of their transactions and the best trades in shares that are available across a number of markets. Thus, by offering superior transparency and aggregate liquidity, Neonet promotes increased competition among European marketplaces.

Asked whether all players can offer Best Execution, Mr Nathanson’s answer was a definitive ‘no’.

“The ability to deliver Best Execution requires infrastructure for high-speed technical connections, commercial agreements with many marketplaces and advanced software to identify the best trade. This, in particular, is a core feature of Neonet’s client offering, and an area in which we really are at the forefront of developments.

“Our Consolidated European Order Book creates an overview of liquidity from all marketplaces and the new generation Smart Order Routing technology ensures Best Execution. This means that we send client orders to the best marketplaces for each trade, irrespective of whether that is a traditional stock exchange, an alternative marketplace or a combination of both. Our clients favour our well-developed infrastructure, since we compare prices among more marketplaces than many other players.

“Furthermore, our technology – in itself – is very cutting-edge. Our clients can easily exploit opportunities offered by it, while simultaneously avoiding costly investments in infrastructure and technology.”

But despite all the positive progress, Mr Nathanson admits that Neonet has been affected by the global recession and that some of its clients have been less active in the market.

However what we see now is a good inflow of clients, confirming the considerable interest in our systems and services.

“I think people are coming out of the recession and being honest with themselves with regards to their comfort level, as well as the day-to-day volatility that different investments have. But that is natural, and to be expected.”

There is no doubt that, in a time of growing fragmentation, the ability to quickly connect with new marketplaces is a decisive factor in reaching global liquidity. Neonet is a leading supplier of connections to new alternative markets, as well as traditional stock exchanges. It is also a question of having the required technology to allow you to achieve this.

In fact, Neonet has long-since positioned itself to be able to capitalise on the comprehensive changes occurring in financial markets, while also being involved in driving its development.

“We are really dedicated to leading the way into the new financial landscape. Let’s take dark liquidity as an example; as part of the development of Europe’s market structure, we are seeing an increase in dark pools – electronic marketplaces providing institutional investors with the opportunity to execute major transactions, or to trade in illiquid securities with reduced market impact. We continuously add new markets and develop solutions that simplify access to lit and dark liquidity. In total, Neonet offers trading in seven dark pools, and also launched a sophisticated algorithm that sweeps the dark pools for non-displayed liquidity.”

The company’s evolution has not gone without reward, with Neonet listed on the NASDAQ OMX Nordic Exchange in Stockholm and with clients in regions all over the world.

“Having successfully tackled the Nordic and European markets over the last couple of years, we are now starting to invest our efforts in Asia,” continues Mr Nathanson. “We are very proud of everything that we achieved, as well as the fact that people have had to up their game in competition.

‘We have made it so that our clients can exploit opportunities offered by the new markets, while simultaneously avoiding costly investments in infrastructure and technology. Because we help to seek out the best price for our clients, we know that we are promoting increased competition among European marketplaces, and that can only be a good thing. We’re very glad to be a central element of progress within this revolutionary and cutting-edge financial future.”

Facing the futures market

Posted on February 17, 2010 by

Esignal, long known for its reliable, comprehensive data offering, puts the information crucial to negotiating the futures market together with the tools that make the data come to life. Reliable, fast, streaming, real-time futures, stock, options and forex prices come from the world’s markets, including approximately 150 North and South American, European, African and Asian exchanges.

eSignal’s charting and analytics can satisfy every level of technical analyst. Hundreds of studies, plus easily manipulated drawing tools and familiar charting formats, including marketprofile and Point and Figure, are available.

eSignal also provides a scripting language, eSignal Formula Script (EFS), which allows users to create their own studies. The Formula Wizard, a special Bar Replay function and back testing assist in creating studies and verifying the viability of a market strategy.

To assist with back testing, eSignal is constantly adding historial data to the individual exchanges / services it offers through its datafeed, currently providing as much as three years of extended intraday futures data.

Tools for the market
eSignal has many futures-focused tools. Forward and Yield Curves, for example, are a window type used by futures traders and broad market analysts to look at comparative data across multiple contracts.

The Quoteboard displays quotes in a grid-like fashion and a metre that points to the variation in price throughout the day, showing the current price’s “temperature” as it relates to the day’s high and low.

The software’s spread engine capability for complex spreads and ratios allows control of the decimal placement of the spread, including the display of the resulting symbol in some non-standard formats, such as treasuries and grains.

eSignal users get a view of, not just volume, not just the buying and selling, but a close-up on the activity that really moves the market with market depth information. eSignal provides a breadth of market depth from the NASDAQ, NYSE, CME, CBOT and on forex rates, as well as Canadian depth from the TSX, Euro-next Cash BBO 10 and UK Equity Market Service Level II from the LSE.

The market profile feature functions as an eye on time and price opportunities. It organises information in a manner that makes it possible to see which price areas the market is accepting and rejecting.

Weather maps, especially useful in the commodities market, come in multiple packages, covering areas all over the globe, including US Agriculture, US Energy, Europe Energy and the World Coffee Crop.

eSignal also offers US and international continuous contracts with an intuitive symbol format and spreads in the Quote, Chart and Quoteboard windows, with the ability to make your own symbol-combining multiples.

An all-in-one platform
With the reliable, global data, charting, drawing tools and technical analysis alone, users are already ahead of the game. Add to that from eSignal’s full complement of premium services, and chances of finding profitable opportunities increase.

eSignal’s market scanners search the market’s myriad possibilities for opportunities that suit users’ individual parameters. Its real-time news comes from the best in the industry, including Dow Jones and Hightower.
And, eSignal offers a choice of third party applications and premium add-on studies that are compatible, and often integrated with, the software, as well as integration with the trade execution platforms of many respected futures brokers.

This award-winning software meets the needs of the individual, as well as the professional trader. With its comprehensive data, analytics, back testing and market access, it provides an all-in-one desktop solution for designing and implementing effective strategies for today’s futures market.

For further information tel: 800-723-8260; ww.eSignal.com

Safeguarding competitiveness

Posted on February 17, 2010 by

With advanced technological infrastructures, including the ever-growing network of branches, Marfin Popular Bank Group is equipped with officers assisting the group’s vision to become one of the largest and most successful banking organisations in Southeast Europe. Marfin Egnatia Bank (MEB) is part of Marfin Popular Bank Group, which also owns the second largest bank in Cyprus. Marfin Popular Bank Group provides a spectrum of banking services through 527 branches located in Cyprus, Greece, the UK, Guernsey, Australia, Malta, and in South East Europe (Russia, Romania, Ukraine, Estonia and Serbia). MEB operates 188 branches in Greece.

MEB itself is committed to providing constant support to its clientele, applying innovative and flexible methods, to fulfill any requirements; the strategy followed ensures a fast, reliable, integrated and immediate service for the full satisfaction of all customers, leaving none wanting.

The goal is simple and straightforward; to establish a leading position in the Greek banking industry and deliver strong shareholder value creation reflected on sustained ROEs above 25 percent. MEB aims to expand its overall market share from approximately five percent currently, to seven percent over the next three years through leveraging up the bank’s rapidly expanding infrastructure, further penetrating retail lending and capitalising on the bank’s strengths in key product areas. MEB generates a sustainable competitive advantage through introducing a relevant differentiation from the competition; its key characteristics describe it as people-centric, demand driver; truly a citizens brand.

The Greek shipping industry
The evolution of Greek society and culture has been intricately linked with the sea, an event traceable through the ages in a multitude of forms whether it is within the realms of mythology or actual historical fact. It is precisely this bond which keeps the notion of shipping a tradition, for which a soft spot exists in the Greek psyche. In reality, understanding this connection is not only feasible through a romanticised view of the past, but can be put into numerical facts; for the past two years, shipping has been the most significant contributor to the Greek economy, surpassing the tourism sector and bringing in more than $26bn each year in foreign currency.

Currently the third largest fleet worldwide, provides an invaluable source to tap into, and MEB is perfectly positioned to dive in and access the shipping community through Marfin Investment Group’s stake in the Attica Group.

Products on offer
MEB has a dedicated shipping division to cater specifically for this type of client; on offer one finds a broad range of products aiming to cover its clients’ short as well as long term products. The former is mainly offered for purposes of working capital requirements in a form of overdraft facilities.

Long term needs are offered in large part to cater for financing a vessel acquisition, or a construction of a newbuilding unit. The norm for the duration is around two to 15 years; however this varies on a case-by-case basis, as the main determining factors are the type, age and employment of any vessel in question, in conjunction with the prevailing market conditions at the time. New building finance occupies a large chunk of this type of loan, as the Greek clientele is an eager member of the sales and purchases market. The trick is to strike the correct balance, keeping all parties satisfied, particularly when considering that the owner of the hull under construction needs to participate with own equity.

Bridge financing is also available; its purpose is to assist customers with their special medium term working capital needs, usually spanning between three and 12 months, such as repairs or conversions of vessels. Furthermore, MEB offers letters of guarantee of all types, which may have a set date of expiration, or if required and prudent be open-ended.

If this list of products doesn’t have you tantalising for the services provided, structured finance is also found on the menu. MEB’s shipping division caters for more structured forms of finance, including advisory M&A, sale and lease back agreements, more commonly referred to as bareboat structures, financing of salvages as well as the financing of reverse merger acquisitions. To top it all off, in true professional style, MEB maintains a dedicated shipping branch in Piraeus, which includes a private banking department. In translation, the Piraeus branch is essentially a fully accommodating shipping hub, catering for your every desire, whether it is related to the industry or on a private level.

It would be a mistake to assume that the variety and expedience of all that the shipping division has to offer could be attained without the right people in the right places. The bank personnel posses an excellent understanding of the shipping industry, including its quirks, peculiarities and trends putting them in the best position to adopt forward analytical and synthetic thinking patterns, in order to anticipate and accommodate specific client needs; a view of their track record provides quick confirmation to this fact with an aggregate experience exceeding 250 years. The generation of fresh ideas and alternative solutions, particularly when considering this specific industry, is not so much a desirable quality as a necessity; this ability combined with familiarisation with other departments and their products, is a key distinguishing factor in attaining their desired results.

International reach
MEB itself is characterised by its strongly entrepreneurial and internationally oriented management team; adding the synergies realised following the three way merger to the concoction, provides a powerful recipe for success, in terms of resources as well as knowledge including everyday know-how. The entire client-centric approach presented, is founded on the key element of differentiation, a strategy based on four pillars namely product offering, service provided, capacity and a deep understanding of clients needs.

Customisation of the products on offer, tailored to fit each case specifically is high on the list of priorities, both for the benefit of the client, i.e. getting a personalised service, as well as for the interests of the bank, ensuring a smooth repayment of any facility provided. If these were not enough, MEB’s shipping division stays one step ahead of its clients, ensuring flexibility as well as the capacity to cover non-shipping investment needs, applying cross-benefit techniques that enhance the experience for all involved.

The phrase “time is money” is expressive of the fast pace maintained by all industries and markets. A key distinguishing factor for MEB is the ability to provide quick and accurate responses to their client’s request, whilst still maintaining and allowing the opportunity for any client requiring advisory services.

Power of tradition
This bank has intentionally kept a low profile in the shipping finance market, utilising client relationships as the main basis for the shipping divisions marketing. In today’s world of gimmicks, bells and whistles, one might be surprised to find out that the majority of shipping finance business is directly originated through sales and credit officers, proving the bank’s strong track record in the business via establishing long term loyal client relationships; a methodology which certainly follows in line with the more traditional nature of the industry as a whole. The notion that this way of promoting still holds the ability to not only keep any business afloat, but further push a financial institution forward, particularly when considering the hurdles presented by the ongoing crisis, both in terms of growth and client base, is a testament to the broad range of high quality product range and offered services MEB has the ability to provide.

At present, the shipping department boasts a large clientele list, including significant names not only in the Greek but in the worldwide shipping community, catering for more than 130 vessels. Between 2006 and 2007 alone, the total portfolio increased a staggering 82.7 percent, whilst at the same time presenting improved quality in all aspects, including higher profitability, younger tonnage, lower LTV ratio and a more selective customer base. Today’s total portfolio totals more than $1.5bn, a figure which is exclusive of any commitments and newbuildings, implying a much larger true value.

Dimitris Gialouris, Shipping Manager says what makes MEB’s Shipping Division stand out is “the ability to provide a comprehensive range of financial products to the shipping industry together with the capacity to provide alternative financing solutions through flexible and in many cases tailor-made structured financing products to allow for the provision of added value and higher customer satisfaction”.

Looking after the future

Posted on February 17, 2010 by

Fundação Cesp is the largest Brazilian pension fund sponsored by corporations in the private sector. For the institution, 2010 will be the year to consolidate the strategy and direction of the last decade, and at the same time, a year of new challenges brought by the new economic structures imposed by a new reality worldwide.

Fundação Cesp is currently responsible for managing $11.5bn in assets. This is the combined amount from the different pension plans sponsored by 15 companies in the Brazilian electricity sector which provide the funds to ensure the future of their employees. The sponsors are companies that belong to seven large economic groups, national or multinational: AES Eletropaulo, CPFL Energia, CESP/EMAE, ISA-CTEEP, Elektro, Duke Energy International and Bandeirante Energia (Energias de Portugal).

Private pension and benefit plans are expected to grow in light of the public welfare deficiencies. To illustrate the force of the private entities, while in 2000 their total assets amounted to $69bn, in 2009 it exceeded $260bn – an impressive 275 percent increase in less than ten years.

The resources managed by Brazilian pension funds have gained importance as part of internal savings and even in the overall economy, since their combined assets now represent 17 percent of the Brazilian GDP. Pension plans have become more important players in the Brazilian economic scenario year after year.

Fundação Cesp has made significant progress in consolidation over the past few years. In 2009, for instance, the entity posted a $705m surplus (14.2 percent year on year), and it has won the approval of 87 percent of its beneficiaries, according to the most recent yearly satisfaction survey.

These figures reflect our success as managers, but mostly, they reflect our key concerns: our commitment to the future and well-being of the 46,000 beneficiaries. It is for their sake that we seek sustainability in our investments, striving to strike a balance between safe choices and profitability. We want to make sure that the service we offer is the best possible, and we know that improvement is not destiny, but rather an ongoing pursuit. Our positive performance in finance and our relationship with our customers – whether beneficiaries of the pension and health plans or sponsors – have earned us the nomination as best pension fund in Brazil by World Finance.

Even with the success we have had so far, there is always room to improve. Also, new factors are expected to bear on the process. Falling interest rates, dropping to unprecedented low levels in Brazil, will shift the focus of long term investors such as pension funds. In order to attain the planned yield, investors will have to accept a somewhat higher risk in their portfolio.

A new paradigm may arise in the financial market of Brazil. The basic interest rate keeps falling, and this trend seems irreversible in the medium run – in the short run, there may be a few peeks associated with inflation targets. We may see an increase in equity investments, one of the first choices for more attractive yields, once the idea of higher risk has been assimilated.

Fundação Cesp can be characterised as conservative, with 75 percent fixed income, 20 percent variable income and the remaining five percent of its assets in real estate and loans to participants. Instead of conservative, we prefer to consider ourselves a sustainable investor – looking for attractive returns, yet careful not to place at risk the resources that ensure a comfortable future for our beneficiaries.

There is the pressing need for the assimilation of good corporate governance practices. The perspective of falling interest rates, combined with the perception that investments must be guided by the trade-off between risk and returns, will require both effective management and transparency. These must be seen as the pillars of the new culture in which the relationship between corporation and stakeholders will take place, regardless of size.

All sectors must engage in a productive dialogue for the economy to advance consistently. The necessary conditions for growth are arising, or even consolidated in the country: a significant volume of foreign currency reserves, inflation under control, falling interest rates and positive trade balance.

Risk management is a key concern on the way to economic growth. Since 2007, there is a special area within Fundação Cesp focused on this theme, with a dedicated team for the management of the inevitable risks in our area. They are constantly making forecasts and analysing operational risks, as well as possible threats to our image and values.

Some effects of the implementation of risk management can already be seen in the organisation. One of them is the progressive dissemination of a culture of risk prevention, and the growing awareness of the need to anticipate facts that may bring losses to the pension fund. From the point of view of sponsors, participants and benefit holders, there is more confidence, improved transparency and better corporate governance standards.

The ability to anticipate risks was decisive for the results obtained in 2008, for instance, when the world was immersed in the woes of the largest financial crisis since 1929. At the time, the portfolio of the pension fund boasted a 10.97 percent yield, while the average return in the pension fund sector in Brazil was actually negative.

The same risk management culture is present in the health plans managed by the entity, recognised for the ample coverage they offer to 120,000 participants, providing medical and hospital services, as well as dental and laboratory coverage. Following the self-managed model, that is, not for profit, Fundação Cesp health plans have developed pioneering programmes such as the Preferential Network, investing in the family doctor concept, fostering a closer relationship between patient and care provider. Another example of innovation is the programme for Chronic Disease Management, ensuring ongoing support for patients with diabetes, hypertension and cardiac diseases, and improving their quality of life. These are only some of the reasons why Fundação Cesp health plan is recognised as one of the best in Brazil by the 2009 edition of the Brazilian “Top Hospitalar” Awards.

The outlook for Brazil is very positive this year, meaning we have even greater responsibility in a scenario of falling interest rates in the medium term, associated with bold actuarial targets. Once again, we must find a way to reinvent ourselves.

Yet the ultimate objective of our initiatives is still the same: to live up to our commitment to the quality of life and future of those people who depend on Fundação Cesp. Last year, we launched our project “On the Way to Sustainability” (“Fundação CESP Rumo à Sustentabilidade”), to better channel our desires and needs regarding sustainable development. The slogan of the project is “ensuring sustainability is valuing your future”, and the objective is to bring about a shift in paradigms and transform the culture, raising awareness and encouraging the participation of employees and their respective social networks.

With this initiative, pension funds are encouraging sponsors and their employees to step up and engage in the growth of the organisations and the country – after all, they are the ones who stand to gain the most from their participation. We believe this is an effective way to build a nation that generates opportunities and shares the gains of economic growth among its population.

Fundação Cesp celebrated its 40th anniversary in 2009. In its trajectory, the pension fund witnessed both times of adversity and opportunity. So whatever the next 40 years may bring, we are convinced we can only maintain our success if we preserve our guiding principle: that we must always serve people, ensuring their future and their well-being.

Martin Glogowsky is CEO of Fundação CESP

Restructuring and insolvency

Posted on February 17, 2010 by

The concursos law provides for a single insolvency proceeding known as concursos mercantil (concurso procedure). The concursos procedure consists of two main stages, conciliation stage and bankruptcy stage, each of them supervised by the Mexican Federal Institute of Specialists in Mercantile Insolvency and Bankruptcy Procedures (Instituto Federal de Especialistas de Concursos Mercantiles) (IFECOM).

Concursos law principles
The concursos law is based upon certain principles, mainly (i) all creditors of the same class shall be treated equally; (ii) all creditors of the debtor, whether domestic or foreign, shall have access to the concursos procedure, and shall collect in equal proportion (according to the class) from the assets located within the territorial jurisdiction of the court; (iii) if possible, the debtor’s operations should be preserved (avoiding the “chain bankruptcies” phenomenon, whereby the commercial bankruptcy of one company and its cessation of operations causes the commercial bankruptcy of its creditors); and (iv) all assets of the debtor shall be consolidated and its liabilities determined.

Conciliation stage
Immediately after an insolvency petition is filed and accepted by the court, the court must file a petition before the IFECOM for the appointment of a visitador (examiner). The examiner shall report to the court if the debtor is, in fact, insolvent (according to the measures under the concursos law) and, thus, is in one or more of the hypothesis established in the concursos law to be declared in concursos. If the Court resolves that the debtor is in fact legally insolvent, it shall issue a declaration of insolvency, the effect of which is the commencement of the conciliation stage. A debtor may be declared insolvent if it has generally failed to perform its obligations.

The declaration of insolvency shall include, among others, the retroactivity date (date to which the effects of the concurso procedure will be applied, known as the “hardening or look-back period”); a declaration that the conciliation stage has commenced; and instructions for the IFECOM to appoint a professional conciliador (conciliator). The first stage of a concurso procedure is the “conciliation” stage, which is purported to encourage a binding reorganisation agreement among the debtor and its creditors and, thus, avoid the debtor’s bankruptcy or liquidation (creditors’ agreement). The conciliation stage may not last more than 185 days, unless extended, under certain circumstances, for up to two additional consecutive periods of 90 days each; provided, however, that in no event the conciliation stage shall last more than 365 days.

During the conciliation stage, the debtor must work with its creditors to reach a creditors’ agreement. If this is reached and approved by the court, the concurso procedure ends.

The creditors’ agreement must be approved by the acknowledged creditors whose debts represent at least 51 percent of the total amount acknowledged to the unsecured creditors, the secured creditors (willing to vote the creditors’ agreement) and creditors with a special privilege. The approved creditor’s agreement must be filed before the court, which shall grant an additional term to the creditors for objections. If a simple majority of unsecured creditors or any number of creditors representing jointly at least 50 percent of the total amount of acknowledged debt opposes the agreement, the creditors’ agreement shall not be deemed to be approved.

An express procedure for “cramming down” creditors that do not approve proposals approved within these procedures, as permitted under other foreign jurisdictions, is not contemplated by the concursos law. However, it is possible to reach a plan of reorganisation without the vote of all the creditors if certain mandatory conditions and percentages of votes are met.

Bankruptcy or liquidation
The second stage of a concurso procedure is the bankruptcy stage. The debtor may be declared bankrupt if: (i) the conciliation stage ends without the parties reaching a creditors’ agreement; (ii) the debtor fails to comply with the creditors’ agreement; or (iii) the debtor requests its bankruptcy, or the conciliator requests the debtor’s bankruptcy and the court agrees to grant it.

In general, there are more cases of debtor companies reaching reorganisation plans and successfully emerging from bankruptcy as opposed to liquidation. There are some cases, however, in which the debtor company files directly a voluntary petition for liquidation. Failure to reach a restructuring plan might be the main cause for ending in liquidation, as well as lack of possibility for the company to continue in business.

Categories of creditors
The concursos law classifies creditors into five categories: (i) singularly privileged creditors; (ii) secured creditors (with mortgages and pledges); (iii) creditors with special privilege; (iv) common creditors in commercial transactions; and (v) common creditors in other transactions.

Labour credits and tax credits shall be paid after payment of the singularly privileged credits and the secured creditors, but prior to the payment of credits with special privilege or unsecured creditors.

There are other types of credits that have priority over all other categories: (i) pending wages for the last two working years, prior to the date of declaration of insolvency; and (ii) expenses incurred in the administration of the secured assets.

The concusos law provides special rules for certain contracts including, among others, repurchase agreements, securities loans transactions, differential or futures contracts, derivative financial transactions and framework agreements.

Additionally, the concursos law provides special rules for the concurso procedure of (i) companies that provide public services under concession titles; (ii) credit institutions; and (iii) auxiliary credit institutions.

The concurso law, in principle, does not expressly recognise (nor does it permit the full participation of) bondholders under an indenture; however, there is nothing preventing the full participation of an individual bondholder, provided that it is able to properly evidence its claim against the debtor.

As opposed to other jurisdictions where the beneficial holders of bonds and other debt securities often participate directly in the bankruptcies of companies in which they invest, a Mexican company might solely recognise, in principle, the indenture trustee as the holder of the claim, which may prevent beneficial bondholders, in principle, to exercise their right to accept or reject the creditors’ agreement. In Mexico, if not properly advised, the beneficial bondholders might face difficulties in exercising the rights that they are afforded abroad (even though the beneficial holders are foreigners, and even though their bonds were issued abroad).

Pre-package plan
Effective from December 28, 2007, a new chapter governing a procedure of “pre-package plan” was provided in the concursos law, which grants creditors rights and actions to have debtors to comply with a specific financing restructure. Now, it is feasible for a debtor and its creditors to agree in advance on a restructuring plan out of the concursos procedure, and subsequently proceed to file it through a voluntary insolvency procedure, a concursos, but within a summary procedure. In such case, there will not be controversy or disagreement with respect to the recognition, graduation and degree of the credits, which means that the procedure will be simplified.

A concursos procedure filing with a pre-package plan should be admitted by the competent judge, provided that i) it complies with requirements for a debtor to be declared insolvent; ii) it is duly executed by the debtor and the creditors representing, at least, 40 percent of debtor’s credits; iii) the debtor represents that a) it is in a condition where can no longer perform its payment obligations; or, b) it is imminent, in a period no longer than 30 days, to be in a condition where it can no longer perform its payments obligations; and iv) it contains a restructuring plan of the debtor’s credits signed by the creditors which represent, at least, 40 percent of the debtor’s credits or claims. If admitted by the court, then the concursos procedure will commence and the creditor’s agreement might be approved if it complies with all other applicable rules of the concursos procedure.

When the law recognises foreign proceedings in bankruptcy, insolvency and reorganisation matters, it recognises foreign representatives appointed through a recognition request.

Potential amendments
There is currently no formal final draft to amend the concursos law, but only projects under discussion by the Mexican congress to include certain procedural amendments. In our opinion, it is strongly advisable to amend the law regarding (i) the participation of bondholders under an indenture, (ii) creditor’s rights during the preliminary stages and to oppose acts of the examiner and to special measures or injunctions requested by the debtor, (iii) unsecured credits contracted in foreign currency, (iv) treatment of inter-company accounts, and (v) required specialisation on bankruptcy courts.

Alejandro Sainz is Chairman of the Insolvency & Restructurings Practice at Cervantes Sainz, S.C. For more information email: asainz@cervantessainz.com; www.cervantesssainz.com.

Full service broker meets online standard

Posted on February 17, 2010 by

Back in 2000, when internet access was a fledgling market in Egypt, the founders of Sigma Securities were ahead of the financial services market in launching the first online trading platform. Today, Sigma remains at the forefront of online brokerage in Egypt through its ongoing investment in its people and technology. Sigma offers the full range of brokerage service available to investors in Egypt, all of which are powered by a comprehensive web-based platform. Since its inception, Sigma has relied on the recognition that quality brokerage comes from combining an end-to-end brokerage service with the dynamism of technology. It is this recognition that sets Sigma apart.

Early-mover advantage
When Sigma was founded, internet access in Egypt was a young market; few online services were available to users. Nonetheless, it was clear to the founders of Sigma, spearheaded by Mr Ahmed Marwan, that the future lies in the use of technology to build an organisation that empowers the brokerage service provider, and ultimately the customer, with a quality brokerage and investing experience. Armed with years of experience in the financial services industry and a clear vision for the future, the founders set out to build a world-class securities brokerage service catering to the Egyptian market. With focus on quality at the heart of its vision, Sigma’s goal was to build a robust organisation that relies on top-notch human resources and state-of-the-art technology. The first step towards achieving this goal was the creation of a web-based internal platform that automates brokerage processes, thereby increasing service efficiency. As a result of its technological investments, Sigma gained a platform that not only optimises operational efficiency, but also was the best online trading application available for end-users.

Sigma established its dominance of the Egyptian online brokerage market by launching the first customer-facing online trading platform in 2000. Since that first launch, Sigma has been channeling its harnessed experience in online trading towards retaining its position of dominance.

Online brokerage
Sigma’s online trading platform goes beyond being a user friendly human interface. A quality online trading platform enables traders to make sound trading decisions through availing all the resources and functions that they may need in a single stop. In addition to standard trading actions such as buying and selling, Sigma clients have the benefit of accessing an unmatched resource of real-time market statistics and data as well as reports and analyses. Sigma is the only brokerage company in Egypt that provides a web-based quotes streamer, allowing clients full trading mobility. As quick decisions are an integral part of trading, Sigma guarantees near 100 percent service up-time for its online brokerage service. This is complimented with Sigma Plus, a human brokerage assistance service created specifically to ensure that all the needs of Sigma’s online traders are addressed in a timely fashion, including brokerage, banking, research as well as technical computer assistance

Behind the scenes
Sigma’s edge in online brokerage is a result of the company’s focus on innovation. Sigma continuously pursues the answer to the following questions: how can service quality be improved? What are the needs of Sigma’s customers and how are they best fulfilled? Sigma’s investments in technology and innovation provide the necessary basis for the company’s service advantages. A robust and flexible combination of hardware and software integrated with multi-layer connectivity ensure an unmatched service level in the Egyptian market, creating the necessary capacity and scalability to withstand the traffic demands of Sigma’s current and future online trading customers while retaining service quality. This is achieved through careful planning and constant diagnosis that ensures business continuity even when faced with multiple failures from third parties.

The quality of the online brokerage service that Sigma’s customers see on the front-end cannot be possible without full automation of all company processes in the back-end. Since the first phases of development, the dynamic nature of Egypt’s budding brokerage industry led to the need to ascertain the system’s adaptability as an integral part of development requirements. Consequently, Sigma prides itself on quick responsiveness to customer needs regarding the delivery of new system features and upgrades. During the course of 2009, there have been multiple cases of a 48hr turnaround time for features requested by Sigma’s clients outside the capital of Cairo. Sigma recognises that hardware and software alone are essentially useless without the human intelligence that moulds them and creates purpose. Simply put, the whole team spends a great deal of time thinking about how to do the job better in a more efficient and timely manner.

Sigma’s focus on technology for service quality is driven and solidified by the company’s investment in human capital. At the heart of Sigma’s success is the finest team of professionals in the financial services industry in Egypt. From traders to analysts to technology specialists, Sigma boasts the industry’s top subject matter experts in the local market. At the helm of management is Mr Mohamed Hammam, Sigma’s Managing Director, with career experience focused on brokerage operations management. A core element of Sigma’s success can be traced to the values that constitute the guiding principles for all business strategies, decisions and execution thereof; values that are diffused throughout the organisation and in every single process and action performed every day. Sigma strives to set the standard for ethical practices in Egypt’s brokerage market, focusing on transparency and fair-dealing with all stakeholders. The importance of continuous learning and innovation is another value that contributes to Sigma’s leadership position, especially in light of Sigma’s reliance on technology as one of its main differentiators. These values serve as a basis for Sigma’s ultimate mission: to lead the industry in customer satisfaction and retention.

A well-deserved payoff
As a result of Sigma’s investment in building its organisation and services, the company has been experiencing spiraling growth since 2007. Sigma’s volume of trade grew 17 fold between 2007 and 2009 compared to a three-fold market growth. As an indicator of the growth in Sigma’s online brokerage business, Sigma’s online trading platform now serves 60 times the customers it served in 2007, constituting about 37 percent of Sigma’s total trading volume. Sigma’s total customer base has seen a 100 percent increase between 2007 and 2009. This magnificent growth trajectory has been serviced by a 300 percent increase in the number of Sigma employees, and has lifted Sigma’s ranking amongst brokerage firms in Egypt, rising from 50 in 2007 to 11 throughout the second half of 2009. Due to its reliance on automation and technology, Sigma’s organisation is by far the leanest in the industry, thereby maximising its margins. More importantly, Sigma’s name has become synonymous with the benchmark of quality brokerage service in Egypt.

Right place, right time
The future looks bright for the economy of Egypt in general. Despite the global financial crisis, Egypt sustained a five percent growth in real GDP in 2008-2009, and FDI continues to grow in the wake of reforms in Egypt’s commercial sector. With economic prospects looking favourable, Sigma is poised to continue its rapid growth trajectory through its continued focus on customer satisfaction and innovation. This growth will be achieved through Sigma’s ongoing expansion into the retail market through the establishment of branches and representative offices throughout Egypt’s governorates. Capitalising on its web-based platform, Sigma is also looking to extend its customer reach through relying on its virtual organisation to cater to the needs of clients throughout the Middle East region. Over and above, Sigma plans to spread the reach of its services beyond the Egyptian brokerage market, availing trading on international exchanges through its online trading platform. These developments are scheduled for launch during the first half of 2010.

Amr Rakha is Sigma Capital’s Business Development Manager.
For more information tel: +202 3335 7575; email: info@sigma-capital.com

Truckloads of rupees

Posted on February 17, 2010 by

“Urgently wanted: Scores of incorruptible financial experts with experience in infrastructure projects. Proof of bravery will be an advantage.”

That’s one advertisement we’ll never see in The Times of India. But it’s the kind of person the World Bank is looking for as it pursues a campaign to keep the sticky fingers of politicians, businesspeople, bankers and other criminals out of the development funds it disburses annually.

Having seen much of this money disappear into the hands of the “Mafia Raj” – local gangs with connections that control road-building and other infrastructure projects – Robert Zoellick has got serious about the stupefying levels of corruption holding up the economy. The bank’s plan is to place people of integrity along the funding pipeline to make sure money reaches its intended destination.

It’s a great idea and we have to hope it works, as the World Bank is probably India’s best hope of escaping a culture of bribery. The bank’s deep pockets would be sorely missed were it to pull the plug. India is the bank’s largest single borrower and roughly half of those loans are interest-free, like the latest $1bn cheque to clean up the Ganges River.

Certainly, there’s not much hope of any Indian agency cleaning up the Augean stable, however well-intentioned it may be. Nearly every attempt over the best part of half a century has failed and the situation is getting worse, as chief justice K.G. Balakrishnan admits. At a conference on corruption, he cited a whole string of practices that amount to an epidemic of corruption. And even when no money changes hands, he bemoaned, there’s still corruption. “The quality of governance suffers when decisions are made on account of extraneous considerations related to political patronage, kinship or caste and linguistic identity among other factors.”

Bribery is a way of life. A World Bank study last year revealed that it was almost routine for firms to be “asked” for cash gifts or in kind to get almost any kind of public service, even a phone connection. Hardly surprising that integrity watchdog Transparency International ranks India at eighty fourth on the Corruption Perception Index, right down with Guatemala and Panama. Justice Minister M. Veerappa Moily understands the damage this is doing long-term, warning that “corruption is an impediment for integration with the global economy.”

You can’t even drive a truck without a fistful of rupees. Truckers pay $5bn a year just to get goods across state boundaries, reports Transparency International. Legendary businessman Azim Premji, founder of international software giant Wipro, sums it up: “Bribing is a transaction cost and it is not cheap.” Also a member of the board of the Reserve Bank of India, Dr Premji says it’s time the business community woke up to the commercial benefits of straight-dealing. “If people just stop giving bribes you cut down corruption. You pay a short-term price for it, not a long-term price.”

Unfortunately, it’s getting worse. India’s Central Bureau of Investigation has no less than 9,310 pending corruption cases, many against public servants and their “associates”. But pending is a big word – about 2,000 of those cases have been pending for over a decade.

Elected and public officials hide behind a quaint law called Article 311 which effectively stymies many investigations. Under 311, investigators need “prior sanction” from a “competent authority” before proceeding with a case. If the competent authority fears the consequences, sanction won’t be forthcoming. And since hundreds of state MPs have criminal records, they’re not exactly in a rush to put a noose around their necks. An eminent economist suggests that the best way to tackle corruption is from the bottom up rather than wait for action from the top. Given India’s record, this seems sensible and it puts the ball squarely in the court of the business community. As Azim Premji says, just stop paying bribes. But don’t wait up.

Joint ventures under Turkish law

Posted on February 17, 2010 by

Joint ventures are partnerships whereby two or more legal entities or individuals who are independent of each other in legal and economical terms gather for the accomplishment of a common task. According to the Turkish Code of Obligations (the TCO) and the Turkish Commercial Code (the TCC) a joint venture is deemed a type of general partnership (adi ortaklık).

According to Article 520 of the TCO, general partnership is a type of partnership whereby two or more persons agree on allocation of a specific contribution for the purpose of accomplishing a common purpose. The legal scholars and the High Appeals Court have extended the scope of general partnership and defined it as the agreement on a partnership relationship lacking a legal entity status whereby the partners contribute a specific value for the accomplishment of a common purpose and are jointly and severally liable against the third parties.

The main elements of a general partnership are the partners (as either individuals or the legal entities), common purpose, continuing effort to accomplish such purpose, contribution and agreement of the partners.

Unless otherwise agreed in the partnership agreement, all partners are entitled and under obligation to participate in the management of the general partnership. As a general rule, the ordinary managerial activities of the partnership are conducted by the unanimity of the partners. Furthermore, unless otherwise agreed upon in the partnership agreement, the partners are jointly and severally liable against third parties for the obligation of the general partnership. However, this obligation is not inclusive of the claims of third parties arising out of acts of tort.

Unless otherwise agreed to in the partnership agreement, the partners hold the title of the partnership estate collectively in result of which any transaction related thereto shall be subject to the unanimous decision of the partners. Contrary to joint ownership where the owners are allowed to exploit all their rights in proportion to their stake in the related estate, the collective title holders shall have no proportionately exploitable rights. Therefore, any decision with respect thereto would require the agreement of all partners. However, the partners may opt in to agree otherwise in the partnership agreement. Unless otherwise agreed in the partnership agreement, the partners shall assume the loss and gain the profit equally whereby the amount of the loss and profit will be divided with the number of partners. As per Article 532 of the TCO, no partner is allowed to transfer its stake in the general partnerships without the consent of the other partners. The transfer in breach of this provision shall not be valid. It is believed that otherwise may be agreed among the partners in the partnership agreement.

The general partnership will be dissolved in case (i) the common purpose is accomplished or in the event of the impossibility of such accomplishment, (ii) any of the partners passes away in absence of an agreement with the deceased’s heirs, (iii) an executory proceeding is realised for the stake of any of the partners, or the bankruptcy or mental incapacity thereof, (iv) the partners agree on dissolution, (v) the term of the partnership is expired, (vi) six months prior dissolution notification is served by any of the partners in case the partnership is established with an unlimited term or with a term limited to the life time of any of the partners, (vii) the court decides on the dissolution due to just causes. Unless otherwise agreed in the partnership agreement, the dissolution is required to be pursued by the participation of all partners.

Apart from the above-mentioned general classification of the TCO in the Turkish legal system, the “joint ventures” are specifically regulated also under the Public Tender, FDI and Corporate Tax legislations. The term joint venture (ortak girisim) is defined in Article 4 of the Public Tender Law as the business partnerships or the consortia which has been established by the individuals or the legal entities pursuant to an agreement executed for the participation in a state tender. It is important to note that a joint venture cannot be a partner in a joint venture beside the individuals and legal entities. Under Article 14 of the Public Tender Law, it is stated that joint ventures can be established solely in two types. Accordingly, in business partnerships, the business partners undertake the accomplishment of the awarded tender jointly and severally. On the other hand, in case of consortia, the members will be under duty to perform the related part of the awarded tender which they have specifically undertaken.

Therefore, when a performance failure in a state tender occurs, all business partners will jointly and severally be liable for any and all partners’ breach whereby the consortia members will be released from their obligations in proportion to the accomplishment of their specifically undertaken obligations. The business partnerships are allowed to participate in any state tenders but the consortia can only participate therein in proviso that the
relevant tender specification consents thereto. The joint ventures comprising of business partnerships and consortia are established through the execution of a joint venture agreement which shall be submitted to the related governmental authority prior to the finalisation of the tender process. However, if the tender is awarded to the related joint venture, it is a prerequisite for the joint venture members to submit the joint venture agreement to the tender commission in a notarised form. In case of business partnerships, the agreement is required to include the provisions concerning the joint and several liabilities of the partners and the identification of the leading partner. However, in case of consortia, it is a requisite to identify the coordinator and to specify the liability of the members for their specifically-owed obligations.

The Corporate Tax Law and the Corporate Tax General Communiqué Serial Number 1 (the Communiqué) do not specifically regulate the joint ventures. As per Article 15.3.1.1 of the Communiqué, it is set forth that “the firms gathering for the accomplishment of a certain project are allowed to establish three types of partnerships, namely general partnerships, business partnerships and consortia. It is noteworthy to highlight the fact that the corporate tax approach focuses on the subject matter of the taxable body corporate rather than the determination of the features of these terms. Article 2(7) of the Corporate Tax Law addresses the corporate tax payers. According to the Article, the business partnerships are defined as the partnerships that are established by and among the corporate tax payers or by and among the corporate tax payers and individuals or collective companies for the joint accomplishment of a single project. In order for a business partnership to be deemed as a corporate tax payer, a request related thereto is required. It is also set forth in the same Article that lack of being established in a form of a legal entity shall make no difference to such status. As one may easily observe, the Corporate Tax legislation has defined business partnerships as an establishment involving at least one corporate tax payer. In other words, the establishments incorporated solely by collective companies or solely by individuals are not deemed as a business partnership which necessitates the involvement of at least one corporate tax payer. Article 2.5.2 of the Communiqué requires the existence of corporate tax payer partner, single commercial purpose (project) to be completed in a specific time period, written agreement, undertaking agreement between the partnership and the project holder, joint and several liabilities of the partner and profit sharing so as to be deemed a corporate tax payer business partnership.

In respect of the FDI law, foreign investors are defined as the foreign individuals, legal entities, institutions or Turkish nationals residing abroad. The foreign investment is pursued through the incorporation of new companies or establishment of branch or liaison offices or participation therein through share purchases. The companies in which the FDI can be made are the ones set forth in the TCC and the partnerships regulated under the TCO. Pursuant to Article 9 of the Regulation on the Implementation of FDI law, (contrary to the abolished Law on Incitement of Foreign Investment) joint ventures and business partnerships are deemed as general partnerships and are accepted as models for FDI.

Joint venture, apart from the interdisciplinary measures in Foreign Public Tender, FDI and Corporate Tax legislations, are deemed as general partnerships under Turkish law. The provisions in the TCO are mostly complementary rules to be applicable in case the partners to a joint venture agreement fail to agree otherwise. The most important complementary provisions are the ones related to the title to partnership estate, management and loss and profit. Therefore, the joint venture agreements aiming to be regulated under Turkish law are strongly recommended to be well drafted so as not to be subject to such onerous legal standards.

Sezer Caliskan is a Partner at Taboglu & Demirhan. www.taboglu.av.tr

Trading without frontiers

Posted on February 17, 2010 by

The spoken word started civilisation, the printed word started industrialisation, and the internet started the information age. Today, the world is open for businesses, as the internet has fundamentally reshaped international markets and brought the vision of a global economy to fruition. The internet has brought us closer for we no longer live estranged and isolated; rather, we have become interconnected in a globalised world. DIF Broker is looking to the future with an innovative Dorsey, Wright & Associates (DWA) partnership. DWA is an equity owner of DIF Broker; it is a special partner that provides managed solutions for investors with a long-term, wealth building horizon. The global models are automatically managed in an account at DIF. We have kept the tactically managed Exchange Traded Fund Models (ETFM) of DWA while taking the human emotion out of the equation. The tactically managed models span the globe from the far east to Europe.

In fact, DIF is presently the only platform that offers such models to individual investors. The future is here and now at DIF. Not only are automatically managed models available for the investor who is too busy to devote time for investment research, but he also can access DWA’s productivity system of portfolio development and management from the DIF platform. In today’s information age, what we learn and understand about products is often more valuable than the product itself. At DIF, we provide the most comprehensive information for researching investments as well as a place to execute and manage portfolios.

The internet reshaped international markets and brought the vision of a global economy. In turn, DIF has brought a business model focused on the needs of the client.

DIF and DWA have transitioned globalisation of capital markets out of the exclusive domain of financial institutions and into the hands of everyday investors.

DIF’s Chief Operating Officer Paulo Pinto stated, “In the beginning, we believed that more and more people would become interested in stocks trading around the world. DIF’s vision was to become the global broker of choice for retail investors interested in adding international assets and derivatives to their investment portfolios. We then realised that investing internationally is a challenging experience to most retail investors.” Mr Pinto continued: “What was needed was a systematic, logical and organised approach to investing globally. We had to provide technical research to our clients to help them untangle the maze of countries with viable stock exchanges and provide one source of research that speaks the same language in every country: supply and demand.”

“With trading online becoming a commodity, we quickly understood that our value proposition was not to become the biggest broker but instead to be the best broker for individual investors to build wealth for retirement,” said Mr Pinto. This is where DWA joined the team. This group is a US-based global research and money management firm that is the primary provider of technical research to large institutions such as Morgan Stanley, SmithBarney and Wachovia Bank. This firm provides on a subscription basis its global technical analysis productivity system on DIF. It also provides the guided or auto managed investment models on DIF, which is truly revolutionary. DIF, in conjunction with DWA’s auto managed accounts, shares the only broker/dealer platform in the world that provides this information to the individual investor.

“Our next few years will be characterised by innovative modeling solutions that will change how people invest. I guarantee it,” said Mr Pinto.

Most investors are always looking for that stock that will constantly increase in value. In many cases, however, the overall market is simply not in a position to support rising prices; rather, lower prices can often be a more reasonable expectation. At times like this, one must think about playing defensively and for the long-term. The market moves through periods conducive to wealth accumulation and periods of wealth preservation, and a prudent investor must be aware of these types of markets.

“For most people in this business, it’s always a bull market if you have the right stocks. At DIF, it’s different because we believe we could be 10 years into a 20-year bear market. We now have the Dow at the same level it was in 1999, which means we have already lost a decade in the index’’ said Pedro Lino, Chief Executive Officer. “Markets move in cycles, and we had a 19-year bull market from 1982 and 2000 when it was easy to make money.

This past 10 years proved how difficult it is to make money in a bear market bouncing up and down, yet going nowhere. If history is any guide, this erratic market could go on for another 10 years or longer.’’ Not only that, but the modern portfolio theory, which relates individual stock price changes to group stocks’ values, has now been discredited; the year 2008 demonstrated that all asset classes can become correlated simultaneously.

Stock trading is uncomplicated in a bull market because times are good and people are optimistic; whereas attitudes and fears rise during bear markets. It is easy to confuse and correlate clear thinking with a bull market.

This is why we at DIF created the private broker concept with a top-down approach to the market that begins with the overall market. We then break up the market into its components: asset classes and sectors. We view the overall market first with an offensive and defensive approach and then put our game plan into force. Our unique approach has not changed since we began using it, yet Wall Street has lost favour with this method in exchange for highly sophisticated, yet questionable, algorithms that all too often sink investment programmes. One must embrace the irrefutable law of supply and demand and nothing else to understand the simple price changes of stocks in world markets.

At DIF, people are no longer willing to believe in some version of the myth that one’s portfolio can grow 15-20 percent a year without risk. We endeavour to mitigate risk as much as possible by establishing a close relationship with the client. We educate and build our client’s confidence, as he works with an investment professional to construct a personal portfolio tailor-made to fit his expectations. The client and investment professional will work together on making good decisions and smart trades, and the client will be apprised of all alerts and portfolio changes that may be of interest.

The day is rapidly approaching where the individual will have to take greater responsibility for his own financial affairs. We will help them learn to manage their own portfolios, watch their investments, and remain calm during bear, bull, and sporadically changing markets.

Dif Broker is an independant and privately owned registered broker company; www.difbroker.com

BNP Paribas beats Q4 forecasts on lower charges

Posted on February 17, 2010 by

France’s biggest listed bank BNP Paribas took fewer bad debt provisions than expected in the fourth quarter, helping it beat profit forecasts, and said these charges would be lower again in 2010.

BNP struck a relatively confident note despite the economic uncertainty clouding the banking industry. Its profit was up on the previous quarter and it swung back from a big year-ago loss.

Net profit rose 4.6 percent to 1.365 billion euros ($1.9bn), also helped by higher investment bank earnings and its acquisition of Fortis assets. Revenues came in slightly below forecasts at 10.06 billion.

Chief Executive Baudouin Prot said he expected the cost of risk to fall this year, and that BNP had a relatively small exposure to Greece’s economic problems.

“Altogether we would expect the cost of risk at group level this year to be a bit lower than last year,” Prot told CNBC television.

The bank raised its dividend to 1.50 euros a share from one euro.

“The bottom line looks good but on the underlying level it was slightly below estimates,” said WestLB analyst Christoph Bossmann.

Bonus controversy
BNP Paribas is the first of France’s top banks to post fourth-quarter results with the sector still weighed down by writedowns on toxic assets, the debt woes of Greece and a political backlash against bankers’ bonuses.

Rival Societe Generale publishes results on Thursday while Credit Agricole and BPCE report next week.

The global banking sector has so far seen a mixed set of figures, with higher profits at Barclays, Credit Suisse and JP Morgan contrasting with losses at Citigroup and Bank of America and client withdrawals at UBS.

European bancassurance group ING also posted a bigger-than-expected fourth-quarter loss of 712 million euros on Wednesday although, like BNP, ING had a smaller-than-expected loan-loss provision.

Like many banks around the world, France’s lenders have come under political pressure to make moderate bonus payments. France has also joined Britain in imposing a tax on the bonuses of traders.

Prot said BNP had set aside 500 million euros overall for its 2009 bonus payout and added that its bonus payments were lower than many of its peers.

Prot said BNP’s 2009 compensation-to-revenue ratio within its investment banking division stood at 27.7 percent.

By contrast, Barclays said on Tuesday that its compensation ratio stood at 38 percent while Deutsche Bank’s stood at 40 percent..

BNP Paribas shares closed up 2.8 percent at 49.20 euros on Tuesday. The stock, which rose 90 percent in 2009, has fallen 12 percent so far this year while the DJ Stoxx European bank index has fallen around 10 percent.

Engineering financial stability

Posted on February 16, 2010 by

The severity of the global financial crisis that we have seen over the last two years has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. To do that, we must advance the state of our financial technology.

In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin.

This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself.

Many finance experts – including Alon Raviv, Mark Flannery, Anil Kashyap, Raghuram Rajan, Jeremy Stein, Ricardo Caballero, Pablo Kurlat, Dennis Snower, and the Squam Lake Working Group – have been making proposals along the lines of “contingent capital.”

The proposal by the Squam Lake Working Group – named for the scenic site in New Hampshire where a group of finance professors first met to devise ideas for responding to the current economic crisis – seems particularly appealing. To me, the group’s work has exemplified the creative application of financial theory to find solutions to the crisis (I am a member, but I am not the source of its important contingent-capital idea).

The group calls their version of contingent capital “regulatory hybrid securities.” The idea is simple: banks should be pressured to issue a new kind of debt that automatically converts into equity if the regulators determine that there is a systemic national financial crisis, and if the bank is simultaneously in violation of capital-adequacy covenants in the hybrid-security contract.

The regulatory hybrid securities would have all the advantages of debt in normal times. But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt-to-equity conversion. The regulatory hybrid securities are thus designed to deal with the very source of systemic instability that the current crisis highlighted.

The proposal also specifies a distinct role for the government in encouraging the issuance of regulatory hybrid securities, because banks would not issue them otherwise. Regulatory hybrid securities would raise the cost of capital to banks (because creditors would have to be compensated for the conversion feature), whereas the banks would rather rely on their “too big to fail” status and future government bailouts. Some kind of penalty or subsidy thus has to be applied to encourage banks to issue them.

The theory of “debt overhang” – the intellectual origin of the proposal – explains why troubled banks are reluctant to issue new equity: the benefits accrue mostly to the bank’s bondholders and dilute existing shareholders. But the proposal does not follow directly from modern finance theory. It is a real innovation, with no prior precedent.

Why wasn’t the idea of contingent capital seized upon in earlier crises? Wasn’t the same problem of debt overhang prominent in the banking crises of the Great Depression, for example?

I think that part of the reason must be that the problem was poorly understood then, so that contingent capital could not be well articulated and lacked the force of argument that would allow it to be impressed upon government policy makers. Moreover, there is a fundamentally creative element to innovation: it results from an intellectual process that takes time, and that in retrospect always seem inexplicably slow or episodic.

The Financial Stability Board (FSB), headed by Mario Draghi, publicly stated in its September 2009 report to the G-20 that it was studying contingent capital proposals. The FSB was created in April 2009 at the G-20’s London summit as the successor to the Financial Stability Forum. Its member organisations are the G-20’s central banks and top regulatory agencies. The G-20’s member states are committed by the G-20 statement that they signed to implement the FSB’s conclusions on a worldwide basis. As a result, the FSB is in a unique position to make innovation happen.

In its recent reports, the FSB has concentrated on capital requirements, on closing legal loopholes that allow banks to evade them, and on improving accounting standards. The FSB has already facilitated a number of proposals that would help make our financial system more secure.

Contingent capital, a device that grew from financial engineering, is a major new idea that might fix the problem of banking instability, thereby stabilising the economy – just as devices invented by mechanical engineers help stabilise the paths of automobiles and airplanes. If a contingent-capital proposal is adopted, this could be the last major worldwide banking crisis – at least until some new source of instability emerges and sends financial technicians back to work to invent our way of it.

The risky rich

Posted on February 16, 2010 by

Today’s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies. Traditionally, sovereign risk has been concentrated in emerging market economies. After all, in the last decade or so, Russia, Argentina, and Ecuador defaulted on their public debts, while Pakistan, Ukraine, and Uruguay coercively restructured their public debt under the threat of default.

But, in large part – and with a few exceptions in Central and Eastern Europe – emerging market economies improved their fiscal performance by reducing overall deficits, running large primary surpluses, lowering their stock of public debt-to-GDP ratios, and reducing the currency and maturity mismatches in their public debt. As a result, sovereign risk today is a greater problem in advanced economies than in most emerging market economies.

Indeed, rating agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the UK, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors.

The impact was greater in countries that had a history of structural fiscal problems, maintained loose fiscal policies, and ignored fiscal reforms during the boom years. In the future, a weak economic recovery and an aging population are likely to increase the debt burden of many advanced economies, including the US, the UK, Japan, and several Eurozone countries.

More ominously, monetisation of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base via massive purchases of short- and long-term government paper. Eventually, large monetised fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply increase long-term government bond yields and crowd out a tentative and so far fragile economic recovery.

Fiscal stimulus is a tricky business. Policymakers are damned if they do and damned if they don’t. If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetised fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold on growth.

Countries with weaker initial fiscal positions – such as Greece, the UK, Ireland, Spain, and Iceland – have been forced by the market to implement early fiscal consolidation. While that could be contractionary, the gain in fiscal-policy credibility might prevent a damaging spike in long-term government-bond yields. So early fiscal consolidation can be expansionary on balance.

For the Club Med members of the Eurozone – Italy, Spain, Greece, and Portugal – public-debt problems come on top of a loss of international competitiveness. These countries had already lost export-market shares to China and other low value-added and labour-intensive Asian economies. Then a decade of nominal-wage growth that out-paced productivity gains led to a rise in unit labour costs, real exchange rate appreciation, and large current-account deficits.

The euro’s recent sharp rise has made this competitiveness problem even more severe, reducing growth further and making fiscal imbalances even larger. So the question is whether these euro-zone members will be willing to undergo painful fiscal consolidation and internal real depreciation through deflation and structural reforms in order to increase productivity growth and prevent an Argentine-style outcome: exit from the monetary union, devaluation, and default. Countries like Latvia and Hungary have shown a willingness to do so. Whether Greece, Spain, and other Eurozone members will accept such wrenching adjustments remains to be seen. The US and Japan might be among the last to face the wrath of bond-market vigilantes: the dollar is the main global reserve currency, and foreign reserve accumulation – mostly US government bills and bonds – continues at a rapid pace. Japan is a net creditor and largely finances its debt domestically.

But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed. The US is a net debtor with an aging population, unfunded entitlement spending on social security and healthcare, an anemic economic recovery, and risks of continued monetisation of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200 percent of GDP.

The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan. At least European voters are willing to pay higher taxes for their public services.

If America’s Democrats lose in the mid-term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetising the fiscal deficits would then become the path of least resistance: running the printing presses is much easier than politically painful deficit reduction.

But if the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly. America’s foreign creditors would not accept a sharp reduction in their dollar assets’ real value that debasement of the dollar via inflation and devaluation would entail. A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession.

Is military power becoming obselete?

Posted on February 16, 2010 by

Will military power become less important in the coming decades? It is true that the number of large-scale inter-state wars continues to decline, and fighting is unlikely among advanced democracies and on many issues. But, as Barack Obama said in accepting the Nobel Peace Prize in 2009, “we must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes. There will be times when nations – acting individually or in concert – will find the use of force not only necessary but morally justified.”

When people speak of military power, they tend to think in terms of the resources that underlie the hard-power behaviour of fighting and threatening to fight – soldiers, tanks, planes, ships, and so forth. In the end, if push comes to shove, such military resources matter. Napoleon famously said that “God is on the side of the big battalions,” and Mao Zedong argued that power comes from the barrel of a gun.

In today’s world, however, there is much more to military resources than guns and battalions, and more to hard-power behaviour than fighting or threatening to fight. Military power is also used to provide protection for allies and assistance to friends. Such non-coercive use of military resources can be an important source of the soft-power behaviour of framing agendas, persuading other governments, and attracting support in world politics.

Even when thinking only of fighting and threats, many analysts focus solely on inter-state war, and concentrate on soldiers in uniforms, organised and equipped by the state in formal military units. But in the twenty-first century, most “wars” occur within, rather than between states, and many combatants do not wear uniforms. Of 226 significant armed conflicts between 1945 and 2002, less than half in the 1950’s were fought between states and armed groups. By the 1990’s, such conflicts were the dominant form. Of course, civil war and irregular combatants are not new, as even the traditional law of war recognises. What is new is the increase in irregular combat, and the technological changes that put ever-increasing destructive power in the hands of small groups that would have been priced out of the market for massive destruction in earlier eras. And now technology has brought a new dimension to warfare: the prospect of cyber attacks, by which an enemy – state or non-state – can create enormous physical destruction (or threaten to do so) without an army that physically crosses another state’s border.

War and force may be down, but they are not out. Instead, the use of force is taking new forms. Military theorists today write about “fourth generation warfare” that sometimes has “no definable battlefields or fronts”; indeed, the distinction between civilian and military may disappear.

The first generation of modern warfare reflected the tactics of line and column following the French Revolution. The second generation relied on massed firepower and culminated in World War I; its slogan was that artillery conquers and infantry occupies. The third generation arose from tactics developed by the Germans to break the stalemate of trench warfare in 1918, which Germany perfected in the Blitzkrieg tactics that allowed it to defeat larger French and British tank forces in the conquest of France in 1940.

Both ideas and technology drove these changes. The same is true of today’s fourth generation of modern warfare, which focuses on the enemy’s society and political will to fight. Armed groups view conflict as a continuum of political and violent irregular operations over a long period that will provide control over local populations. They benefit from the fact that scores of weak states lack the legitimacy or capacity to control their own territory effectively. The result is what General Sir Rupert Smith, the former British commander in Northern Ireland and the Balkans, calls “war among the people.” In such hybrid wars, conventional and irregular forces, combatants and civilians, and physical destruction and information warfare become thoroughly intertwined.

Even if the prospect or threat of the use of force among states has become less probable, it will retain a high impact, and it is just such situations that lead rational actors to purchase expensive insurance. The US is likely to be the major issuer of such insurance policies.

This leads to a larger point about the role of military force in world politics. Military power remains important because it structures world politics. It is true that in many relationships and issues, military force is increasingly difficult or costly for states to use. But the fact that military power is not always sufficient in particular situations does not mean that it has lost the ability to structure expectations and shape political calculations.

Markets and economic power rest upon political frameworks: in chaotic conditions of great political uncertainty, markets fail. Political frameworks, in turn, rest upon norms and institutions, but also upon the management of coercive power. A well-ordered modern state is defined by a monopoly on the legitimate use of force, which allows domestic markets to operate.

Internationally, where order is more tenuous, residual concerns about the coercive use of force, even if a low probability, can have important effects. Military force, along with norms and institutions, helps to provide a minimal degree of order.

Metaphorically, military power provides a degree of security that is to political and economic order as oxygen is to breathing: little noticed until it begins to become scarce. Once that occurs, its absence dominates all else.

In this sense, the role of military power in structuring world politics is likely to persist well into the twenty-first century. Military power will not have the utility for states that it had in the nineteenth century, but it will remain a crucial component of power in world politics.

Japan finmin wants 1 pct inflation, BOJ help

Posted on February 16, 2010 by

Japan’s finance minister said he would like to see price growth of one percent and urged the Bank of Japan to cooperate in beating deflation, putting fresh pressure on the central bank for more action to support a fragile economy.

BOJ Governor Masaaki Shirakawa said the central bank was willing to cooperate, but he offered few clues on what it would do beyond keeping monetary conditions very easy.

“I personally would like to see [consumer price index] growth of around one percent, or perhaps even a little more,” Naoto Kan told a lower house budget committee.

“I think the BOJ shares the government’s view that this is a desirable policy goal,” he said, adding that how best to achieve the goal was up to the central bank to decide.

The bank appears to be ready to ease policy again in the future if market shocks, such as a sharp rise in the yen or a heavy tumble in Tokyo shares, threaten a fragile economic recovery.

Shirakawa, addressing the same budget committee as Kan, repeated that the BOJ would keep monetary conditions very easy and was always ready to provide liquidity when necessary.

“We are serious about ending deflation. It will take time and it’s not something the BOJ alone can achieve. But we will be doing all we can,” he said.

But he effectively ruled out any return to quantitative easing, a policy under which the BOJ flooded markets with excess cash from 2001 to 2006 in a bid to end an earlier bout of deflation.

Quantitative easing was effective in ensuring financial stability but it had only a limited effect in pushing up prices, Shirakawa said.

Japanese government bond yields edged up prior to Kan and Shirakawa’s comments as traders sold to make room for a re-opening sale of five-year JGBs.

“Investors would rather see a new issue being sold, but at the same time they are aware of the deflationary pressure gripping the economy as shown by yesterday’s GDP data,” said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.

Japan’s economy grew faster than expected in the fourth quarter due to a stimulus-fuelled rebound in domestic demand and corporate investment. But markets focused on the record three percent annual fall in the GDP deflator as a sign that the gap between supply and demand was pushing Japan deeper into deflation.

“[Deflation] is unlikely to result in immediate easing, but it will keep up the pressure on the Bank of Japan to continue with an easy monetary policy,” Yamawaki said.

Japan’s core consumer price index (CPI) fell from a year earlier for the 10th straight month in December and the so-called “core-core” CPI, the narrowest measure of consumer inflation, fell at the fastest pace on record.

Haruhiko Kuroda, the head of the Asian Development Bank, also urged the BOJ to work out a solution for persistent price falls, telling a newspaper interview that Japan was virtually alone in suffering deflation.

Securitisation/life

Posted on February 15, 2010 by

Securitisation is the isolation of a pool of assets and the repackaging of those assets for trading in capital markets. Securitisation began in the 1970s with US banks selling off pools of mortgage-backed loans. By 2002, some $450bn of assets had been securitised. The first insurance securitisations were related to property and casualty in the 1990s. Life securitisations followed with the sales of rights to future proﬁts from blocks of life policies and annuities.

The mechanics of securitisation
The basic idea behind securitisation is to move an asset off-balance sheet, usually done by transferring the asset to a special purpose vehicle (SPV). The SPV then issues securities to investors who contribute funds. The SPV remits some or all of these funds to the originating institution, which in which in return transfers the asset to the cash ﬂows generated by the asset. Typically there are different classes of security, with different claims and different seniority rights to the underlying cash ﬂows. Most of these arrangements will contain features to protect participating parties, including over-collateralisation, subordination as well as external guarantees.

Beneﬁts of securitisation
Securitisation is particularly useful for insurers as it offers a more efficient way for many types of insurance risks to be traded in capital markets rather than held on-balance sheets, allowing for insurance companies to take advantage of available capital. For investors, insurance securitisation offers the opportunity to invest in life-related risks, opening formerly inaccessible investment outlets involving mortality and longevity risks. These are attractive as life risks have little correlation with other risks, adding little extra risk to a diversified portfolio.

“Block of business” securitisations
These have been used to capitalise expected future proﬁts from a block of business, recover embedded values and exit from a geographical line of business. Writing new business puts pressure on a company’s capital as most of the costs in writing new life policies are incurred in the ﬁrst year of the policy and amortised across the remainder of the term. Securitisation helps to relieve this pressure by allowing immediate access to expected future proﬁts; an attractive option if the company is experiencing rapid growth in a particular line of business.

Mortality and longevity bonds
Mortality bonds with at least one payment tied to a mortality index, and their purpose is to protect life insurers and annuity providers against the adverse consequences of an unanticipated extreme deterioration in mortality. Longevity bonds offer payments tied to a longevity-related variable, such as the survivorship rate of a speciﬁed cohort, and are designed to protect insurance companies or annuity providers against an unanticipated increase in longevity.

Pension bulk buyout securitisations
Pension bulk buyouts are a recent class of securitisations with an active market is in the UK, where buyout funds such as Paternoster (backed by Deutsche Bank) and Synesis Life (backed by JPMorgan) have been running since 2006.

Annuity books and their assets contain a range of risks. The main matching assets for annuity liabilities are corporate and government bonds, the coupons and principal on which are used to make the payments on the annuities. The main risks on the asset side are from credit and interest rate risk, while the risks facing those paying annuities and pensions are inﬂation and longevity risks. Companies therefore sell off unwanted risks and retain those that the company feels comfortable managing.

The idea behind pension bulk buyout securitisations is for a counterparty to take on some or all of the risks of a pension fund. A leveraged (or structured) buyout offers one method and is used for pension schemes in deﬁcit where the sponsor wishes to wind up.

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