Month: August 2014

Why MiFID II is Europe’s latest regulatory headache

Posted on by Ashton Wenborn

ESMA, the EU’s overarching markets regulator, has recently faced questions from banks and trade bodies about the Markets in Financial Instruments Directive, Mark II (MiFID II), which is set to sweep Europe’s financial sector in 2017. Concerns over this upcoming 720-page directive and its accompanying regulation, MiFIR, include costs, which will most likely amount to billions of euros; a lack of clarity in the stipulations of the legislation; and the sheer impact it will have on the European economy.

With the UK financial sector recently having ‘survived’ the implementation of the retail distribution review (RDR), many firms in London have only just gotten round to dealing with other regulation such as AIFMD. The UK financial sector saw a slew of M&A after the RDR was put in place a few years ago, as many smaller independent financial advisers (IFAs) were unable to support the compliance costs necessary under the new rules.

Now, with MiFID II looming in the distance, European trade bodies are increasingly concerned that banks, investment firms and wealth managers will be facing yet another massive bill that will bring many firms to their knees and push their resources to the very limits.

The key points of the directive include a new framework for EU financial services; new cost disclosure agreements designed to show how costs affect investment returns; new definitions of independent/restricted advice; an extension of the commission ban to discretionary fund managers; and the establishment of target markets for financial products and distribution.

MiFid II Need to know: wholesale

  • High frequency trading will be restricted through greater testing of algorithms, but there will be no 500 m/s rule.
  • ‘Dark Pools’ will be subject to a volume cap at four or eight percent for reference price waiver and negotiated trade waiver.
  • All trading to be conducted on regulated markets, multilateral trading facilities, systematic internalisers or organised trading facilities. Excludes equities.
  • Access provisions for exchange traded derivatives can be deferred for up to five years if approved by national regulatory authority.
  • Position limits on certain commodity derivatives, daily reporting implemented.
  • Benchmarks must be licensed within two years and cannot copy or substitute an existing benchmark.

It also stipulates that investment research cannot be tailored or bespoke in content; that inducements must be quantified and that it must be clear how they improve client services; telephone recordings with clients must be kept for up to seven years; that the top five executive venues used by a firm must be recorded; and that natural and legal persons need to have a client or legal entity identifier before trading.

In essence, all this entails the production of a significantly larger amount of data for every financial transaction made or client had, and that again will demand serious resources from firm’s compliance and IT teams.

Cost concerns
Britain’s Wealth Management Association, a trade body representing 250 fund, portfolio and wealth management firms, is understandably concerned about the costs of the directive. At this stage, said Ian Cornwall, Director of Regulation, “there’s not enough detail for us to determine costs, but it will be very expensive,” he told World Finance in an exclusive interview. “MiFID II is not as great as MiFID I in terms of headlines, but firms will have to manage a lot of data and in terms of financial impact, MiFID II will require a large resource allocation up until January 2017.”

The uncertainty related to the impact of MiFID II, is based on the legislation only having reached ‘level 1’, consisting of vague principles and rules, as well as ESMA having recently consulted interested parties such as the WMA on technical details and implementing measures for ‘level 2’. The directive is still in a starting phase, but soon enough, these rules will become law and this is why trade bodies were given two months to process the 700 pages of legal language.

“There are bits we want to re-write even now. We’ve had to race through this lengthy stuff,” said Cornwall, adding there are five key problems in the new legislation that could prove expensive and which firms need to look out for. These include the handling of trading volumes, transaction monitoring, telephone recordings, disclosures of costs, and loss thresholds of discretionary managers.

One notable change is the plan to ban inducements, which are quite broadly defined and therefore could impact a large part of the finance industry. “It looks as though almost all external research provided to fund managers, except that which is deemed ‘very generic and widely distributed’, may be viewed as an inducement, and so payment for this would have to be unbundled from dealing commissions,” Citi said in a recent research note.

If the plans make it to law, asset managers will either conduct more research in-house or use their own money to pay for external research, with both strategies increasing costs significantly. As such, Citi estimated that asset managers’ operating margins would fall from 35-40 percent to 25-30 percent as a result of the inducements ban alone.

This is also a primary concern for the wholesale market, said Michael H Sterzenbach, Secretary General of Germany’s Federal Association of Securities Trading Firms.

“If ESMA does not change its opinion at this point, its ‘technical standards’ could in practice prohibit investment firms from providing investment research on the basis of a CSA. If execution brokers would have to ‘unbundle’ investment research from execution and sell research separately for a cover price per dossier, this would result in cutting off small buy side firms from access to research and thereby significantly reduce the amount of research, which can be sold to market participants with a severe negative effect in particular for smaller issuers,” said Sterzenback.

“We are of the opinion that investment research, even when it is provided on the basis of a CSA, is not an inducement but a service paid for, and that CSAs offer a fair pricing model, which allocates the cost of research proportional to the volume of trading activities and therefore does not create any conflicts of interest and is beneficial to buy side firms, investors and issuers of any size,” he maintained.

Stricter transparency
In comparison to MiFID I, the directive will make things even tighter for firms, covering organised trading facilities or swaps, consolidated tape which reports the latest price and volume data on sales of exchange-listed stocks and the handling of so-called dark pools – the secretive electronic alternative trading systems. In this respect, MiFID II/MiFIR is a response to market fragmentation and information distortions revealed in the wake of MiFID I.

With regards to the retail market, investment firms that execute clients’ orders will have to make public (annually, for each class of financial instrument) the top five execution venues in terms of trading volumes where they executed clients’ orders in the preceding year and information about the quality of execution obtained, in the name of transparency. However, Cornwall has his reservations.

“Our problem here is going to be the sheer cost of producing the data. What is meant by the terms ‘each class of financial instrument’, ‘trading volumes’ and ‘quality of execution obtained’? What is the time period to produce the data? There are potentially huge system costs with little benefit for retail clients”, he says.

In addition, changes to transaction reporting mean investment firms that transmit orders to another investment firm will still be able to rely on that firm to report the transactions, but will be obliged to provide much more information and sign a written obligations agreement between the two parties. There also needs to be client identifiers and a trader ID attached to every transaction.

“It sets out 93 data attributes which firms will need to fill out when submitting a transaction report, an increase from the current 25 attributes. So there will be an increased dependency on static data for reporting, which firms should be concerned about. Their current data systems might not be adequate and will probably need some major changes,” said Cornwall.

Investor protection
In addition, MiFID II sets out a new regime for communications regarding client orders. Rather than recording six months, firms will have to record up to seven year’s worth of client communications and dealings that can be accessed by regulators. The directive also calls for the disclosure of all costs and charges in connection with investment services, on an annual basis, to clients.

In this enhanced reporting to clients lies a key concern for the industry, the WMA said. According to MiFID II, firms will have to report losses above agreed thresholds of 10 or 20 percent. However, such movements within an investment account could be based on transfers between accounts, ISAs, pensions etc. and not be based on an outright loss. As such, mandatory loss reporting could lead to unnecessary concerns or panic among clients, Cornwall argued.

MiFid II Need to know: retail

  • New cost disclosure agreements.
  • Need to establish a target market for products and distribution.
  • Ban on inducements – investment research cannot be tailored or bespoke.
  • Telephone recordings need to be kept for up to seven years.
  • Top five execution venues must be recorded.
  • Losses above 10 or 20 percent trigger a mandatory report.
  • Traders and clients must be clearly identified in transactions.
  • Transaction reporting will have up to 90 criteria rather than the current 25.

Whereas ESMA has been particularly clear on the matter of loss thresholds, other parts of MiFID II are lacking in clarity. The trade bodies World Finance spoke to all said terms such as costs, switch and suitability needed further elaboration, as did things such as the amount of reliance a firm might place on other parties for compliance. What’s more, the UK’s Financial Conduct Authority (FCA) has been surprisingly quiet on how it will handle MiFID’s relationship with the RDR, which could prove a tricky field to manoeuvre for firms in London.

A key concern for firms and trade bodies will be how MiFID II fits in with the current regulations and directives on a national basis. In the UK there are relevant concerns that MiFID and MiFIR overlaps with the RDR, which UK firms have spent years and billions of pounds on, in order to comply.

MiFID II appears to permit an override by national regulators to enable them to continue to impose their own rules, but whether that means the RDR will survive is unclear, as there are some key points of the directive that are incompatible with RDR stipulations.

“MiFID and the RDR have different definitions of independent and restricted services, which could mean the UK has to change its rules again barely a year after a significant overhaul,” explained Cornwall, who also asked whether there “will be an RDR II to clean up the mess? In my own view, we ought to change the RDR to match what’s happening in Europe.”

Whether or not London can expect changes to the RDR remains to be seen and either way, the FCA will not put out their consultation paper on MiFID II until late 2015 or early 2016, and that will be the first indication of whether or not the two pieces of legislation are compatible.

Bigger picture
National concerns aside, the broad consequences of MiFID II are also worth mentioning. No matter what ESMA or other authorities say, the eventual outcome of the directive is going to be a series of expensive systems upgrades.

“There will have to be a lot of prep on the part of firms, mainly starting in the last six months of 2015. We are trying to create awareness of the cost of i.e. products, so firms can manage their expectations. 2016 is going to be a pretty dismal year and I expect that we will see more consolidation,” said Cornwall.

The costs will most likely lead to another surge in M&A, similar to that which swept the UK in 2012 and 2013. For larger firms, it will just be another regulatory burden, but for smaller companies, such as those which are dominant in Germany, the costs may be unbearable and concerns have arisen that competition in the European financial sector will take a severe hit when smaller IFAs are forced to consolidate.

Again, MiFID II will most likely cause a hike in client costs and see financial activity drop as a result. For a recovering European economy, MiFID II could be very bad news indeed. Nevertheless, it’s hard to predict whether the directive will have as sweeping an effect as RDR had on the UK financial sector. Trade bodies are only hoping that ESMA will take note of these concerns in order to limit the financial burdens inflicted by compliance as much as possible and thereby cushion the inevitable blow to Europe’s finance industry.

Access Bank makes sustainable banking a reality for Nigeria

Posted on by Ashton Wenborn

‘Sustainable banking’ has been a buzzword in the industry for some time now because of its positive connotations. Since the onset of the global financial crisis, there has been growing concern amid customers that their banks are not only resilient, but also sustainable. At first there was concern that sustainable banking institutions focused on financing businesses that actively benefit the wider society and pay extra attention to creating affirmative environmental policies and would jeopardise an institution’s competitiveness.

However, new research by the Rockefeller Foundation and the Global Alliance for Banking on Values has proven that sustainable banks outperform leading traditional banks in a number of areas and typically offer comparative or better financial returns.

Built-in sustainability
For Access Bank, a leading Nigerian institution, sustainability has always been a fundamental part of their business model. “We focus on creating real value through careful implementation of our sustainability agenda and have incorporated this into every aspect of our business operations and relationships,” explains Omobolanle Victor-Laniyan, Head of Sustainability at Access Bank.

“Our strategy is driven by our commitment to be the best in all that we do and to adopt best practices in every aspect of our operations. We want to be the change in our industry and we intend to create a viable future by setting standards that make the difference for a sustainable future.”

For Access Bank, a leading Nigerian institution, sustainability has always been a fundamental part of their business model

As a result, Access has been blazing a trail in the region, setting a positive precedent for other banks. “A key development was our decision to embed sustainability into all our core operations as well as a review of our corporate strategy to define our business outlook,” says Victor-Laniyan. “In Nigeria today, Access Bank is respected for laying a solid foundation of sustainability in the banking landscape; the bank has provided leadership in the development of the Nigerian Sustainable Banking Principles. We also organised a capacity building workshop for the industry in conjunction with the Sustainable Finance Advisory, Dutch Development Bank and United Nations Environmental Protection and Finance Initiative.”

The Nigeria Sustainable Banking Principles include guidelines on oil and gas, agriculture and power, which are culminated in a circular release by the Central Bank of Nigeria directing all banks, discount houses and development finance institutions to adopt and implement the principles. It has been a huge step forward for the Nigerian banking industry, as the guidelines help local institutions invest wisely and sustainably in worthwhile environmental and development projects.

“Access Bank’s business philosophy is hinged on high ethical practices and standards. The business philosophy will guide the bank’s day-to-day operational decisions and actions, and is anchored on three key elements: customers, sustainability and talent,” says Victor-Laniyan, explaining Access Bank’s strong corporate social responsibility initiatives, which span beyond sustainable banking.

“We have also developed policies to shift social paradigms. While promoting women’s economic and political empowerment has gained greater attention over the last three decades, progress has been slow.”

Getting it right
“At Access Bank, we focus on empowering female multipliers; those women whose integration into the banking sector will create ripple effects throughout the economy. We know the critical importance of developing policies within our own institution to help break down barriers to women entering careers that in the past have been dominated by men, such as in banking. Women make up 30 percent of our board which is impressive by international standards.”

It is through initiatives such as these that Access Bank has built its reputation as a modern and socially conscientious bank. With its robust sustainability and CSR practices, the bank has been climbing the ranks within the regional industry, and coming ever closer to its goals which has contributed to overall growth. “The bank aspires to rank in the top three position in chosen markets and serve as the standard for creating value for customers, employees, shareholders, investors and local communities through sustainable business practices,” explains Victor-Laniyan.

“The strategic thrust of the bank is to triple it’s size over the next five years, with clear focus on improving profitability and return to shareholders.” Commercially, Access Bank’s strategy is a runaway success. With revenues of over $1.2m, and $28m of profits before tax, it is not hard to see that the bank is certainly doing everything right.

Pleasing the electorate means killing infrastructure developments

Posted on by Ashton Wenborn
London’s Crossrail is the largest transport and infrastructure project in Europe, but took 60 years to get government approval
London’s Crossrail is the largest transport and infrastructure project in Europe, but took 60 years to get government approval

For most modern democracies, getting even the most minor, short-term decisions made can be an arduous task at the best of times. Planning anything beyond the term of a government is especially difficult, as elected politicians start to make decisions based not on the long-term good of the country, but on how their re-election prospects might be affected.

The problem is understandable, albeit selfish. After all, why would someone spend vast sums of money on something they’re unlikely to see the benefit of? A government may deem it foolish to dedicate valuable resources to something that won’t be built until long after it can claim any of the glory.

Inadequate infrastructure
However, with the world becoming increasingly industrialised and urban sprawls getting larger, the infrastructure needs of countries have never been so stark. Both developing and developed countries are experiencing rapid population growth, causing significant strain on infrastructure. While developing countries are struggling to build quickly enough to satisfy increasingly demanding citizens, developed countries are finding infrastructure that was good enough decades ago is no longer adequate for their current populations.

Although large transport projects are usually the most widely discussed infrastructure schemes, a whole range of other things come into the category. Schools must be built to cater for future generations of pupils, particularly in countries experiencing rampant population growth. Likewise, the energy needs of increasingly industrialised populations need to be met. Clean water must also be easily accessible to all the many new homes that will have to be built for future generations.

Some countries have found it easier than others to get transformative infrastructure projects off the drawing board and into operation. Many Gulf countries have little difficulty getting approval to construct impressive new infrastructure, perhaps due to the lack of citizens having a say in what gets built. Similarly, China has powered ahead with a huge array of new roads, airports, water systems, power plants, accommodation and rail networks, with little in the way of NIMBY campaigns to hold things up.

Unfortunately for countries with strong democratic political systems, merely ploughing on with big projects without stopping to consider the wishes of the people is tricky. India, a country in love with bureaucracy and elections, has struggled to build the huge infrastructure projects its swelling population so clearly needs. Likewise, the UK has frequently kicked decisions on major projects into the long grass, hoping a future government will have to take the tough decision and foot the bill. As a result, the country is now suffering; its infrastructure network was once the envy of the world, but is now wildly inadequate for the needs of its ever disgruntled population.

However, recent proposals by both sides of the UK’s political spectrum have hinted that politicians might finally be starting to look beyond the date of their next election, and towards the needs of future generations. First, there was the announcement last year by the opposition Labour Party that it had tasked a former expert on large-scale projects to look into what the country needed to do to build for the future.

A shift in focus
In 2013, businessman Sir John Armitt, who had headed up the UK’s Olympic Delivery Authority, unveiled his report into Britain’s infrastructure needs. Armitt’s work had been widely praised for ensuring the 2012 London Olympic Games was on schedule, leading the Labour Party to enlist him for this study.

In his report, Armitt cited the trailblazing Victorians as an example of people who understood how important infrastructure was to a successful, modern economy, and why clear and long-term planning was crucial to allow future generations to prosper. “Today we cannot dodge the need to adapt what we have inherited or the critical importance of investing for the future,” he said.

He added that governments – and particularly the UK – often find it difficult to get beyond the initial planning phase of a major infrastructure project as a result of indecision. “At the front-end of the investment cycle we seem to encounter problems; understanding why we must invest, what we must build, how and when we are going to deliver projects and then sticking to decisions. What are often missing are the enabling factors of cross party support and clear objectives.”

As a result, Armitt recommended that the British government set up a National Infrastructure Commission with statutory independence from government, therefore transcending the petty squabbles of party politics. The commission would assess the infrastructure needs of the UK each decade for the coming 30 years or so, outlining for the government of the day what exactly needed building, and providing them with the shopping list.

Armitt cites the examples of similar bodies around the world, including the Singapore Urban Redevelopment Authority, which plans 40 years ahead for projects, and the New Zealand’s National Infrastructure Unit, which has a 20-year focus. Infrastructure Australia is another body that allocates capital on ‘evidence-based’ appraisals of schemes.

Bridging the gap
Encouragingly, one of the leading figures from the other side of the political divide made noises about the need for a long-term view regarding infrastructure. Mayor of London Boris Johnson, the colourful Conservative Party politician who is set to re-enter Parliament at next year’s general election, unveiled his Infrastructure Plan 2050 in August, laying out what he believes the UK’s capital requires to cater for its citizens in the next 35 years.

Setting out a staggering £1.3trn shopping list of major projects London apparently needs, Johnson said: “This plan is a real wake-up call to the stark needs that face London over the next half century. Infrastructure underpins everything we do and we all use it every day. Without a long-term plan for investment and the political will to implement it, this city will falter. Londoners need to know they will get the homes, water, energy, schools, transport, digital connectivity and better quality of life that they expect.”

In the report, he called for a range of projects, including a new orbital rail line around London, as well as the much-needed Crossrail 2 underground line. Predictably, Johnson also made the case for a new hub airport in the Thames Estuary, something that has been discussed since the 1960s but dismissed by successive governments as too expensive. The current government is thought to favour the far cheaper alternative of expanding Heathrow Airport, even though it is constrained by space and already near full capacity. It is an example of such a decision that many feel should be taken out of the hands of short-termist governments. The contrast between the two options is stark: Heathrow could get an additional runway at a cost of around £15bn, but with current rates of air travel rising, this would be filled within a decade or two; the Thames Estuary, with its four runways, would be able to cater for the needs of the UK’s aviation industry for far longer, but would cost anything between £45bn and £80bn to build.

The huge costs associated with catering for population growth make most politicians squirm and look for short-term fixes. But they must not be allowed to put projects on the back burner so they can play to the electorate. The alternative to making the sort of bold decisions the Victorians are famed for is to do nothing. While it may allow governments to offer tempting tax cuts to the electorate shortly before an election, it does nothing for the long-term needs of the country, and the generations of workers who will suffer with the shockingly inadequate infrastructure left to them by those in charge now.

NDB Wealth Management leads Sri Lanka’s asset management industry

Posted on by Ashton Wenborn

A new virtuous cycle is driving Sri Lanka’s growth at breakneck speed. Known for its exquisite blue sapphires, tea gardens and beautiful beaches, the country is being transformed thanks to growth in six key sectors: aviation, maritime, knowledge, tourism, commercial and energy. The country is in overdrive. With the transformation of the economy, driven by these six sectors, banking sector assets have grown more than 50 percent in the past four years, while the formal asset management sector experienced explosive growth due to a rapid increase in funds under management, as well as the number of new service providers entering the fray.

The Government of Sri Lanka and the Securities and Exchange Commission of Sri Lanka have come out in full force to support the asset management industry by offering generous tax incentives, helping to create market awareness and introducing the speedy regulatory changes necessary for asset growth. The mutual fund industry, which is licensed by the Securities and Exchange Commission of Sri Lanka, for example, has issued many new licenses: the number of mutual fund managers has tripled and their assets under management have quadrupled in the last four years. The underlying asset markets, specifically government debt and corporate debt markets, have grown in breadth and depth due to the liberalisation of these markets, which has allowed foreign investors to enter directly or through mutual funds.

$46bn

approx. banking assets in Sri Lanka

Market leader
NDB Wealth Management has taken the lead of Sri Lanka’s asset management industry, and has the largest asset base under management. It also leads the mutual fund industry, with around 30 percent of the industry’s total assets. It has over 20 years of experience, superb research capabilities, world-class systems, high standards of client service, and has earned a reputation as the leader in the asset/wealth management industries in Sri Lanka.

In recent years, the wealth management industry in Sri Lanka has evolved, and the strong presence of the retail banking industry is being complemented by wealth management products and securities trading to offer banking clients comprehensive financial solutions.

NDB Wealth Management has been the catalyst for this growth in Sri Lanka, driving the convergence process between retail banking and capital markets by joining its NDB group retail banking and securities trading units with its wealth management arm.

Positive numbers
Total banking assets in Sri Lanka are estimated to be at around $46bn, while the total wealth management industry, including mandatory government provident funds and insurance fund assets, adds up to around $10bn.

With the high expected GDP growth rates, it is forecast that Sri Lanka’s per capita GDP will reach $4,000 by 2016, giving a further impetus to the convergence model which NDB Wealth Management has pioneered in the country.

NDB Wealth’s private wealth management service has shown remarkable growth in line with Sri Lanka’s rapid economic growth. The sale of wealth management products has been made easy due to high-net-worth clients having the requisite knowledge, wealth and appetite for risk, while the affluent retail market is gradually being inducted into the concept of wealth management via low risk and highly liquid money market accounts.

A decade of growth
Ultimately, Sri Lanka, with its prime location at the centre of the East-West trading route, is expected to enjoy tremendous growth in the next 10 years with the evolution of the six key sectors mentioned above. This growth will accentuate the speed at which the structure of the economy moves towards a more service-oriented system, in which financial services will represent an important vertical. NDB Group, together with NDB Wealth Management, envisions being at the centre of Sri Lanka’s financial hub, helping to lead its growth

Crédit Mutuel stays strong in spite of France’s troubled economy

Posted on by Ashton Wenborn

France has been highlighted by some sources as the weak link of all the major European economies, as the country struggles to negotiate the worst of its national debt crisis and keep pace with the rate of recovery in Europe. Nonetheless, for now the nation remains the second-largest economy on the continent, and boasts a number of key industries still in impressive shape.

One area that is still very much in its heyday is the financial services industry, which has expanded quite considerably over the years, regardless of sometimes-disappointing showings for the French economy as a whole. The industry’s sterling performance has been underpinned, above all, by a number of enterprising players, whose contributions to financial services and to the French economy as a whole have been second-to-none.

The country’s innovative streak can perhaps best be seen in the case of Confédération Nationale du Crédit Mutuel, a leading and long established bank and insurance group and a key constituent of the French financial services industry. “The Crédit Mutuel group played an active role in financing the economy in 2013, both at the national and regional levels,” Confédération Nationale du Crédit Mutuel Chairman Michel Lucas told World Finance.

Crédit Mutuel in numbers

€2.71bn

total net profit

€2.65bn

net profit attributable to the group

14.5%

core tier 1 ratio

5,920

points of sale

78,482

employees

30.4m

customers

€669bn

in savings

€351.2bn

in loans

17.2%

market share in bank lending

14.9%

market share in deposits

A leading lender
Taking into account the entirety of the Crédit Mutuel network, the bank employs upwards of 100,000 employees, 78,482 staff members and 24,000 elected voluntary directors, and delivers its expert products and services to a customer base of 30 million, 28 million of which are individuals. What’s more, backed by a long history of local experience, Crédit Mutuel continues to reaffirm its status as a leading lender for individual customers, as well as small, medium and intermediate-sized business (PME/PMI), for which it is the third-largest lender in the industry.

“With a focus on quality of service – the key to its trust-based relationships – the group is expanding all of its banking, insurance and service businesses by constantly making its offering more comprehensive, better adapted and more competitive,” says Lucas.

As evidenced by its sizeable contribution to the French economy in years passed, Crédit Mutuel is indicative of the financial services industry’s ability to look beyond otherwise unimpressive results and deliver outstanding financial solutions that rival even the most competent global names. The group’s chairman speaks at length about the bank’s progress, ratings (see Fig. 1) and how exactly Crédit Mutuel has managed to succeed where so many have struggled.

“Underpinned by the strong business growth of its networks, notably in retail banking, it has buttressed its fundamentals while combining growth and efficiency,” says Lucas. “The Group maintained its focus on service quality and succeeded in growing across all its segments – banking, insurance, services – with an increasingly adapted and diversified product line.”

For the year ending December 31, 2013, the group posted a net profit of €2.65bn and a total net profit of €2.71bn, representing an annual increase of little under 23 percent and thereby bolstering its already impressive share of the market. The bank’s core tier 1 capital, throughout that same time, stood at an impressive €30.5bn, marking an annual increase of 6.6 percent and resulting in a core tier 1 ratio of 14.5 percent based on ‘Basel 2.5’ standards, the highest of any French bank and of any European lender. As of the end of 2013, Crédit Mutuel boasted 7.5 million members of its 11.5 million customers, as well as more than 2,000 local branches administered by more than 24,000 representatives and elected members.

The group’s impressive performance has not come without investment, however, and the bank has grown to such an extent that its two main banking networks, Crédit Mutuel and CIC, together with the Targobank and Cofidis networks equate to an overall network of close to 6,000 points of sale. “Fully owned by its members, the Crédit Mutuel Group allocates all of its profits to growth and development, employee training and strengthening capital,” says Lucas.

Remote access
Recognising technological expertise to be a key differentiator in the industry, the group holds this attribute at the heart of its development strategy, not only in France but also throughout the entirety of Europe and beyond. “New innovative services are constantly being added, confirming the group’s position as a leader,” says Lucas.

As a pioneer in the field of remote banking, Crédit Mutuel offers a range of digital services to maintain close ties with its members and customers. Not content with a bricks and mortar branch network alone, customers have the opportunity to indulge in all manner of remote banking products and services, and, in 2013, the group’s remote banking division recorded more than one billion contacts, of which almost half were via the internet.

What’s more, mobile telephony, the group’s third business line, offers yet another means of providing bank insurance and financial services, and represents an alternative payment method to support the group’s position in electronic payments. Finally, to satisfy the needs of individuals as well as professionals, the group created EPS, a residential remote surveillance system that stands as the leader in France with a 35 percent share of the market.

Understanding that customer expectations today are greater ever than they have been, Crédit Mutuel, as with any other successful name in financial services, has taken strides to ensure that it can offer a multi-facteed experience for today’s much-changed banking public.

The group’s insurance subsidiaries are also a major force to be reckoned with in France. Groupe des Assurances du Crédit Mutuel (GACM), Suravenir, Suravenir Assurances and Assurances du Crédit Mutuel Nord (ACMN) together manage a total of 34.4 million policies, up 11.2 percent on the year previous, of which 29.6 million are in risk insurance and 4.8 million in life insurance – on behalf of 12.9 million policyholders.

Total income generated by the insurance business last year reached €14.4bn, representing an increase of 21.2 percent in one year, and in large part driven by life insurance. The group’s results in the insurance segment once again illustrate the strength of the historic bank insurance model, which was created by Crédit Mutuel more than 40 years ago now, and accounts for more than 30 percent of its total net profit.

Growing internationalisation
The group’s international presence is also on the up, and operations aside from those in France accounted for approximately 18.2 percent of total net banking income last year, up from 4.7 percent in 2005. The bank’s expansion into international markets, however, has not come without an appropriate strategy to match, which has seen the bank embark upon a series of carefully chosen partnerships.

In 2013 the group finalised agreements to strengthen its partnership with the Canadian banking group Desjardins and signed an agreement in the insurance segment to mark the creation of Monetico International (SMI), a leader in the global electronic payments market.

Source: Crédit Mutuel
Source: Crédit Mutuel

Last year also marked the first full-year consolidation of the Belgian division Beobank/OBK and, in the insurance segment, of the Spanish subsidiary Agrupacio. “Crédit Mutuel Group’s goals are aligned with those of its shareholder members and customers on behalf of the economy. The group is continuing its diversification policy in France and abroad, while consolidating its retail banking position outside of France,” says Lucas.

The same values demonstrated by the group in forming these various partnerships can again be seen in the way in which the bank is governed. Cooperation, responsibility and solidarity are the cornerstones of the group, and have been since Crédit Mutuel was first established.

“It belongs to its members, who own its share capital and guide its strategy through a democratic process,” says Lucas. “As a mutual bank, Crédit Mutuel bases all of its actions on the interests of its members. Growth is always guided by the founding values: solidarity, responsibility, equality, proximity and transparency, and these shared values are as strategic as the quality of its services. At the core of Crédit Mutuel’s identity, these values affirm its difference and underpin its growth model.”

Supported by a stronger balance sheet and controlled growth, the group actively contributes to supporting the real economy on a daily basis. Owing predominantly to the day-to-day commitment of its directors and employees, the trust shown by its customers and solid financial fundamentals, Lucas believes the group can focus on growing, adapting and affirming its difference, constantly aiming to better “help and serve” its members and customers. “With these assets, it can confidently meet the economic, technological, competitive and regulatory challenges of today’s world,” he says.

BMO helps high-net-worth families plan for the future

Posted on by Ashton Wenborn

Across Canada and globally, the number of high-net-worth families continues to grow, and we are reaching new heights in 2014. Consider the following facts: two-thirds of affluent Canadians are self-made, and many of those are new Canadians; stock markets and the value of many stock option plans are hitting new highs; more women are achieving financial success; and successful families must decide on how to engage the next generation, whether it be via a business or an estate plan. To serve such a wide array of clients, private banks must be ready to deal with a myriad of different and often very complex situations.

Wealth leads to unique opportunities. It can produce a sense of security. It gives people the possibility to redeploy capital in their businesses, acquire new businesses and contribute to economic growth. It allows leveraging when investing. It allows one to get involved with and influence the community. It provides access to travel, education, artistic pursuits and philanthropy.

But notwithstanding these opportunities, wealth leads to complexity, increased responsibility, and at times, conflict. To support these families, BMO Harris Private Banking has assembled a coordinated, talented and passionate team with diverse expertise. Every client strategy team is served by a private banker, an investment councillor, a trust specialist, and a wealth planning professional. Backed by the heritage, stability, and resources of BMO Financial Group, our teams are dedicated to creating a profound impact on the lives of the families with whom we work.

Private banks must be ready to deal with a myriad of different and often very complex situations

Alleviating complexity
In a world of complexity, change and globalisation, private banks must help their clients make sense of what can be an overwhelming financial landscape. BMO Harris Private Banking seeks to make sense of the complexity by helping our clients establish a wealth plan, update and revise it when necessary, and execute it. Execution is key. Our goal is to provide clients with an integrated wealth management plan, and work with them to bring it to life. We tackle critical and urgent issues that need to be resolved within the first month or two. We address secondary issues in the subsequent three to 12 months, and deal with other issues as they arise.

Our objective is to build strong relationships with the families with whom we work so we can truly make a difference. We respectfully challenge successful Canadian families to take action on what’s important, to drive exceptional outcomes today and through the many times of transition and change they will eventually encounter.

We do that by proactively asking thought-provoking questions to truly understand our clients:

  • We engage clients in a disciplined process of discussion to highlight what’s most important to them;
  • We provide clients the motivating rationale, solutions, and support to take action on what needs to be addressed to ensure their wealth is protected and put to the best use;
  • We recognise that difficult and emotionally sensitive matters must be addressed, and doing so can lead to significant relief;
  • We make the overwhelming manageable. We deal with one matter at a time, but keep the whole context in mind.

Given the evolution of wealth in Canada and the demographic changes in the country, our efforts to support our clients are focused on three areas that we believe are important to them.

Building diverse client service teams
Wealth in Canada continues to evolve. To ensure private banks can support the uniqueness of each successful family they need to build client service teams that understand the communities they serve and have a deep understanding of the breadth of wealth services. Fundamental to success in private banking is an understanding of the particular goals, dreams and objectives of each family. The uniqueness of each family makes the role of private banks that much more demanding. It is not enough to provide today’s clients with tailored wealth management products, services and strategies and call it a day.

Rather, we believe being a successful private bank means anticipating clients’ unique needs and truly knowing and caring about our clients. This means developing an employee base that reflects the communities in which we do business. It involves asking thought-provoking questions, engaging clients in a disciplined process of discussion to highlight what is important to them, and working with them to take action on what needs to be addressed.

As an example, we do that by working closely with clients to achieve a connection with the client themselves and their family. Through these efforts, we get a better understanding of their priorities and what drives and motivates them. In order to achieve such a connection, we must understand that different clients have different needs and face different issues. One way we build connections is to have dedicated and specialised teams that focus exclusively on specific client segments, such as executives, business owners, new Canadians, medical professionals and ultra-high-net-worth Canadians.

Each segment has specific personal and business considerations: a doctor or dentist may have equipment purchasing issues; a business owner may need franchising expertise; and new Canadians have a plethora of issues to consider, such as investments, schooling for children, moving costs, business interests in their country of origin, and more. Our teams are able to concentrate on the particular issues relevant to the individual and their families’ needs.

Wealth transfers to the next generation
As the population ages, the need for estate and trust planning increases. The objective of specialists in this sector is to ensure that clients have the opportunity to leave a lasting legacy to the next generation. Our services run from education programmes for young adults to assisting families in establishing family governance structures, as well as the utilisation of strategic philanthropy to assist in transferring values and wealth from one generation to the next. We also provide financial, retirement, will and tax planning and assist in the establishment of trusts to help following generations in understanding the wealth management process.

For business owners, succession planning represents an important issue. Over the next 10 years, it is estimated that more than two-thirds of Canada’s present generation of business owner’s will either retire or move on to a new career. The business often constitutes the vast majority of the family’s wealth. Assisting a business owner with maximising the value of a business – whether it is to be transferred to the next generation or sold – is fundamental to helping our clients during this important transition.

Most business owners have been focused on running their business and have not spent a lot of time preparing the transition issue or communicating with family members on their desires and expectations. There are often emotional issues with respect to entitlement and expectations that need to be bridged. Our role is to encourage open communication. We also focus on setting up separate governance structures for family issues, business issues and ownership issues to enable more direct and specific conversations to reduce some of the tension that can exist.

We believe in providing financial education to the entire family. We host a number of events catered to clients, their children, and other family members to equip them to understand the basics and even become comfortable with some of the more complex aspects of sound financial management.

Philanthropy: creating a lasting impact
We are seeing more and more Canadians take an interest in giving back to society and to their communities, to create a legacy, have a social impact, express their values and truly make a difference.

We have built our expertise in philanthropy over the past 10 years – our experts can initiate the discussion with clients to outline the possibilities and options available. We often take the step of challenging those of our clients who have more than enough wealth for their retirement needs and for supporting children, grandchildren and loved ones to consider charitable giving and/or creating a family foundation.

We find that such discussions resonate with successful Canadians; it leads to better and richer decisions. This is a particularly important effort, where questions of legacy can matter greatly. We also link philanthropy into estate planning. As with other elements in the transfer of wealth, education is key. We have experts who can help the younger generation understand how a family’s philanthropic activities fit into the larger wealth plan, and how they can continue the legacy far into the future.

Helping families drive better outcomes
Knowing that there is a growing number of successful Canadians that have a diversity of challenges, and also that the sophistication of clients is increasing, citizens expect more from their wealth advisors. With the expertise to support such a wide and complex variety of issues, BMO Harris Private Banking helps these families make the best choices for them and prepare for a well-planned future.

CaixaBI: Portugal’s return to capital markets is strong

Posted on by Ashton Wenborn

On May 17, 2014, Portugal officially exited the Troika’s financial assistance programme without any credit lines or financial support from foreign institutions. The date also marks the country’s full return to the international capital markets, a process made of decisive steps that had begun three years before with the arrival of the Troika of international lenders: the International Monetary Fund (IMF), the European Commission (EC) and the European Central Bank (ECB).

The global economic crisis that is now abating, with progressive recoveries projected for Europe and the US, had its first symptoms in America in the second half of 2007, with the subprime lending and securitisation debacle, which gained momentum when Lehman Brothers went bankrupt in September 2008. By May of 2010, a new chapter of the crisis affecting European sovereign debt could no longer be ignored when Greece asked for financial assistance from the Troika after being shunned from market funding. A similar request came from Ireland in November 2010 and, by April 2011, Portugal followed suit.

Even after the Irish requested financial assistance, Portuguese issuers continued to benefit from access to international funding markets. As late as February 2011, the Republic of Portugal came out with a €3.5bn, five-year Obrigações do Tesouro (OT), joint-led by Caixa – Banco de Investimento (CaixaBI). This was the last Portuguese institutional issue before intensifying investor aversion to peripheral debt forced Portugal to request its own financial assistance programme from the Troika, shutting international capital markets for Portuguese issuers, a hiatus that lasted nearly two years.

Notable Portuguese corporate Issuances interest rate behaviour (percentage growth)

September 2012

EDP, €750m

5.75%

five-year transaction

October 2012

BCR, €300m

6.875%

5.5-year transaction

October 2012

Portugal Telecom, €750m

5.875%

5.5-year transaction

January 2013

REN, €300m

4.125%

five-year transaction

April 2013

Portugal Telecom, €1bn

4.625%

seven-year transaction

May 2013

PORTUceL, € 350M

5.375%

7NC3 bond

september 2013

edp, €750m

4.875%

seven-year transaction

October 2013

REN, €400m

4.75%

seven-year transaction

November 2013

Galp, €500m

4.125%

five-year transaction

november 2013

edp, €600m

4.125%

seven-year transaction

January 2014

EDP, $750m

5.25%

seven-year transaction

march 2014

bcr, €300m

3.875%

seven-year transaction

April 2014

EDP, €650m

2.625%

five-year transaction

july 2014

galp, €500m

3%

6.5-year transaction

At that time and as part of the Troika’s involvement, Portugal would begin an economic adjustment programme aimed at restoring external competitiveness and financial stability, placing public finances on a sustainable path through internal devaluation, institutional and market reforms and severe austerity measures.

Corporates open the order book
It was only in September of 2012, 18 months into the country’s adjustment programme, that a dramatic improvement in investors’ sentiment towards the periphery, coupled with progress made in the programme, allowed for a Portuguese corporate, the utility EDP, to return to the wholesale debt capital markets with a €750m, 5.75 percent five-year transaction, attracting an order book oversubscribed by 10 times.

Within one month, two other Portuguese corporates – BCR, the toll-road concessionaire and Portugal Telecom – had also made their way into the capital markets, with a €300m, 6.875 percent senior secured deal and a €750m, 5.875 percent senior transaction respectively, both with a 5.5-year tenor and brought jointly by CaixaBI. In the months that followed, two of the top banks in the country, BES and CGD, had also made their return to international debt markets with four benchmark issues in the three-to-five-year maturity range, of which two were assisted by CaixaBI as joint bookrunner, before the Republic succeeded in breaking its almost two-year absence from syndicate issuance in January 2013, with a €2.5bn tap of the Oct 2017 OT.

Late 2012 thus saw the beginning of Portuguese issuers progressively returning to international debt capital markets, a remarkable development given the then still uncertain fallout of the Portuguese rescue programme. Save for a brief blip in the summer of 2013 due to short-lived political tensions at home, this process would only continue.

Regular debt issuance is restored
Positive investor sentiment towards peripheral countries increased during the remainder of 2013, a trend reflected in Portugal which experienced solid programme implementation and continuous fiscal discipline, together with growing signs of economic turnaround. Driven by an exceptional exports performance, the country posted the first quarterly GDP growth in the second quarter, the highest in the eurozone – at 1.1 percent – ending a slump that lasted 10 quarters.

Capitalising on swelling investor participation in Portuguese debt deals, traditional issuers would intensify their comeback to international debt markets in 2013, some at ever-low yields. REN, the electricity and gas transmission grids operator, made two appearances in the international debt markets in 2013, with a €300m, 4.125 percent five-year transaction in January, and, in October, with a €400m, 4.75 percent seven-year issue.

CaixaBI was instrumental as joint-bookrunner in both deals, as well as in Portugal Telecom’s €1bn, 4.625 percent seven-year issue in April. Another utility taking advantage of the favourable conditions twice in 2013 was EDP, making the decision for two seven-year benchmarks in September and November. In the financial institutions spectrum, unusual issuer ESFG also decided to tap the market in April, while BES captured investors’ appetite for yield pick-up by issuing a tier two, €750m, 7.125 percent 10NC5 transaction in November.

The strong momentum seen in Portuguese risk, combined with a solid performance evidenced by Portuguese credit spreads in the secondary market, enabled first issuers Portucel, the pulp and paper producer, and Galp, the flagship oil and gas company, to inaugurate their eurobond issuance in 2013. The first came to market with a €350m, 5.375 percent 7NC3 bond in May, while Galp launched a milestone €500m, 4.125 percent five-year deal in November, the first unrated public institutional bond issued by a Portuguese corporate and one of the largest unrated bonds to come from Southern Europe in the year – a bond jointly led by CaixaBI.

During this period of economic adjustment in Portugal, CaixaBI cemented its leadership position in the debt capital markets with a particular emphasis on the corporate and SSA sectors where it was bookrunner in two thirds of the issues in the period.

Uninterrupted issuances in 2014
Entering 2014, Portugal was mostly seen by investors as a success case, much in comparison with Ireland which had cleanly exited its Troika programme in December 2013, and credit spreads reflected those views by continuing their relentless tightening. Some of the main Portuguese financial institutions, in the names of CGD, BES, BCP and Santander Totta, took particular advantage of this favourable setting and gained back some issuance ground after a timid 2013. Collectively they issued six new benchmarks in the first half of 2014 for a total of €4.5bn, evenly split between covered bonds and senior unsecured issues.

On the corporate sector front, EDP, the most frequent Portuguese issuer, maintained its issuance drive by opening the year with a $750m, 5.25 percent seven-year print in January and followed up with a €650m, 2.625 percent five-year bond in April, jointly led by CaixaBI, that also brought BCR back to the debt markets in March 2014 with a €300m, 3.875 percent seven-year deal. In July, Galp decided to follow up on its successful inaugural issue by placing a new €500m unrated benchmark, this time for a longer 6.5-year maturity and still lowering its cost by more than one percentage point to a yield of 3.125 percent.

In the SSA space, where CaixaBI has led in market share, Parpública, the state equity holding company, was the first agency to venture back into the debt capital markets with a €600m 3.75 percent seven-year eurobond in late June, a transaction jointly run by CaixaBI. Besides the increment in the number of investors drawn to Portuguese assets in 2014, their quality and diversity has also been on the rise, with Portuguese issuers attracting a growing number of buy and hold investors and of more diverse origins.

Sovereign issuance and debt management
Portuguese credit spreads showed a notable tightening during the period 2012-2014 across all asset classes, rewarding committed investors with solid returns and luring a growing number to increase their exposure. Representatively, the bund spread in 10-year sovereign bonds touched 326bps (yield of 5.16 percent) in May 2013 from a peak of 1,322 bps (yield of 15.84 percent) in January 2012 at the zenith of the crisis. This trend gained further momentum into 2014, with 10-year OT bund spreads reaching minimums of 214bps (yield of 3.32 percent) in June.

Portugal used these constructive market conditions to bring out a number of successful issuances. After the comeback OT tap issue of January 2013, high investor support allowed the Republic to launch a succession of new syndicate issues in a €3bn, 5.65 percent 10-year OT in May 2013, jointly-led by CaixaBI and a €3bn tap of this issue in February 2014 following a second five-year tap in January 2014 of €3.25bn of the June 2019 OT, also brought jointly by CaixaBI.

Additionally, IGCP, the Portuguese debt agency, took a number of decisive steps to regain full market access. Between December 2013 and May 2014, it conducted liability management exercises and bond repurchases in the secondary market, managing to buyback €2.8bn and extending €6.6bn of the 2014 and 2015 maturities (35 percent of the amount outstanding), smoothing the profile for future debt payments.

It also re-launched the OT auction programme in April 2014, complementing its sources of funding, and, crucially, it has built a substantial cash buffer of over €15bn that allows it to cover funding needs for about one year. These steps, together with successful benchmark issuance since January 2013, have evidently contributed to putting Portugal back in the debt capital markets in a conclusive fashion.

Exiting the Troika’s programme
This debt management process prepared the country to successfully exit the Troika’s financial assistance programme, which with the benefit of an outstanding tightening of sovereign spreads, enabled Portugal to officially opt for a clean exit in May 2014. According to the Troika’s official statement, after its 12th review mission in May 2014: “The programme has put the Portuguese economy on a path towards sound public finances, financial stability and competitiveness.

“During the past three years, the external current account has moved from a substantial deficit into surplus, the budget deficit has been more than halved, and public debt sustainability has been maintained. There have been ambitious reforms across all the main sectors of the economy.” The economy has significantly rebalanced both externally and internally, growth was reignited and aggregate debt is back on a sustainable path. Portugal’s return to the international capital markets is hence now complete.

Equity capital markets in Portugal
As a result of the global economic crisis and the instability related to the public deficit and sovereign debt in Portugal, which culminated with the request for financial assistance in April 2011, the Portuguese Equity Capital Markets (ECM) during 2011 and 2012 saw limited activity, as international investors showed significant levels of aversion towards Portuguese equities. During this period, only a few number of transactions were concluded successfully, being mainly related with rights offerings of Portuguese financial institutions that had to comply with the new capital requirements imposed by the Bank of Portugal and the European Banking Authority.

Simultaneously, the index PSI20 in 2011 presented high volatility levels and a significant negative performance, with an annual decrease of 27 percent, maintaining this markedly negative trend until the summer of 2012. Only from this point onwards was there an inversion in this trend, as the ECB announced a series of actions to support the economies of the eurozone.

Since then, the PSI20 has been able to maintain a positive performance – except for brief periods in February, March and June 2013 – reaching an annual growth of 16 percent last year, and 8.4 percent from the beginning of 2014 to the end of May.

For this positive behaviour there were two additional instrumental factors, namely the strong signs of macroeconomic recovery in Portugal, with GDP projections evolving towards a more solid growth, and the greater stability at a political level, since Portugal has been able to fulfil the targets set by the Troika and exit the assistance programme successfully in May 2014.

The Portuguese ECM market also benefited from these positive factors and moreover from the gradual change in investors’ perception towards domestic assets that began in 2013, allowing it to reopen to new primary issues with the IPO of CTT in December 2013, the first in Portugal since 2008. This offer was considered a great success as it was able to generate high interest among international institutional investors, causing the total demand to exceed significantly the offer’s shares and the final price to be set at the maximum point of the range.

CaixaBI was joint global coordinator and bookrunner in this transaction, and, by exploiting its significant experience and leading role in ECM, it was able to take a crucial part in the reopening of the Portuguese ECM market and on the attraction of international investors’ interest towards Portuguese domestic assets.

(From L) Subir Lall of the IMF, Isabel Vansteenkiste from the ECB and Head of EU delegation Sean Berrigan listen to Vieira da Silva, Head of the committee nominated by the Portuguese Parliament during a meeting about the financial assistance programme
(From L) Subir Lall of the IMF, Isabel Vansteenkiste from the ECB and Head of EU delegation Sean Berrigan listen to Vieira da Silva, Head of the committee nominated by the Portuguese Parliament during a meeting about the financial assistance programme

Working with the government
CTT’s IPO was a significant landmark in the Portuguese ECM market as, once again, a Portuguese company was able to attract the generalised interest of international investors through a primary transaction, paving the way for further equity offerings in Portugal.

Furthermore, by capitalising on the significant improvement in market conditions in Portugal, several companies have sought to finance themselves or to monetise non-strategic stakes through ECM transactions. Since the beginning of 2013, there has been an upsurge in the number of Accelerated Bookbuildings (ABBs) with Portuguese equities, including companies such as EDP, Portugal Telecom, Galp and Mota-Engil, among others.

CaixaBI has acted as advisor and joint bookrunner in several of these ABBs and has proven itself a privileged partner of private companies by helping them finance their activity and strategic plans and giving them access to international institutional investors.

These transactions benefited from the growing interest of international investors and from very favourable market windows, with share prices reaching maximum values of several months/years. This positive context has allowed the offers to be concluded with great success, reaching levels of demand that have exceeded significantly the number of shares offered in each transaction and discount values below the average of similar transactions in Iberia and Europe since the beginning of 2013.

The Portuguese government has also taken advantage of the improvement in the domestic market conditions by fulfilling the privatisation plan of the assistance programme. Through ECM transactions, it was able to conclude the full privatisation of companies such as EDP and REN and the privatisation of 70 percent of CTT’s share capital.

CaixaBI has once again been an essential partner of the Portuguese government in the execution of this privatisation plan, acting as joint global coordinator and bookrunner in these transactions.

Top 5 worst defaults in history

Posted on by Ashton Wenborn

Argentina moved into effective default on Wednesday 20 July after failing to reach an agreement over outstanding debt. It is now playing the blame game with the US and threatening to take the matter to The Hague.

The country defaulted on its sovereign debt, after vulture fund investors demanded a full payout of bonds they’re owed. Before the announcement in July, a ministerial delegation from Argentina flew to New York to broker a deal and, at the time, people took this as a positive sign that both parties were in dialogue. But Argentina told bondholders – led by NML Capital – that they could not afford to pay the $1.3bn sum and accused investors of exploiting their debt problems to make a profit.

The overall damage this latest default will have on Argentina remains unclear. If there is any silver lining, it’s that the country has dealt with such problems in the past, having previously defaulted in 2001-2002.

This latest $1.3bn default, however, is breadcrumbs in comparison to past economic meltdowns elsewhere in the world. The global economy has a long track record of nations defaulting on debt. Allegedly, Greece was the first in 377BC, while Spain has defaulted more times than any other: six times in the 1700s and seven times in the 1800s, but fortunately, not once since then. One of the biggest historical sovereign defaults includes the cataclysmic collapse of Icelandic banks that led to a far-reaching recession. Here are some of the most significant and damaging defaults in history, starting over 150 years ago in the US.

1. US, 1840s
It wasn’t one of the biggest meltdowns, but it is a fascinating example of what happens when a country defaults within a single currency. The US had only just recovered from the ‘Panic of 1837’, only for 19 of its 26 states to default in the early 1840s. The default was fuelled by what now seems a rather archaic practice, canal building. A canal-building boom caused vast debts of $80m to pile up, after a surge in infrastructure projects and a race to raise capital to open new banks.

Creditors could not use military force and were reluctant to impose trade sanctions to retrieve lost capital. Among the 19 states that went into default, Illinois, Pennsylvania and the territory of Florida – it didn’t become a state until 1845 – were included. By the end of the 1840s the debt had been largely paid off, despite the fact that no direct sanctions were enacted. This goes some way towards disproving the popular belief regarding the effectiveness of trade sanctions on debt repayment.

2. Mexico, 1994
The Peso Crisis was sparked by the government’s unexpected devaluation of the peso against the US dollar by 15 percent. The president at the time, Ernesto Zedillo, said after his inauguration speech that the peso would not have its value lowered. A week later the peso’s value was lowered. The devaluation fuelled a flight of foreign investors who rapidly withdrew capital and sold shares, as the Mexican Stock Exchange nosedived. The central bank had to repay tesobonos – a peso-dominated bond – by buying US dollars with a much-devalued currency and was staring sovereign default in the face. Neighbouring economies were noticeably weakened too. The impact it had on the Southern Cone and Brazil became known as the ‘Tequila Effect’.

Mexico’s GDP fell by five percent during the crisis and it was only rescued by a collection of loans totalling $80bn. Bailout funds came from the IMF, Canada, a host of Latin American countries and, notably, a $50bn loan granted by the-then US President Bill Clinton. It saved Mexico, and much of Latin America, from what could have been an even greater financial crisis.

3. Russia, 1998
International economies were on the brink of catching the flu after the Russian government and the Central Bank of Russia (CBR) devalued the currency, defaulting on massive debt reserves. After six years of reform and economic stabilisation, the CBR recorded Russia’s first positive growth since the fall of the Soviet Union.

Yet Russia was forced to default on its debt after the CBR defended the ruble in capital markets, losing $5bn in foreign reserves. The stock market had to be completely shut down for 35 minutes as shares fell at an unprecedented rate in Russia. The international effects of the meltdown – colloquially known as the Russian Flu – were widespread and affected markets in the US as well as Asian, Baltic and European countries.

It was later revealed that $5bn in loans, provided by the World Bank and the IMF, were stolen upon the eve of the financial crisis, according to the World Bank. Drawing positives from the Russian economic crash is hard. What the crisis did teach Europe was how to manage contagion, a lesson that would prove to be invaluable in the future.

4. Iceland, 2008
Iceland has a population of around 320,000 but still managed to cause one of the biggest financial crashes in history. The Nordic state defaulted on more than $85bn in debt after three of its largest banks – Glitnir, Kaupthing and Landsbanki – collapsed in close succession after struggling to pay off short-term debts. This caused the government to resign, robbed over 50,000 citizens of their life savings and destabilised international economies.

Iceland’s crash has been linked to everything from neoliberal principles and reckless bankers to inadequate regulation of the financial sector. Regardless of what caused the collapse, an environment was created which allowed private banks to grow so fast that they quickly amassed more debt than they could handle.

Instead of bailing out the banks using taxpayer funds – like the US did – Iceland chose to cut the fat and let them go into default. Economists like Joseph Stiglitz have said that allowing the banks to take the hit was the right option. This hypothesis was proved right in 2013 as Iceland’s GDP grew by three percent.

5. Greece, 2012
Greece adopted the euro in 2001 but the economy was in an unsustainable state long before this. Between 1997 and 2007, wages for public sector employees rose by 50 percent and the government incurred massive debts funding the 2004 Athens Olympics, which cost €9bn according to Bloomberg Businessweek.

By 2012 the country was knee-deep in the biggest sovereign debt-restructure in history – Argentina previously held the record for their $94bn debt crisis in 2001. The default in Greece came after two years of economic hardship, influenced by the global recession in 2008 and high debt-to-GPD levels. The country only represents 2.5 percent of the EU economy and the crisis posed little threat to the financial stability of Europe. Nevertheless, it had international ramifications as it neutered short-term growth across the continent and kept the euro weak against the US dollar.

In March 2012, a deal was struck between Greece and the holders of government bonds. Reluctantly, bondholders agreed to trade in their old bonds for ones with a longer maturity and half the original value. The deal allowed Greece to chisel off a sizeable chunk of its €350bn debt but it’s not out of the woods yet. EU finance ministers have given the country until 2016 to reduce its deficit – a condition that was agreed upon when bailout loans were first issued.

Fehmarn Belt Fixed Link to accelerate European trade

Posted on by Ashton Wenborn

Connecting the cities of Stockholm, Copenhagen, Hamburg and Berlin, the Fehmarn Belt Fixed Link will bridge the gap between Northern Europe’s economic straits, and is one of the largest infrastructure projects in Europe. The link will consist of an 18km-long tunnel containing a four-lane motorway and two electrified railroad tracks. It will open up Central Europe’s corridor and allow an unprecedented amount of traffic to travel. The link will be a game changer for European commerce and, in particular, for the trade flows between Germany and Scandinavia, which are valued at more than €100bn a year.

The Fehmarn Belt Fixed Link will connect Rødbyhavn in Denmark to Puttgarden in Germany and is expected to bring economic benefits to the entire region, including German hubs such as Hamburg and Berlin. The opening of the link will reduce the travel time to 30 minutes between continental Europe and Scandinavia, eliminating the time spent on embarking, disembarking and waiting for ferries. The whole link has been divided into four workgroups: the immersed tunnel, marine works, installations, and portal and ramps. It is estimated the tunnel motorway and railway will have a 120-year design life and, during its lifetime, some 100,000 ships will pass over it.

The project, which is currently going through final approval stages in the Danish and German parliaments, is set to open for traffic in late 2021. In 2008, Denmark and Germany signed the state treaty on a fixed link across the Fehmarn Belt and, a year, later the Danish government agreed to a project planning act that would ensure hinterland connections in Denmark to accommodate the new link. Denmark is largely responsible for the planning, design, funding, construction and operation of the Fehmarn Belt Fixed Link, and will be its sole owner and operator. Despite the EU prioritising the project as one of the 30 most important infrastructure deals in Europe – and thereby qualifying it for European funding support – Germany’s participation in the link is relatively small. So far, the country has only agreed to an upgrade of its land facilities on road and rail leading to the fixed link.

18km

Length of the Fehmarn Belt Fixed Link

€100bn

Trade flows between Germany and Scandinavia per year

The Fehmarn Belt Fixed Link is designed to close a gap in the infrastructure between Scandinavia and continental Europe. This will foster a higher level of flexibility and considerable time savings for both passenger transport and transport of goods, which is expected to increase significantly by 2025. According to the Danish Ministry of Transport, improved connections between Scandinavia and Central Europe are crucial at a time when the major Danish export markets need stronger transport connections to remain competitive.

The ministry argues that, as was the case with the fixed links across the Great Belt and Oresund, the Fehmarn Belt link will result in a significant upgrade of both national and international transport corridors benefiting societal development and economic growth in the Nordics.

“The Fehmarn Belt Fixed Link is a European project,” says Ajs Dam, Director of Corporate Communications & Regional Development at Femern A/S, the state-owned organisation overseeing the project. “It will boost prosperity and raise the standard of living in the cross-border region that comprises Eastern Denmark, Northern Germany and Southern Sweden by providing new opportunities for business development, job market integration, and cultural and scientific cooperation. It is also a central part of the European transport network, where it removes an important cross-border bottleneck on the Scandinavia-Mediterranean corridor; Europe’s main north-south axis.”

The fixed link is a high priority project in the expansion of the Trans-European Transport Network and, as such, the European Commission has supported the project with €270m in funding between 2007 and 2013.

Game-changer for trade
Given the added efficiency the link will bring to logistics corridors in Europe, it is no surprise authorities are eager to sponsor the project. Cars, lorries and passenger trains currently take 45 minutes to cross the Fehmarn Belt by ferry – not including waiting times. Freight trains between Scandinavia and continental Europe have to take a 160km detour over the Great Belt and Jutland. Once the link is completed, a crossing will take only seven minutes by train and 10 by car. Travel times will be reduced by almost two hours, with high-speed trains running between Copenhagen and Hamburg in significantly less than three hours, according to the Danish Ministry of Transport (they currently take four and a half).

“It will give trade and logistics company more freedom in terms of where to allocate their production and distribution centres along the corridor,” says Dam. “The shorter route for freight trains will make transportation by train more competitive within Europe, while the overall project will help shift freight traffic from the road to the greener mode of rail transport. In this context, the tunnel will also provide incentives for intermodal freight transport. This is also in accordance with the EU’s climate goals to reduce CO2 emissions”. Aside from the obvious boost to the billion-euro trade flows between Germany and Scandinavia, the majority of €5.5bn investment in the link (2008 prices) will benefit the European construction industry.

The nine international consortia seeking to secure one or more of the main construction contracts all include European firms. According to a report on the regional effects of the link by Copenhagen Economics and Prognos, the construction industry across Europe will profit from the development, with a particular boost to the local SMEs that will act as subcontractors for the chosen consortia and gain invaluable recognition from working on an international mega-project.

Bigger picture
The project entails much more than a tunnel alone. The fixed link across the Fehmarn Belt also requires massive extensions of the hinterland connections in Denmark and Germany. In Denmark, this includes an expansion of the railway infrastructure on South Zealand and Lolland-Falster. New bridges at Fehmarn Sound and Storstrøm will also be needed. On the German side, parts of the motorway between Denmark and Hamburg that do not already have four lanes will be expanded, and a double-track railway needs to be constructed. However, the German government has postponed development of the railway link to the Fehmarn Tunnel until after 2015 as part of a major reduction in planned government investment post-crisis. Whether this will postpone the overall project is not clear.

With both the German and Danish economies having strong shipping industries, some have expressed concerns that a drop in shipping revenue in the Nordics will outweigh the trade gains from a fixed link. However, estimates from Femern A/S suggest the project will lead to the development of new warehouse and dry port facilities close to the tunnel connections. These could prove to be viable options for shipping companies looking to expand or consolidate their business.

When looking at the overall cost of the project, it is crucial to note, that for once, a mega-infrastructure project won’t cost the taxpayers anything. Using a state guarantee model, the Danish state will underwrite the project through state-backed loan guarantees. Femern A/S takes up the respective loans and uses the money to finance the construction. After completion, the users of the link, not taxpayers or the government, will foot the bill by paying for the loans with their toll charges. A similar way of funding has been successful in the building of several other fixed links in Denmark, which many consider a pioneer when it comes to cross-water bridges and tunnels.

The decision on which European firms will finally get the honour of building the tunnel connecting Germany and Scandinavia will be made in December 2014. Actual construction work will begin in the late summer of 2015, and, without further German delay, Europe should prepare itself for the effects of an efficient new trade corridor: one of the most innovative infrastructure projects of our time.

China tackles its air pollution, if a little reluctantly

Posted on by Ashton Wenborn

Look out onto any one of China’s major metropolises and chances are you’ll be faced with a thick cloud of smog and throngs of passersby donning facemasks. This is the country’s ‘airpocalypse’, a phenomenon that has so far caused hundreds and thousands of seedlings to wither, an 80-100 percent year-on-year boom in air purifier sales, and millions-upon-millions of people to die prematurely.

The level of pollution at times resembles a nuclear winter, obscuring the sun’s rays, slowing photosynthesis and costing the country’s food supply dearly. Earlier this year, those in China’s northern provinces were cloaked in visible pollution for upwards of a week and were left with no option but to keep children indoors and reduce exposure to the smog in what ways they could. Pictures of Beijing and Guangzhou circulated the globe, showing a familiar cityscape blanketed in smog, and barely perceptible silhouettes of people squinting into the invisible distance.

In January, the country’s former health minister spoke out against the cloud hanging low over China’s city streets and joined leading members of the scientific community in condemning China’s contribution to climate change. Chen Zhu, a professor of medicine and molecular biologist, concluded, along with colleagues at the World Bank, World Health Organisation and Chinese Academy for Environmental Planning, that between 350,000 and 500,000 people die each year as a result of China’s air pollution. Behind only heart disease, dietary risk and smoking, air pollution is seen as the largest threat to the population, and lung cancer is today the leading cause of death from malignant tumours.

[A]ir pollution is seen as the largest threat to the population, and lung cancer is today the leading cause of death from malignant tumours

Not contained to health hazards, China’s pollution problem has also had a measurable impact on the national economy. The country’s environmental issues cost the economy dearly in 2008 when, according to the World Bank, they reduced gross national income by nine percent; and, with annualised GDP growth at less then eight percent in 2013, the same issue looks to have raised its ugly head once again.

After years spent dismissing the smog as nothing more than a natural consequence of double-digit growth, the matter has finally brought international condemnation and widespread discontent to Chinese shores, leaving the country’s administration with little option but to face the issue head-on.

Let the battle commence
In answer to the pressing social and political hot potato, Li Keqiang finally took to the stage before Chinese delegates in March to denounce the country’s wayward emissions and ineffective stance on climate change. “We will declare war on pollution and fight it with the same determination we battled poverty,” he said at the National People’s Congress. “Smog is affecting larger parts of China and environmental pollution has become a major problem, which is nature’s red-light warning against the model of inefficient and blind development.”

China has long been accused of failing to sufficiently impose itself on matters relating to corruption, labour standards and, above all, pro-environmental policy. But, the country’s leadership appears to be quickly changing tact, in light of growing pressure from those working towards mitigating climate change. “It is currently a major and growing emitter, but it is doing a lot – and increasingly more – to constrain the growth of those emissions and, indirectly, reduce emissions globally,” says Fergus Green, Policy Analyst and Research Advisor to Nicholas Stern, Chair of the Grantham Research Institute.

A woman wears a mask as she makes her way along a street in Beijing
A woman wears a mask as she makes her way along a street in Beijing

The foundations for change were laid in November of last year when China’s leadership set out a raft of ambitious economic and social reforms, namely the relaxation of the one-child policy, improved property rights for farmers, and all-round support for free market-led growth. For the environmentally minded observer, the best was still to come, when a few months later Li unveiled a series of pro-environment reforms.

“China already has a target to reduce emissions per unit of GDP by 40–45 percent between 2005 and 2020, with a target of 17 percent during the 12th five year plan,” says Green. “China’s plans to achieve this reduction in emissions intensity, and to constrain its emissions generally, include: implementing energy efficiency measures to reduce the energy use of firms and households; retiring its least efficient coal and industrial plants and increasing the efficiency of new capacity; capped coal use or imposed coal growth constraints in a number of provinces, in accordance with its air pollution control plan; reducing its share of coal-fired power generation in its energy mix; rapidly expanding its renewable and nuclear generation capacity; and taking a wide range of additional measures to reduce emissions in transport, industry, land-use and beyond.”

Cost to the economy
For months now the country has pushed a number of pro-environmental policies and plans to the fore that look, in principle, to clamp down on dirty industries and lift the clouds hanging over China’s major cities. However, the approach is yet to influence proceedings in a measurable way, as affected industries and growth-hungry local governments appear unwilling to introduce pro-climate policies with quite the same enthusiasm as Li’s administration. The issue in the main is the supposed consequences this could bring for a national economy that has grown accustomed to double-digit growth in past decades.

Many of the administration’s major plans will likely take years to implement, and low-carbon developments will be a long time coming before the economy and environment feel the benefit. Therefore, any reforms introduced to tackle climate change must be made to appear pro-growth as well as pro-environment if local governments are to introduce them willingly, for fear of the backlash that could ensue should China’s growth fall short.

Buildings shrouded in smog in Beijing, China
Buildings shrouded in smog in Beijing, China

Nonetheless, for China to make the shift to a low-carbon economy, the country’s leadership will have to concede that lower growth is a necessary evil in order to achieve sustainable prosperity. For decades China has chased headline GDP growth while blind to the environmental implications of doing so, and the country’s 30 year-long industrialisation drive has polluted the country’s skies and increased global emissions at an unprecedented rate.

One key step taken last year by Chinese authorities was the decision to assess officials on factors apart from economic growth when measuring performance, marking a departure from its ‘economic growth at all costs’ strategy. A document released by the ruling administration in November and seen by Reuters promises to measure resource use, environmental damage and industrial overcapacity, among other things, when assessing officials, which – crucially – could encourage local governments to make the necessary changes.

The systematic overhaul looks to overcome one of the major hurdles to pro-environmental policy, in that officials are no longer incentivised only to boost economic output regardless of the costs to environmental welfare and social wellbeing. And while the changes could likely cause disruptions for dirty industries and sacrifice much-loved GDP points, the change is close to what is needed for the country to end its relentless and – at times – irresponsible pursuit of growth.

Global influence
Irrespective of the environmental dangers that exist for the country’s population, the world’s number two economy and number one emitter also – willingly or not – plays a huge role in informing environmental policy around the world. “Action by China, as the world’s largest emitter, is important in shifting global expectations about whether sufficient climate action/a shift to a low carbon economy will occur,” says Green. “The more steps China takes to cut emissions, the more others – investors, governments, citizens – are likely to expect future global emissions reductions – and green market opportunities – will materialise, and, therefore the more likely they are to follow suit.”

It’s unlikely that a significant emissions reduction will come soon, given that coal consumption is yet to peak and economic growth is still very much reliant on domestic energy production and consumption. This is a country of 1.4 billion people, responsible for upwards of 10 billion tonnes of carbon emissions a year – 10 times greater than the entire African continent – and still dependent in large part on the fossil fuels industry. However, should Chinese policymakers do away with their growth at all costs mentality, we could well see the beginnings of a concerted global movement towards mitigating climate change.

Lagarde investigated over political scandal

Posted on by Ashton Wenborn

The squeaky clean image of IMF Chief Christine Lagarde has taken a hit after she was placed under formal investigation over a scandal that has rumbled on for the past six years. The news came after she was questioned for 15 hours earlier this week by the Cour de Justice de la République.

As World Finance reported in May, the allegations relate to her time as French finance minister, where she worked under Nicolas Sarkozy. In 2008, allegations emerged against controversial businessman Bernard Tapie after he was awarded €408m at an arbitration over a business dispute. It came just a year after he supported Sarkozy’s presidential election campaign.

[Lagarde] claimed that if there had been any wrongdoing on her part, it had been through “inattention”

Lagarde was responsible for the arbitration process that awarded Tapie his payout, although she denies any wrongdoing in the case. He had been involved in a dispute with French bank Crédit Lyonnais over the sale of sports manufacturer Adidas in 1993, arguing that the bank had defrauded him. In 2008, Lagarde stepped in to award Tapie his victory.

Tapie has been steeped in controversy for many years. In the early 1990s he was imprisoned for corruption for match fixing while owner of football team Olympique de Marseille. His support for the right-wing Sarkozy in 1997 was seen as surprising, as he had previously served as a minister in a socialist government. His accusers claim his support came with a price – a favourable decision in the arbitration case in 2008.

Protesting her innocence on Wednesday, Lagarde said she would be appealing against the court’s decision, and claimed that if there had been any wrongdoing on her part, it had been through “inattention”.

“After three years of procedure, the sole surviving allegation is that through inadvertence or inattention I may have failed to intervene to block the arbitration that brought to an end the longstanding Tapie litigation,” she said.

Why everyone’s talking about ‘dark pools’

Posted on by Ashton Wenborn

Many investors could be forgiven for having a knowledge gap when it comes to knowing what ‘dark pools’ are. The June 2014 announcement from New York State Attorney General, Eric Schneiderman, that he was launching a probe into the activities of Barclays Bank, however, at least brought to the public’s attention a hitherto mysterious investment backwater.

In his announcement, Schneiderman said that in the case of Barclays, not only did he have evidence of the bank’s staff falsifying marketing materials, but also evidence of it misleading major institutional clients in a bid to expand its dark pool activities and boost revenues.

In addition, he accused the bank of playing both sides against the middle by giving preferential treatment to brokers and proprietary trading firms employing high-frequency trading strategies, while telling other clients it was protecting them precisely from such tactics. Barclays has since filed a motion contesting the claims, arguing Schneiderman’s office used misleading information in its suit.

If Schneiderman’s initiative marks a more aggressive stance being taken by the US authorities it merely follows steps already taken by Australia and Canada in limiting the trading volumes of dark pools.

Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information

An existing force
First and foremost, dark pools are not a new phenomenon and can trace their origins back to the late 1980s when technology was less advanced and larger scale trades had a proportionately greater impact on market pricing. In essence, dark pools emerged when some institutional investors decided they needed to get together and trade in an environment where they could avoid the prying eyes of public exchanges or brokers and be able to buy or sell large quantities of stocks without affecting the market, thereby getting better execution prices.

In 2005, dark pools accounted for just three to five percent of total market trading activity. By 2012 this had almost tripled to 12 percent, according to estimates from the TABB Group. Much of this due to the advent of electronic trading and a SEC rule that came into effect in 2007, aimed at generating greater competition and reducing transaction costs. Meanwhile, overall non-exchange trading accounted for roughly 40 percent of all US stock trades by 2014.

At its simplest level the objective of a dark pool is so-called ‘price improvement’. In other words, if the bid price for a stock on a recognised exchange is $30 and the first asking price is $30.30, the dark pool will typically set the price at the midpoint of $30.15.

However, participants in a dark pool won’t know who the other participants are and similarly won’t, in theory, know if there is interest in stock they may wish to offload, hence the availability of information is self evidently paramount. To address this issue some brokers may do ‘payment for order flow’ deals and agree to send orders to a particular dark pool.

Alternatively, ‘indications of interest’ from dark pools may come into play. In this case information such as the particular stock, its price and how much of the stock is available may be revealed. Worth noting is that not all dark pools are the same. While some will passively match buyers and sellers at exchange prices, such as the midpoint of the exchange bid and offer price, others will execute orders by their price and time priority, according to Haoxiang Zhu of the MIT Sloan School of Management in his paper, Do Dark Pools Harm Price Discovery?

A measure of success when it comes to trading privacy and the quest for best execution prices can be seen in the more than 40 alternative trading systems currently in operation in the US – many of them dark pools – these in addition to the public exchanges. It isn’t difficult to see why when one examines the mechanics of what was going on prior to non-exchange trading.

Past alternatives
Before the advent of dark pools, an institutional investor with a very large parcel of stocks needing to be offloaded had a number of options available. These included working the sale through a floor trader, which could often take a day or so; breaking the order up into much smaller units and hoping for a reasonable weighted price average or finally, selling off the parcel in small amounts over a number of days until the entire block was offloaded.

While the vendor was always going to be open to pricing downside, irrespective of the path taken, because identities of buyers and sellers could not be kept secret, the option of trying to offload stock over a period of time until the sale was completed as a whole, was viewed as an even riskier bet than the negative market impact of a large one-off sale.

For purchasers of stock in a dark pool, on the other hand, the one obvious downside is potentially sitting on overpriced stock should news of that sale/purchase leak into the public domain and cause the stock’s price to slump.

The investment landscape began change in 2007 when the SEC in the US passed new regulations that would become known as Reg NMS (Regulation National Market System). Its aim was to generate competition when it came to both individual orders and individual markets, ostensibly to promote efficient and fair price formation across securities markets.

This was in stark contrast to the market architecture of the early 1970s when there was no national market system and the overall market for securities was a fragmented one. From a practical standpoint the same stock could, in theory, be traded at different prices at different trading venues. Indeed, the NYSE ticker tape did not report trades in NYSE-listed stocks that were traded on regional exchanges or on the OTC markets. By the mid-1970s the US Congress finally authorised the SEC to facilitate a national market system.

Reg NMS built on rules formulated in 2005, that included the Order Protection (or Trade Through) Rule, providing intermarket price priority for quotations that are immediately and automatically accessible. The problem was, Reg NMS opened up a can of worms, given it required traders to deal on a trading venue at the lowest price, rather than a venue offering the quickest execution or the most reliability.

While critics have viewed all this as unnecessary government interference the rule’s defenders counter that all it does is simply require brokers to do what they should be doing anyway, i.e. acting in their customers’ best interests.

Given Reg NMS increased competition for the exchanges by removing rules that protected manual quotations by exchanges, investors were now being given the opportunity to trade elsewhere if they could find a better price more quickly.

Securities and Exchange Commission’s Division of Enforcement Director, Robert Khuzami
Securities and Exchange Commission’s Division of Enforcement Director, Robert Khuzami

Making a splash
Enter dark pools, where not only like-minded institutional investors could get together to buy and sell stock without affecting the market, but also find even better prices. However, against the backdrop of an increase in automated trading as technology continued its inexorable advance, broker-dealers saw this as an opportunity to set up their own dark pools.

Unsurprisingly, they began to attract clients with big trades and looking to save on dealing costs. The question of whether Reg NMS has achieved its stated aim of protecting investors, or whether it has produced unintended consequences, remains open to debate. In a December 2013 speech before the Consumer Federation of America’s annual conference, Luis Aguilar, a Democratic member of the SEC, opined that the commission should immediately revisit Reg NMS.

As some critics have noted, competition has acted as a driver for rapid-fire high-frequency trading, which in theory puts the ordinary retail investor at a disadvantage.

High-speed firms have been able to reap profits by being more agile than their competitors by moving quickly between different trading venues. Competitors have fought back by developing their own trading algorithms so they too can compete.

After taking a relatively passive stance initially – ostensibly on the grounds it was unclear whether high frequency trading helped or hindered markets overall – the SEC, following on from Barclays, has since launched probes into the activities of Deutsche Bank and UBS to determine whether broker run exchanges have given an unfair advantage to high-frequency traders. The two banks have been named in class action suits alleging both violated US securities laws by allowing high-speed traders to make a profit at the expense of institutional investors, such as pension funds and insurance companies.

While UBS confirmed in its quarter two earnings report it was responding to inquiries from the US authorities over the operation of its ‘dark pool’, Deutsche Bank merely confirmed it had received requests for information from certain regulatory authorities related to high frequency trading, without giving additional details.

In the case of Barclays meanwhile, the impact – post-probe announcement – was near immediate with the number of shares traded on its Barclays LX alternative system slumping 79 percent in the space of 10 days, to 66 million shares (from 197 million), according to a report from Wall Street’s self funded regulator the Financial Industry Regulatory Authority (FINRA).

Meanwhile, Deutsche Bank, Credit Suisse and Royal Bank of Canada, among others, stopped routing orders to Barclays’ dark pool after the securities fraud lawsuit was filed. While Barclays, Deutsche Bank and UBS are the first (and certainly won’t be the last) institutions to fall afoul of US regulators, history records how the US authorities have altered their stance in recent years – eBX LLC being a case in point.

Cracking down
In October 2012 the SEC charged Boston-based dark pool operator eBX LLC with failing to protect the confidential trading information of its subscribers and not disclosing to all subscribers that it allowed an outside firm to use their confidential trading information. If eBX, in effect, misled investors by having insufficient safeguards and procedures in place to protect them, it eventually paid for it with an $800,000 fine to settle the charges.

Yet as Robert Khuzami, Director of the SEC’s Division of Enforcement noted at the time: “Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information.

“Many eBX subscribers didn’t get the benefit of that bargain – they were unaware that another order routing system was given exclusive access to trading information that it used for its own benefit.” In other words the implication was that dark pools were acceptable – even if the imparting of confidential customer information – evidently wasn’t. Prior to the Barclays announcement the SEC had already announced plans requiring more oversight by traders of their algorithms relating to the buying and selling of shares. SEC Chairwoman Mary Jo White publicly stated she was wary of setting speed limits on traders, although the regulator would consider options that would minimise the speed advantage some industry players have.

When the dust begins to settle and the ongoing probes have been concluded, the likely public fallout may mean White having a battle on her hands from the politicians. Watch this space.

Testing times for European banks

Posted on by Ashton Wenborn

Europe’s banking industry has hardened most banks after years of crisis, and taught them a thing or two about dealing with adversity and regulation. Now, the ultimate test still lies ahead for Europe’s banks, in the form of unnerving balance sheet evaluations performed by the European Central Bank (ECB). In an unprecedented effort, the ECB will unleash thousands of auditors and regulators to examine the books of 128 banks in the eurozone before early November when the it will assume oversight of the region’s largest financial institutions.

The so-called stress tests will take a detailed look at the quality of the banks’ balance sheets and their resilience to potentially adverse market conditions. Not surprisingly, this could result in the ECB requiring some financial institutions to make improvements – but more importantly, the regulator may go as far as to recommend that some banks be liquidated. This would be an unprecedented move signalling harsher regulation than we’ve ever seen and disturbingly, could seriously unsettle Europe’s financial sector.

The hope is that despite this, the experiment will sound the all clear for the eurozone, which has limped out of the financial crisis and poured billions of state-funded euros into the sector. To this end, the ECB is still providing emergency credit to some banks. However, the potential for elimination of these institutions could restore some much-needed confidence in the European economy, especially if the rest are granted a certificate of financial health.

The so-called stress tests will take a detailed look at the quality of the banks’ balance sheets and their resilience to potentially adverse market conditions

Destabilising effect
Yet the project is clearly a risky one. Should the ECB prove too strict, it could destabilise a European banking sector that has only just begun to show the first signs of recovery. But if it isn’t strict enough, the ECB’s credibility could be called into question. As such, the stress tests will provide the first indication as to whether the ECB can live up to the task of monitoring Europe’s banks.

Just three years ago, Europe’s first financial watchdog – the European Banking Authority – launched a broad stress test, only to see it fail miserably. The 50-person team in London proved to be completely overwhelmed and ironically, the agency’s credibility quickly vanished when some banks that had passed the test almost immediately ran into difficulties.

This is why Danièle Nouy, Head of the ECB’s supervisory arm, is making sure that the regulator comes off strong and as such, she won’t be holding back when it comes to weak banks. “We have to accept that some banks have no future,” she told the FT recently. “We have to let some banks disappear in an orderly fashion”.

Rumours have circulated that the ECB intends to fail around 30 banks in order to establish credibility and that German banks will be particularly hard hit, due to the sheer amount of banks there compared to countries like Italy and Spain. A particular issue for German banks is the billions of loans tied to the shipping industry that are set to default soon – a serious concern for banks like Commerzbank, which has a €14bn shipping portfolio and Deutsche Bank, which is tied to a large number of complex securities.

This is grim news for an economy that pretty much keeps the eurozone afloat. What’s more, estimates from the OECD and economic analysts suggest that European financial institutions could be worse off than we assume, billions short of a sufficient capital buffer, and that this could result in a far higher number of failures than expected.

Problematically, the ECB auditors have been unnervingly quiet about the stress test process and specifications have not yet been finalised, despite the deadline for the tests being not far away. It’s grossly concerning that banks affected have had little time to prepare and the majority haven’t received a schedule for the test or any associated documentation. Time spent on the evaluations is also limited, with the ECB committed to completing the balance sheet checks soon and with the second phase of determining how much capital each bank will need to withstand specific crisis scenarios, which was due to begin in May.

Further complicating the effort is the fact that while the first phase may already have begun, Nouy is still establishing her team. Of the 1,000 employees set to work at the ECB’s regulatory arm, only a few hundred have started work, and many of those are only on loan from national watchdogs. This means that the ECB has left much of the evaluation to external auditors who have only recently begun their work. This all raises the question whether the ECB is applying the necessary time and resources to actually conduct proper stress tests and whether these will have any credibility afterwards.

Too much transparency?
Finally, there are concerns about the amount of transparency associated with the tests and how this will affect the overall economy in Europe. Concerned industry voices have said that any results coming out of these banks post-test will be impossible to keep under wraps and that the examination of eurozone banks could actually unleash renewed turbulence instead of calming the markets. The ECB has said that test results may be made transparent and publically accessible, and this has raised concerns that speculators could target weak banks and make their problems even worse.

As such, it’s hard to gauge the outcome of the ECB stress tests, despite the anguish this is currently causing in the European banking sector. It’s clear that the process itself is somewhat lacking, without enough employees to conduct the stress tests and banks receiving very little information on what is necessary and needed in order for the tests to be conducted. What’s more, it is concerning that there is very little clarity on how much information will be available to the public on specific banks, and what criteria will be set up for whether a bank should be shut or not. This all creates growing uncertainty in the eurozone, which should otherwise be on the cusp of economic recovery and stability. Sadly, it seems that while the ECB was hoping to steady the region’s finances, it is more apparently, stressing Europe’s economy like never before.

Banco Nacional de Crédito: one of Venezuela’s most treasured institutions

Posted on by Ashton Wenborn

The Venezuelan economy is not without its fair share of problems, although the country is still home to a number of budding economic opportunities and enterprising business names. Widespread economic reforms look to offer the country the stimulus it needs and certain sectors are performing ahead of expectations, not least financial services, which has emerged as a major economic constituent and an example in how best to promote growth.

Despite being only 10 years since its establishment, Banco Nacional de Crédito (BNC) has become one of the country’s most stable and successful institutions, and in many ways represents a much broader progression in Venezuelan financial services. On its foundation in 2003 the bank had only three offices in Caracas, San Cristóbal and Valencia. However, skip forward to the present and at the end of 2013 the bank is the seventh largest of Venezuela’s commercial and universal private banks, as defined by the Venezuela banking regulator, SUDEBAN.

Offering a comprehensive range of products and services to its clients through a broad network of 162 branches and over 400 automated teller machines in over 50 cities and in 21 states, the bank is testament to the strength of Venezuela’s financial services sector. The success attained in the last decade and in a highly competitive market, is due to the bank’s extensive expertise, combined with a pursuit of constant innovation, attention to modern risk management guidelines, excellent service, and institutional policies aimed at generating growth.

What’s more, as a socially responsible institution, the bank fulfils an important social function by offering its support to the most vulnerable sectors of the social structure. BNC contributes to projects aimed at strengthening education, values, religion and family, improving the quality of life of children, adolescents and senior citizens, as well as serving as a fund raising vehicle through its branch network, to address serious health concerns.

Experienced management team
The bank’s senior management is renowned for its successful track record in the banking industry, and is represented by a strong and experienced board of directors and a cohesive group of shareholders. These foundations have contributed to the building of a successful business model based on close proximity with clients and the promotion of a commitment to the highest quality in delivering banking services. This is a commitment that can be seen in the results of 2014’s first quarter, which was one of the banks’ brightest in terms of growth and expansion. During the first quarter, BNC’s assets grew 17.54 percent, far beating the performance of Venezuela’s banking system at 11.21 percent and propelled by the expansion of the Gross Credit Portfolio, which increased 17.14 percent compared to the end of 2013 – higher than the 9.45 percent growth recorded by the national system. Client deposits also increased 19 percent; almost double that of the system’s 11.01 percent.

The combination of BNC’s financial solidity and responsible philosophy should be seen as an example for others in the industry in how best to achieve explosive growth in a market still experiencing growing pains (see Fig. 1). The bank’s growth during the first quarter of 2014 has been one of the most significant, healthy and reliable of any in the sector, and the bank’s non-performing loan index stood at 0.06 percent as of the end of March 2014,the lowest such index in the Venezuelan banking system. In addition, the ratio of non-performing loans in its portfolio has allowed BNC to attain the highest coverage of non-accrual loans in the country, at 2,724.97 percent.

Since its establishment, BNC has pursued a strategic goal to become a modern bank with nationwide coverage, and, in a bid to fulfil this goal, the bank has implemented an aggressive expansion plan. Its growing physical presence throughout the national territory has allowed it to increase its assets under management and enhance its participation in the market through its banking relationship officers, taking timely decisions to directly service its clients, and reach a market share of three percent as of March.

Source: BNC. Notes: 2014 figures
Source: BNC. Notes: 2014 figures

However, the institution’s progress is far from limited to traditional banking channels, and growth has also been achieved by way of unusual, modern channels of service: electronic banking and web platforms, along with the design of new products and automated services. The bank is the country’s seventh largest in terms of operating automated teller machines and has a number of commercial points of sale, a call centre renowned for its speed and excellent service, and an easy-to-use web platform with the highest security standards.

The bank has also experienced significant development on the international front in a country with strict foreign exchange controls and one that is highly dependent on imports. Its Curaçao branch, for example, has allowed BNC to participate in international business when supporting its clients in their foreign trade transactions, performing hard currency processes in accordance with current legislation, and in directing payments through the Regional Settlements System (“Sistema de Compensación Regional” – SUCRE) and ALADI agreements. For these purposes, the bank relies on a significant number of alliances and correspondent banks located in a number of major economic and financial centres worldwide.

Pushing the boundaries
After a decade of successful expansion, BNC has identified technological innovation as the route to solidifying its position in the market, optimising processes and raising awareness among the general public along the way. In addition to developing its own software, the bank has incurred significant expenses in technology and systems in order to bolster protection and security, as well as transactions, data and processing. In the Venezuelan market, technology has emerged as a crucial differentiator for those in the financial services industry, in particular among those looking to extend their reach into new markets.

For the custody of data related to clients and transactions, greater capacity and flexibility in data processing – and to assure the continuity of operations under crisis – BNC has built an information storage and processing site to replicate the bank’s Data Processing Center. These facilities adhere to the strictest anti-seismic standard, and data centres best practices according to the Telecommunications Industry Association (TIA) and provide redundant backup of transactions and protection from natural disasters, failures in the main systems and/or other potential challenges.

Throughout the course of the bank’s modernisation process and the development of alternative service channels, BNC has added several other options to its website, allowing the bank to broaden its range of available products and services, such as self-managed real time loan applications and traditional banking products and services. The website has also been optimised for use with tablets and smartphones, therein placing products and services within reach of customers regardless of their location, while maintaining tight controls throughout.

Taking into account the transformation of recent years, technological or otherwise, and the increasingly prevalent role of web applications and social networks in the lives of consumers, BNC has sought to make its presence known in this community. By maintaining an active presence on social media, BNC hopes to foster closer ties with clients through tools that might not necessarily constitute a key part of the traditional banking business, but are relevant, nonetheless, in current social dynamics.

By joining Twitter with the account @bnc_corporativo, the bank has been able to form close ties with the public and reinforce its ambition to offer personalised, efficient and timely services. The platform also allows BNC to not only promote its products and services, but announce the opening of new branches, special business hours, events and relevant information, security measures to avoid theft and fraud, as well as interacting directly with its clients and users addressing concerns or complaints.

Elsewhere, with the recent launch of its YouTube BNC Corporativo, the bank is promoting an information channel that includes tutorials to address frequently asked questions from clients relating to banking processes and transactions, as well as advertisements.

After a decade of pulsating growth, BNC is betting on technological innovation and expansion to consolidate its reputation in the market and bring more customers on board. Entering into its 11th year now, BNC’s goal moving forwards is to optimise its existing operations and accommodate for an ever-changing financial marketplace by building solid, safe and trustworthy relationships throughout.

Will copying the Dutch pension system help the UK?

Posted on by Ashton Wenborn

Dutch Space is a corporation that manufactures advanced products that, among other things, helped put the Vega rocket into the upper atmosphere. In May, the Netherlands-based company, a division of the giant EADS Astrium aerospace group, sent its own rocket into the Dutch pension industry by announcing the merger of its company-wide €115m pension fund with a much bigger fund known as PME. An industry-wide retirement plan, PME has €34bn of AUM.

The strategy deployed by Dutch Space illustrates the latest step in a brutal process of consolidation among the country’s pension firms which has, in the last 22 years, seen the number of funds implode from over 1,000 to around 380 today. De Nederlandsche Bank, the Dutch central bank, predicts there will be just 300 firms left to manage all retirement investments within a few years. If so, that would leave the pensions of workers under the control of too few superfunds. Currently, the remaining 380 funds already manage €950bn of pension assets, or an average €2.5bn each.

However, some industry leaders are forecasting an even more severe contraction in a sector whose ‘collective pensions’ have served Dutch retirees well for 70 years. Just over two years ago, Ruud Degenhardt, Chairman of PGB – one of the bigger pension funds with €14.5bn of AUM – predicted there may eventually be just 50 to 100 pension funds remaining in the Netherlands.

Assuming they have a similar ratio as today in AUM, that would average out at €100bn to €200bn of assets for every surviving firm.

A collective approach
Now British firms fear a similarly Darwinian process could happen in the UK in the wake of imminent reforms that seek to create Dutch-style collective pensions. With €1.9trn in AUM, an industry-wide consolidation would inevitably lead to job cuts among actuaries, investment consultants, administrators and fund managers. The Conservative-Liberal Democrat coalition unveiled the sweeping reforms – the biggest in decades – in May on the basis that Britain’s pensioners have long had a raw deal. That’s because of the UK’s immensely complicated and constricting pension laws, and because of the fees charged by asset managers that steadily whittle away at retirement pots.

With €1.9trn in AUM, an industry-wide consolidation would inevitably lead to job cuts among actuaries, investment consultants, administrators and fund managers

“A huge proportion of our pensions disappears in fees, with charges swallowing up to 40 percent of the value,” argues RSA, the multinational insurance giant, in a report that took two years to research. “If a typical Dutch and a typical British person save the same amount for [their] pension, the former can expect a 50 percent higher income in retirement.” It’s not just about fees though. Company-wide pensions, which are by definition much smaller than pooled ones, are more vulnerable to variations in the stock market. Thus, an employee may lose heavily – or gain significantly – if he retires in a particular year.

“It’s not rocket science why collective pensions are better”, argues the report, “as anyone who has taken an introductory finance course knows, the way to address the problem of risk is to diversify. So we buy a portfolio of many securities if we want to limit our risk. Similarly we can diversify our liabilities; for example, when we buy insurance. So each of us gives some money to the insurance company, and by pooling those contributions there is enough to compensate us should our house burn down.”

Written by David Pitt-Watson, Chairman of Hermes Focus Asset Management that has £26.9bn of AUM, the report argues that Dutch-style collective – or industry-wide – pensions not only provide economies of scale that lead to lower costs, but also deliver higher returns over the long life of the pension because they allow asset managers to spread the investment risks. “The benefits of collective, defined contribution [as distinct from defined benefit] schemes are huge,” the report notes.

These views match that of the UK government, which estimates that collective schemes should give pensioners up to 39 percent more money to retire on. The Dutch schemes are “some of the best in the world”, enthuses the coalition’s Pensions Minister Steve Webb, the main flag-bearer for collective pensions. RSA Insurance Group’s research backs up the government: according to the report, Britain’s pensioners would pocket extra retirement income that is almost equivalent to the entire economic contribution of the North Sea oil field.

The Wild Western Europe
The UK reforms are a response to a long-festering crisis about underfunding that has threatened to overwhelm company-wide schemes. Many small and medium-sized companies have reportedly fallen into administration because of holes in the old system. Successive governments have also bungled earlier reforms. As a disgruntled letter-writer pointed out in The Daily Telegraph in May: “One of Gordon Brown’s first decisions as [Labour] chancellor was to scrap tax relief on pension-fund dividends, costing savers an astonishing £118bn since 1997.”

Another issue has been the legal requirement to convert most of a pension pay-out into an annuity. By some estimates this has chopped £1bn off retirement incomes because pensioners have not always had the necessary expertise to sign up to the most suitable schemes. Indeed, many critics say the annuities system has functioned like a giant financial cartel to the detriment of the consumer. By common consensus, something had to be done. “The UK private pensions system is not fit for purpose,” says Pitt-Watson. “Regulations in the UK should be changed to enable the establishment by trustworthy providers of low-cost collective pensions similar to those enjoyed in Holland and Denmark.”

Sensing opportunities, pension funds from the Netherlands and Denmark have already thrown their proposals down. They have told UK companies they are ready to provide low-cost pensions in what promises to add extra pressure on the British industry as it comes to terms with the reforms. Meanwhile, further consolidation is seen as inevitable in the Netherlands. Indeed, even the Dutch central bank, which regulates the industry, believes this is the case. In April, the institution took the ominous and unorthodox step of writing to 60 small and medium-sized funds in what amounted to a warning that they may not be around for much longer. The regulators invited these precariously poised funds to analyse their ‘long-term viability’.

In an extremely competitive and volatile environment, consolidation is gathering pace. “It’s already going pretty fast and it could go faster,” PME’s Transition Manager Koos Haakma told Financial News. Dutch Space’s action was just the latest in a long series of company-wide funds being rolled into industry-specific ones. As early as 2005, electronics giant Philips sold the management of its pension scheme to two separate firms and others such as Germany’s Siemens and Stork, the construction materials giant, have since followed suit.

Brit/Dutch incompatibility
Insiders say much of the problem is down to the regulators themselves who were galvanised into action in the wake of the financial crisis. “The dynamics in pension funds have changed greatly”, explains Degenhart, citing much tighter supervision and monitoring of the funds. The result is that costs are rising steadily. “More costs mean of course higher premiums and lower benefits”, he told shareholders. “Scale size will be increasingly important in the coming years.” Like PGB, competing funds are looking for economies of scale and are moving into other industries related to their core one, or they are swallowing up branch and remaining company funds. But they are at least doing so while attempting to preserve the identity of the original fund by, for instance, a communications policy that focuses on individual members.

Even in a superfund all members are treated equally, whatever the nature of the original scheme. As Degenhart explains, “the conditions are symmetrical, meaning that for the participating groups entering or leaving branches or corporations, no significant benefits or disadvantages may occur.” Although Dutch schemes put more money in retirees’ pockets than do Britain’s funds, it’s still not enough for the government. According to the Dutch Labour administration’s Jetta Klijnsma, the collective schemes aren’t trying hard enough. “A higher expected yield can only be achieved by accepting more risk,” she wrote recently in a confidential document. Having said this, the government will force funds to keep pace with price indexation, which means that pensions must grow annually in step with inflation so pensioners don’t lost purchasing power.

In the meantime the British insurance industry remains divided about the viability of the reforms, and especially about the introduction of Dutch-style schemes. For Alan Higham, Head of Retirement Insight at Fidelity Worldwide Investment, it comes down to generational funding. Collective schemes, he argues, “allow one generation of member to receive more pension in the hope that future investment returns will ultimately justify the decision. Younger people may bear the cost in reduced future pensions should these judgments proved flawed and/or pensioners may see their income fall, or in the extremis see income clawed back.”

In the same light, Neil Lovatt, Marketing Director at Scottish Friendly, fears the reforms will lead to “a huge Ponzi scheme”, whereby retirees are paid out of the premiums of new members of the fund. Others fear the British market is just too different from the Dutch one for the reforms to work. David Smith, Financial Planner at Bestinvest, told Scotland’s Sunday Herald that “for collective pension schemes to work effectively you need economies of scale. However, the UK pension market is already extraordinarily fragmented and it’s highly unlikely that such schemes will establish sufficient critical mass to work as well as they theoretically could.” However, it looks very much as though the reforms are here to stay.