Securities & INVESTMENT May 2012

REthe members’ magazine of theV chartered instituteI forE securities &W investment cisi.org/sireview In the shadows Have been conspiring to fix the LIBOR benchmark? page 12

Material change? Why EU audit-industry reform may maintain the status quo, p16

American import How the Volcker Rule could reshape European fund management, p20

Securities & Investment may 2012 RE VIEW Editor Louise Reip Commissioning Editor Hugo Cox 12 Senior Designer Pip Atkinson Art Director Steven Gibbon Publisher David Poulton Production Director John Faulkner Managing Director Claire Oldfield Chief Executive Martin MacConnol Advertising Sales Yanina Stachura +44 20 7010 0945 [email protected] Cover illustration David Angel for Debut Art Published on behalf of the Chartered Institute for Securities & Investment by Wardour, 5th Floor, Drury House 34–43 Russell Street London WC2B 5HA Telephone: +44 20 7010 0999 Fax: +44 20 7010 0900 www.wardour.co.uk 18 22 ISSN: 1357-7069

Communications Editor, Chartered Institute for Securities & Investment Contents Richard Mitchell 8 Eastcheap, London EC3M 1AE Features Members’ features Regulars Telephone: +44 20 7645 0749 12 fixing the game? 22 cpd: winds of change 5 city view Email: [email protected] Hugo Cox investigates Christopher Bond, Chartered The CISI is investing in allegations that banks MCSI, explains what firms education to support the Editorial panel colluded to set the London can expect from Mifid 2 industry members of Nick Seaward, Supervision Services Chartered FCSI, Chairman Partnership Inter- Offered the future Suren Chellappah FCSI Sanford C Bernstein Rate (LIBOR) Moorad Choudhry FCSI 24 raising the standard Simon Culhane, Chartered Institute for Organisations are being 6 upfront Chartered FCSI Securities & Investment 16 still coining it? encouraged to sign up to a News and views from Scott Dobbie FCSI(Hon) Will the EU’s proposed Mike Gould FCSI Russell Investments new integrity charter mark members of the CISI, Peter Land, Chartered FCSI changes to the audit including our regular back Gregor Logan MCSI industry break up the story by Clay ‘Mudlark’ Harris Paul Loughlin, Rathbone Investment Chartered MCSI Management Big Four’s dominance? 26 need to read Robert Merrifield FCSI Legal & General Jennifer Bollen reports Catch up with this Richard Mitchell Chartered Institute for month’s essential reading 11 first person Securities & Investment Christopher Adams looks at the Frank Reardon, JM Finn 20 Chartered FCSI a rule too far advantages and downsides Patricia Robertson, Westport Global Annabelle Palmer looks 27 diary to another round of Chartered FCSI into the impact of the US’s Jeremy Robinson, Charles Stanley CISI events and new quantitative easing Chartered FCSI Volcker Rule on the fund Hamish Rowan-Hamilton TheCityUK member admissions Markus Ruetimann FCSI Schroder Investment management industry Management 18 profile: carol Nimrod Schwarzmann FCSI RBS Global Markets 30 people: hurley burly alexander Arjuna Sittampalam, Sage & Hermes Chartered MCSI Terry Hall MCSI explains The leading academic talks Nigel Sydenham, BPP Professional Education his passion for the Gaelic financial risk management Chartered MCSI Alan Yarrow, Chartered Institute for game of hurling with Hugo Cox Chartered FCSI(Hon) Securities & Investment

Make the switch! Read the Securities & Investment Review on your computer, Average audited circulation: 17,886 for period July 2010 – June 2011 smartphone or tablet as if you had the printed version in front of you, and have your CPD hours logged automatically! © The Chartered Institute for Securities & Investment (CISI). All rights reserved. Reproduction in whole or part prohibited without prior permission of the CISI. The CISI and Wardour accept no responsibility The Institute will donate £1 to its educational charity for for the views expressed by contributors to the Securities & Investment Review; or for unsolicited manuscripts, photographs or illustrations; or every member who switches to receive the digital magazine. for errors in articles or advertisements in the Securities & Investment Review. The views expressed in the Securities & Investment Review are visit cisi.org/sireviewinfo not necessarily those held by the CISI or its members.

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city view

cisi opinion The CISI is stepping up its efforts to help young people forge a career in finance Education, education, education change in education is all around us: new Certificate for Introduction to the prospect of an A-level curriculum being Securities & Investment for schools, developed by universities; steeper student which combines UCAS points for prospective steering young people into jobs or university entrants with full equivalence to apprenticeships instead of university; colleges the Introduction to Investment Award used by and even professional bodies being able to many firms recruiting staff in the operations the CISI is doing, not just in Leeds but across offer degrees in the future; and a stronger sector. Accordingly, school leavers opting not the sector globally. To achieve this, the Board focus on freedom from government, yet to go to university may have a stronger chance is establishing a new committee, comprising also greater regulation. These of obtaining work in the sector. academics as well as practitioners, to oversee changes provide the CISI with unprecedented Leeds is England’s largest centre for financial and guide our education strategies. opportunities to make a difference. For several services outside London. The CISI will offer The committee will be chaired by Nick Swales, years, the CISI has sought to penetrate the the teacher’s funding and a partnership of a Chartered FCSI, from supporter firm UBS. Nick schools and universities sector, furthering strong regional committee and the stockbroker is representative of the many CISI members our charitable objective ‘to promote for Redmayne-Bentley to support a school who already combine work with giving their the public benefit the advancement and own time to develop the industry’s future. He dissemination of knowledge in the field of contributes to Newcastle University, chairs an securities and investment’. While While ‘professionalism’ education charity for disabled young people and ‘professionalism’ summarises the heart of our is a mentor to graduates entering our industry. mission, ‘partnership’ best describes the way in summarises the heart of which the CISI works. This has led us to achieve our mission, ‘partnership’ A modern Institute international recognition for our qualifications To professionalism as our heart – and and constructive thought-leadership when best describes the way in partnership as our style of engagement – add interpreting the UK regulatory landscape. technology as our tool for success. Education for This partnership approach is now being which the CISI works the young, as well as for the busy practitioner, successfully applied in education. needs to balance face-to-face development with For example, by September 2012, the CISI will identified by the Local Education Authority. online learning, and the CISI will continue to have 20 universities working with us, planning, This will also be assisted by a local university. focus on bringing the best of technology to bear delivering or developing undergraduate and By coincidence, the teacher in all our work. Taking this as our postgraduate provision, while new A-level- and funded by the Trust in Leeds worked part time cue, you can support the Trust’s work GCSE-equivalent qualifications are among at Redmayne-Bentley as a teenager, which by switching to our new interactive online initiatives under development. inspired her own interest in Securities & Investment Review. We will donate Moreover, following a CISI Board decision to as a career. The Trust will also fund a part-time £1 to the Trust for each member who, in this set aside additional funds for its own education ‘work placement co-ordinator’ in London, a way, supports our vision for the future, in charity – the CISI Educational Trust – from need identified from our first pilot work in developing our members and improving the September 2012, the Trust will fund a state schools during the previous year. employment chances of our young people. secondary school teacher in Leeds for two Attracting talent, raising aspirations for a Visit cisi.org/sireviewinfo for further details of years (see page 7 for full details). The school career in the sector and providing a partnership this initiative and to read about the benefits will use this resource partly to teach the CISI’s between industry and education is exactly what of accessing the magazine online.

5 News and views from the CISI Upfront

bahrain benefits Islamic finance Fresh look for achievement membership cards

By now, all CISI members should have received their 2012/13 membership cards. The new cards feature the CISI’s special 20th anniversary logo to acknowledge this year’s milestone. The barcode on the reverse side has Jawad Mandakar ACSI (second from right) is congratulated by, from left, Iain Lindsay, British Ambassador been enhanced to make to Bahrain; HE Rasheed Al Maraj; CISI Chief Executive Simon Culhane, Chartered FCSI; and Khalid Al Zayani, the recording of CPD President of the CISI National Advisory Council in Bahrain more comprehensive. Jawad Mandakar ACSI has become the on theoretical background and practical An extended unique, highest-scoring candidate in the CISI’s implementation. Many thanks to the CISI alphanumeric reference Islamic Finance Qualification (IFQ). for offering such a useful programme.” of up to 15 characters Jawad, a bank analyst with the Central “Improving the professional skills had been added to the Bank of Bahrain, achieved this distinction of those who work in banks and other barcode for internal from more than 350 candidates financial firms is key to maintaining use by firms to aid the worldwide, with an exam score of 96%. confidence in the system,” said Khalid recording of in-house Presenting him with an award, Al Zayani, President of the CISI National CPD. This new function is the Governor of the Central Bank of Advisory Council in Bahrain. “Membership in addition to the CISI continuing to scan members’ cards Bahrain (CBB), HE Rasheed Al Maraj, of a global professional body such as at its educational events and automatically recording CPD said: “I congratulate Jawad on this the CISI gives young Bahrainis a solid hours to attendees’ logs. fine achievement. We welcome the foundation for their careers.” In addition, following feedback from members, the collaboration with the CISI in introducing The CBB has backed an exam and lettering on the cards has been printed in black to aid appropriate training programmes that membership programme, the first of its identification when used as a name badge at events. promote the adoption of global best kind in the world, which will soon see the Please replace your current card with the 2012/13 practices and professional qualifications Kingdom having more CISI members than version and bring it to all CISI events to ensure that you that will enable industry professionals to anywhere else outside the UK. Candidates receive your CPD hours. provide sound financial advice.” across a number of the Institute’s exams Jawad said: “The IFQ enhanced my will receive financial support for their As of 1 May 2012, 2011/12 cards are no longer accepted at events. knowledge about Islamic banking and training and qualifications, and pay rises Members who have not received their 2012/13 cards should contact the CISI Membership department on +44 20 7645 0650 or [email protected] finance, especially as the course material funded by a government agency on is very well written and gives information successful completion of CISI exams.

online

events Annual General Meeting New digital S&IR Have you taken a look yet at the new digital magazine format This year’s Annual General Meeting election of candidates to the CISI Board, for the online S&IR? (AGM) will be held at the CISI, 8 is available at cisi.org. Alternatively, a Members can now read the magazine on their computer, Eastcheap, London EC3M 1AE, on hard copy of the nomination form is smartphone or tablet as if they have the printed version in Thursday 6 September from 10.30am. available from Linda Raven at linda. front of them. Anyone accessing the online edition or the A member (MCSI) or Fellow (FCSI) [email protected] or +44 20 7645 0603. app version has CPD hours automatically added to their of the Institute may be nominated for The closing date for nominations CISI CPD logs. elected vacancies on the Board. Board for Board membership is Monday 25 The CISI will donate £1 to its educational charity for every members retiring by rotation may June 2012. CISI Chairman, Alan Yarrow, Institute member who switches to receive stand for re-election and the Board Chartered FCSI(Hon) is happy to speak the S&IR exclusively in online format. Visit itself may sponsor candidates for any to any potential nominee or sponsor cisi.org/mycisi to change your preferences. vacancies arising. before a formal application is made. He A nomination form, which includes an can be contacted at [email protected] For further information about the benefits of explanation of the requirements for the or +44 20 7645 0603. accessing the S&IR online, see cisi.org/sireviewinfo

6 May 2012 cisi.org

The number of entries to CISI exams in 2011/12. Of this figure, 21% of exams were 41,150 taken by candidates from outside the UK ➳ letters education

Postbag Letters to the S&IR can be sent Institute sponsors by post to Richard Mitchell, Communications Editor, Chartered Institute for Securities & Investment, 8 Eastcheap, London EC3M 1AE, or to Leeds teaching post [email protected] Bruntcliffe is the first school outside the Dear S&IR, London area to receive sponsorship for a At a time when many associated with teaching post from a professional financial financial services are treated as social services body. A mixed comprehensive pariahs, I thought it important to redress secondary school, Bruntcliffe already offers the balance, if only in a limited way, by a range of business-related courses. highlighting the work that the CISI East The CISI’s Cert.ISI is a foundation Midlands & Lincoln branch has undertaken qualification designed for new entrants to to raise money for charity. the industry. The course at Bruntcliffe begins As reported in the April edition of the in September 2012 and the first group of S&IR, our region raised more than £800 students will sit the exam in 2013. at its annual dinner in aid of Derbyshire, A range of UK schools is offering Leicestershire and Rutland Air Ambulance From left: Lynda Johnson, Head of Bruntcliffe School; Cllr the Cert.ISI, which is in its second year (DLRAA), which covers a similar Judith Elliott, Mayor of Morley; Ruth Martin, CISI Managing of operation. geographical area to the branch. Director and Keith Loudon, Chartered FCSI, Senior Partner, The Lord Mayor of Leeds, Councillor The evening focused on the priceless Redmayne-Bentley, celebrate the partnership Reverend Alan Taylor, has been instrumental things in life, with inspirational guest speaker Sixth-form students at Bruntcliffe School in enabling the CISI to link up with Bruntcliffe. Lars Tharp, of television’s Antiques Roadshow, in Morley, near Leeds, are being given the Leeds-based stockbroker Redmayne- keeping all the guests amused. The DLRAA opportunity to take a CISI course that could Bentley will support the project by providing provides a helicopter emergency medical give them a major advantage in the financial opportunities for the sponsored teacher service, which attends hundreds of life- services jobs market. to learn more about the kinds of careers threatening incidents a year, from road The CISI has agreed to sponsor a teaching available locally. accidents to house fires. By giving patients post at Bruntcliffe for two academic years, CISI Managing Director Ruth Martin said: access to expert medical treatment within starting with 2012–13. The sponsorship “We’re delighted to support this project, minutes, it offers them the best chance will pay for teacher Sara Hirst, who has which will ultimately offer students that of recovery. experience of working in financial services, to all-important unique selling point required The service is funded entirely by voluntary deliver the CISI’s Certificate for Introduction when entering a tough jobs market or donations, so our support is worthwhile and to Securities & Investment (Cert.ISI). applying to university.” important. Through its branch network, the CISI raises thousands of pounds a year for charities, making a difference to people’s lives across the UK. It is heartening to be able to make such a valuable contribution. Training the trainers The CISI is helping teachers the CISI’s offices in the City of London. Jonathan Wernick ACSI, President, to deliver its foundation Those attending included Gary Evans, CISI East Midlands & Lincoln qualification for school who teaches the course at Hautlieu and college students School, Jersey. more effectively. “The Cert.ISI is becoming one of the The Institute runs ‘train most sought-after subjects on the Hautlieu the trainer’ sessions twice School sixth-form curriculum,” he said. Gary Evans a year, where teachers “First, the course offers a work placement learn about the content of the Certificate sponsored by Wealth for Introduction to Securities & Investment Management in Jersey and, secondly, nearly (Cert.ISI) course and discuss ways of all of our students are finding immediate making it more accessible and interesting employment in the finance industry at the to young people. end of their studies. Nine teachers, from six schools, “The ‘train the trainer’ days help me as colleges and training providers that are a teacher to keep on top of my game by either running the course or about to ensuring that my lessons and resources introduce it, attended a recent course. are up to date.” Led by expert trainer Lorraine Mouseley, The next ‘train the trainer’ session will Dr Carl McQueen (left), and Dr Graham Mayers (right), of it was held over one and a half days at take place in July. the Derbyshire, Leicestershire and Rutland Air Ambulance receive a cheque from Jonathan Wernick, President, CISI East Midlands & Lincoln If you are interested in supporting the CISI’s educational initiatives or would like any further information, please contact the CISI Educational Development team at [email protected]

7 news review

interest group partnership Bonds and derivatives to Institute joins be discussed at the CISI worldwide association A new interest group for event about UK debt management and The CISI has become a member of the Association of CISI members will discuss the gilt market. The launch has resulted International Investment Analysts (ACIIA). This is an hot topics related to the from the CISI joining EFFAS last year. The important step forward in the promotion of ACIIA and bond and derivatives group of analysts’ societies, representing its internationally recognised qualification, the Certified markets. The bond interest 27 countries, brings together experts from International Investment Analyst (CIIA), in the English- group is being launched Europe’s equity and fixed-income markets. speaking world. by the CISI in partnership CISI Managing Director Ruth Martin Since the ACIIA was formed, its membership has Dr Con Keating with the European Bond said: “The CISI is keen to launch a joint grown to 37 associations around the world. Members Commission (EBC) of forum with colleagues working in Europe. are spread throughout Africa, Asia, Central and South the European Federation Whereas our existing professional interest America, Europe and the Middle East. of Financial Analysts forums already cover issues of bonds in ACIIA Chairman Fritz H Rau said: “The ACIIA fully Societies (EFFAS). their different ways, the whole focus of this supports the further development and promotion of the Its inaugural meeting, group is Europe.” CIIA within the UK, and we look forward to a long and on 31 May at the CISI’s The 31 May meeting will run from prosperous relationship with the CISI in the interests of offices in Eastcheap, City 12.30pm to 2pm, with a light lunch served. investment professionals worldwide.” Mark Deacon of London, will be chaired Members of the CISI and other EFFAS- CISI Managing Director Ruth Martin said: “We are very by Dr Con Keating, Head of Research at affiliated national societies and non- pleased to be joining the ACIIA at this time. Its approach Brighton Rock Group and a member of the members are welcome to attend. to qualifications recognises the importance of local EBC Executive Committee. as well as global relevance. We look forward to working Mark Deacon, Head of the Research For further information, visit with the ACIIA to further enhance professionalism and Analysis team at the UK Debt cisi.org/bondgroup. To book a place or for and competence globally in the area of securities Management Office, will speak at the enquiries, please email [email protected] and investment.”

The percentage of financial services select benefits players who feel that prospects for the UK economy are brighter than three Movie magic 42 months ago, according to a CISI survey. The CISI Select Benefits Scheme has launched a blockbuster offer for Institute members: significant Last summer, only 26% forecast a UK recovery. discounts on cinema tickets. Members throughout the UK can save an average of 38% on the standard price of To take part in the latest survey, visit cisi.org admission at participating cinemas. The deal is available at Cineworld Cinemas, ODEON, Empire, Apollo Cinemas, Showcase and 230 independent online cinemas across the UK. To take advantage of this offer, simply set up a secure BEST OF THE BLOGS online account with Select Benefits. Members can then order vouchers to exchange at the cinema box office and tinyurl.com/gandelCNN instead, which would have been completely up to five pairs of discounted tickets can be ordered each 1 Stephen Gandel, writing on CNN detached from funding realities. Money’s Term Sheet blog, says that the month. Better still, vouchers are valid for a minimum of six LIBOR trading scandal is just as important tinyurl.com/whartonLIBOR months and members can even get discounts on popcorn as the sub-prime mortgage and insider- 3 If Wall Street and the City were and drinks at Cineworld Cinemas. trading elements of the financial crisis, and teenagers, wonders Wharton’s Knowledge that the public should know more about it. Today blog, would you trust them with the He says that the technical language used keys to the car? Franklin Allen, a finance has ensured that the scandal passed the professor at Wharton, thinks that, if true, public by, but they should try to grasp it the LIBOR scandal highlights a disturbing to “understand the real rot on Wall Street”. trend. “What we are seeing as more and more cases come out is a systematic tinyurl.com/alphavilleFT pattern of unethical and often illegal 2 The Financial Times’ Alphaville blog runs behaviour in the pursuit of profit at clients’ an intriguing statement from JC Rathbone expense,” he says. “If this continues, lack Associates that attempts to justify why of trust will fundamentally change the banks might have felt compelled to abuse industry… any kind of sophisticated product the rate-setting process. “Those in the real will be rejected on the grounds [that it is] For more information about how to obtain this deal, and world,” it says, “should be grateful for a rare trying to rip you off.” other savings, visit the members’ area of the Institute website occasion where banks behaving badly has at cisi.org/mycisi actually produced a positive result.” So if See page 12 for more on LIBOR. *Terms and conditions apply. See website for further details. Discounts the banks hadn’t – allegedly – colluded and range between 12.88% (Cineworld Isle of Wight) and 66.62% (Apollo set artificial LIBOR benchmarks, distressed Do you have a blog recommendation? Cinemas Piccadilly); average savings of 38% based on standard box- banks would have substituted their own Please send it to the Editor: office prices; details correct at time of publication. CISI Select Benefits is funding rates into arrangements [email protected] managed on behalf of the CISI by Parliament Hill Ltd of 127 Cheapside, London, EC2V 6BT. Neither are part of the same group as a provider.

8 May 2012 cisi.org

➳ CLAY ‘MUDLARK’ HARRIS Back story on Mark Austin, Institutional Investor Group, Northern Trust Mark Austin deliberately wears agency told him to put on a suit and skills, specifically in sales. mismatched cufflinks to work every report to Farringdon, London. He identifies five categories of day. In the past, he occasionally wore Applications for the TSB management: people, process, sales, odd socks. The calculated eccentricity privatisation had been scaled down, relationships and money. He has is for his own benefit – to guard requiring the return of excess money always felt that people, relationships against complacency – rather than to to investors in the form of cheques – and sales – rather than process and show off to others. more than one million of them. money – are his stronger points. “I’ve had a City career built on wits To ensure that all had been cashed, Nevertheless, hearing some describe Mark Austin and soft skills,” says Mark, Senior Barclays wanted the cheques to be the back office as a “commodity” does Senior Vice Vice President at Northern Trust’s sorted into numerical order. This took not sit well with him. “I always say President, Institutional Investor Group. It is a about three months and, by the end, that it’s not a commodity – it’s a Institutional career that he happened upon; it was Mark was effectively running the utility,” he says. “Householders pay Investor Group, not until he was about 30, close to a team. He stayed in Barclays’ new- £240 a year for fresh running water Northern Trust

decade after his first financial services and to have all their waste water piped Do you have a job, that he decided he “had the “The back office is not a away. If it went wrong, they’d spend back-office story? makings of a career in the City”. the same amount in a very short time mudlarklives@ In retrospect, there were early signs. commodity – it’s a utility” on bottled water just to brush their hotmail.co.uk Mark had written a financial column teeth. That’s the difference between a for his primary school’s magazine. To issues department for two years, utility and a commodity.” prepare for each issue, he bought the resisting a permanent job because he Mark worked at Chase for Financial Times. was better paid as a contractor. 13 years, ending as Business Later, Mark focused on science, He then worked in corporate Management Head for its securities- but lost interest and only scraped actions for Henderson Administration services business in Europe. He left into Bristol Polytechnic to read (now Henderson Group) for seven as part of a wider management change biology. He left after two years and years, gaining more experience in and has now spent six years at did a series of casual jobs, including operations and becoming deputy head Northern Trust. working as a bicycle courier for seven of the back office. He stresses the importance of months. “It’s great for losing weight, “Henderson was willing to give me a not overly identifying yourself with but not for much else,” he remembers. company car, which was great, except your job. “You aren’t your salary; you He intermittently temped at I couldn’t drive,” Mark says. He took aren’t your title; you aren’t your deal,” Barclays, helping to process the car when his partner said that she Mark says. “You’re what you see privatisation applications, while would drive it. when you look in the mirror. Always working in construction. Things took When Mark moved to Chase try to be yourself. Everyone else is a turn for the permanent when his Manhattan, he decided to gain new already taken.” Illustration: Luke Wilson Luke Illustration:

60-second interview

Angela Knight CBE FCSI(Hon) is to step down this summer as Chief Executive The Chancellor’s announcement that London of the British Bankers’ Association (BBA) after five years in the role. She is a CISI Honorary will host the first offshore renminbi trading Fellow, a recognition awarded to those who have contributed with distinction to financial centre sent a clear message that the UK services and to the Institute. is open for international business. It is also paramount that our new regulatory What has been your biggest capital and liquidity. Since then, change has architecture is well constructed. Q challenge at the BBA? swept through the industry, driven by regulatory Dealing with events! They include initiatives from the UK and beyond. The How can the banking industry bank failure and near failure; the industry is much more stable and risks are Q regain public confidence? eurozone crisis and sovereign better addressed. Other proposals to come Trust is something that is quick to lose and debt; banks with government will reshape its structure, though the lack of takes a long time to get back. The public needs stakes in them; paying back the cost of failure international co-ordination means that UK reassurance that these changes will produce as an industry; regulatory change, which is banks risk being both ‘Vickered’ and ‘Volckered’. real improvements for the economy and the locally, European and internationally generated, The industry is being held to account from all country. At the same time, the industry and retail problems associated with bank directions, becoming more transparent and needs to do its banking well and explain charges, payment protection insurance, faster closer to its customers as a consequence, with itself well. There is no magic bullet and, switching and more. a real cultural shift becoming evident. realistically, it will take many years of hard work to regain confidence. The industry and How does the UK banking industry What must the UK do to remain a the BBA are up for the challenge. Although Q compare with five years ago? Q dominant player in financial services? I’m leaving the BBA, I will remain a supporter There is widespread agreement that, when the Given the eurozone’s ongoing problems, the of banking, which is one of the UK’s few crisis hit, the industry held both insufficient City needs to look further afield for its business. great industries.

9 news review

Stuart Turner Senior Treasury Dealer, Newedge UK Financial Ltd cpd Ask the experts... ‘Nuisance tri-party repo explained The size of the tri-party repo market in the participant cash lenders are able to specify shareholdings’ US alone is $1.74tn as of February 2012, to the tri-party agent the types of collateral with US Treasuries (31%) and Agency they are willing to accept – for example, MBS (36%) making up the majority baskets of only the highest-quality addressed of the collateral. In an environment sovereign debt, lower-rated corporate where unsecured lending has not really bonds, structured finance securities or a As part of the CISI’s London recovered from 2008, repo financing, and basket of equities. CPD programme, on 25 May tri-party repo in particular, has become The tri-party agent maintains the pool Claire Mackintosh will lift key to bank funding. of collateral in a segregated account for the the lid on how ShareGift, the First, the basics. The repo, or repurchase life of the transaction, marking to market company she founded, tackles agreement, is a transaction whereby the assets on a regular basis, substituting the longstanding problem of one party sells securities to another, assets where required, maintaining the ‘nuisance shareholdings’. simultaneously agreeing to buy them back correct quantity of collateral and providing Claire Mackintosh These are small shareholdings at a future date and at a predetermined the necessary position reports to clients. that may arise for a variety of reasons and are price. On maturity, the seller receives back The 2008 financial crisis proved to be uneconomic to sell on their own. ShareGift the same amount of equivalent securities a double-edged sword for the tri-party transfers, aggregates and sells parcels of these and returns the cash, plus interest. The repo market. It illustrated the importance donated shares, giving the proceeds to a range legal title of the security is also transferred of secured financing in a market where of charities – more than £15m to about 1,800 throughout the life of the repo, but the unsecured inter-bank lending had broken beneficiaries to date. seller retains the economic benefit and down; but it also exposed the quality of the ShareGift has increasingly become an industry- corresponding market risk of holding the underlying collateral and the systemic risk standard mechanism deployed by companies as asset. In essence, the repo is a secured in a market of such magnitude. a charitable solution for fractional entitlements, loan transaction. In September 2009, the Federal Reserve small shareholdings and residual cash balances, Under the tri-party structure, an agent Bank of New York formed the Tri-Party both in share-register-management exercises and such as Clearstream, Euroclear or one of Repo Infrastructure Reform Task Force within corporate actions. the two US clearing banks (Bank of New to address weaknesses that became Other highlights of the programme include York Mellon or JPMorgan Chase) will evident during the crisis. This February, an event on 21 June at which Keith Robertson, sit between the two repo counterparties the Task Force delivered its final report, Chartered FCSI, and Director, Armstrong and act as a third-party custodian to the the key recommendation of which was Financial, will contend that the use of volatility – underlying collateral. This role reduces to eliminate intra-day credit through the standard deviation of variance of returns in significantly the administrative cost to operational enhancements and more financial markets – as synonymous with risk both repo counterparties. rigorous control processes. is inaccurate. The tri-party structure facilitates access The Fed’s conclusion is that, although Robertson believes that standard deviation to the repo markets for a wide range of progress has been achieved, further work is an excellent predictive measure for data, participants that otherwise might not find is still necessary to achieve its goals, which presenting a normal probability distribution. it easy to do so. all means the tri-party repo environment But, he will argue, there is overwhelming will continue to evolve at pace. empirical evidence that returns from financial Trade regulations markets are not normally distributed and, This trading is conducted under the Global therefore, standard deviation has no meaning Do you have a question about Master Repurchase Agreement (GMRA) anything from tax to or usefulness as a predictor. and is covered by a separate tri-party virtual trading? agreement. Based on their risk appetite, [email protected] For further details of the London programme, see page 27 or visit cisi.org/capitalcpd

quick quiz

Test your industry knowledge Q1. Which ONE of the following is NOT a money market instrument? A) Certificates of depositB) Commercial paper C) Treasury bills D) Zero coupon bonds

Q2. Which ONE of the following is the second main stage of money laundering? A) Integration B) Layering C) Placement D) Positioning

Illustration: Cameron Law Cameron Illustration: Q3. Which ONE of the following option styles can be exercised only on expiry date? American Barrier Bermudan European The S&IR’s Quick Quiz features questions from CISI A) B) C) D) elearning products, which are interactive revision aids to help candidates prepare for their exams. Answers are on page 29. Q4. A particular country is exhibiting an invisible trade surplus and a visible trade deficit. How would the country best be described? To order CISI elearning products, please call Client A) In recession B) In balance C) Post industrial D) Manufacturing driven Services on +44 20 7645 0680 or visit cisi.org

10 May 2012 cisi.org

first person

Fork in the road The Fed has to decide whether to push ahead with more quantitative easing

to qe or not to QE, that is dilemma facing Ben Bernanke, Get quantitative the question. At least, that’s Fed Chairman, is the difference how one of the world’s biggest between ‘good’ inflation and easing wrong, and the bond investors, Pimco, ‘bad’ inflation. price paid could recently summarised the The reason for holding back be immense dilemma facing the US Federal from further QE is that more Reserve. The huge stimulus could push people’s amounts of money pumped expectations of inflation to the 200,000-plus expected. into the financial markets by undesirable levels, just as the Markets sold off in response. the Fed over the past three recovering economy gains real Of course, the Fed years, through an extended momentum. Actual is unlikely to have been swayed programme of emergency bond inflation could accelerate as a by one month’s figures alone. buying, has helped to prevent result. An estimate of where But, combined with weak wage many economies from sliding investors believe US inflation growth, the evidence for a back into recession. expectations will be in five years recovery in the labour market The decision, therefore, on for the following five years is mixed. It looks, whether to embark on another already puts it at between 2.5% too, like some of the recent job round of so-called ‘quantitative and 3%, according to Pimco, increases can be accounted easing’ – or QE3 – matters not above comparable estimates for by the milder-than-usual just to American homeowners for when the Fed started QE1, weather over the winter, and businesses, but to us all. QE2 and ‘Operation Twist’, the which has encouraged UK house prices, jobs and the most recent variant. consumer spending prosperity of millions depend Set against that is the risk that and acted as a spur to on the correct call. Get it wrong, turning off the morphine would employers to bring and the price paid could be deprive the recovery of the forward hiring plans. immense. Already, confidence-boosting gains in That positive effect financial markets have been asset prices that have, in large may now be dropping scaling back their expectations part, sustained it. There is no out of the picture. of further Fed action. Shares shortage of threats to growth. While and other risky assets have As well as a lack of credit, the construction, car sales been falling back from recent US housing market remains and other indicators highs, revealing what Pimco’s moribund and wage growth may point towards less Executive Vice President Tony is anaemic. Tax increases and need for monetary Crescenzi characterises as their spending cuts are due to kick easing, the uncertainty dependence on “monetary in next year. All over employment – morphine”. “Doing this explains why, for the first which is crucial for a nothing could disrobe the time in months, markets are sustained economic recent rally in risk assets and reacting less to what eurozone recovery – has reveal it for what it is, which is politicians have to say about strengthened the an unsustainable rally that will the debt there and more to case for more bond last only if ever-more monetary headlines on manufacturing buying. Indeed, stimulus is injected into the activity, services output and with fiscal policy veins of global investors,” consumer demand. being tightened in says Crescenzi. Most watched of all are US Europe and the US, On the other hand, if the Fed jobs figures. And there, the it is the only tool left decides to battle against the evidence has been mixed at best. for policy-makers forces holding the US economy After three straight anxious to avoid a back – namely a lack of credit months of solid job creation and Japanese-style era availability – then “it could fall a streak of monthly employment of stagnation. n onto its dagger, committing a gains of more than 200,000, classic error in central banking non-farm payroll figures for Christopher by acting during a turning point March fell far short of analysts’ Adams is the and thereby doing too much”. forecasts. Just 120,000 jobs Financial Times’ At the heart of the were added, compared with markets editor Illustration: Johanna Ward Johanna Illustration:

11 wrong side of LIBOR bets during the period, investors in the debt of major firms whose debt is linked to LIBOR and will have suffered if the rate was set too low, and customers who purchased interest-rate swaps from banks. The process of calculating LIBOR came under scrutiny during the financial crisis, when allegations emerged that some Fixing banks were submitting artificially low rates to exaggerate their creditworthiness at a time when confidence was low and it was difficult for banks to borrow from one another. Because banks’ estimates are published daily, the game? following the release of the LIBOR rate, they send a message to the market about a Regulators around the world are investigating whether banks bank’s financial health. Peter colluded to fixLI BOR, the benchmark for a range of institutional Hahn, a lecturer in finance at London’s Cass and retail financial products.Hugo Cox investigates Business School who previously worked in financial services, believes that the practice of misstating the rate far predates the financial allegations that the London Inter- those colleagues responsible for submitting crisis. “At the banks I worked for,” he says, Bank Offered Rate (LIBOR), the inter-bank the firms’ estimates. LIBOR is “it was frequently discussed that you always lending rate on which a range of wholesale meant to measure the average rate at which a paid less than LIBOR when borrowing in and retail products are based, has been leading bank can obtain unsecured funding the market.” systematically fixed by traders at leading in the London inter-bank market across ten banks are being investigated by regulators different major currencies. As a measure of Weak controls on both sides of the Atlantic. inter-bank borrowing costs, it has become the The British Bankers’ Association (BBA) has Several US regulators, as well as regulatory standard for more than $350tn of derivatives claimed that internal controls protect the bodies in the UK, Japan and Switzerland, products, as well as the basis for a range of rate from manipulation. Writing in the June have approached the major banks whose retail products including mortgages and 2011 edition of the S&IR’s ‘Ask the experts’ estimates are used to calculate LIBOR. credit cards (see box). If the column, BBA Chief Executive Angela Knight Allegations include the claim that traders allegations prove accurate, some participants CBE FCSI(Hon) said: “Trimming ensures at a number of leading banks co-ordinated are likely to seek damages from the major that no single contributor can influence the efforts to manipulate the rate by influencing banks. These could include traders on the calculation and hence affect the benchmark.

12 May 2012 cisi.org

cover story

Any submissions that are dramatically different from the mean are outliers and How is LIBOR calculated? are therefore discarded.” John LIBOR provides a measure of the average rate morning trading session; the LME Official Ewan, LIBOR Manager at the BBA, says: at which a leading bank can obtain unsecured Settlement Price is the last cash offer price. “Internal controls ring alarm bells if the rate funding in the London inter-bank market for a shifts more than five basis points from the given period, in a given currency. What is LIBOR used for? previous submission, or if they ‘cross the A panel of major banks submits daily About $350tn of swaps and $10tn of loans – quote’ – if their estimates have historically been consistently beneath the mean and the estimates of how much it would cost the banks including the majority of major currency futures, latest one ends up above it, or vice versa.” to borrow from one another for 15 different as well as residential mortgages and credit Small shifts could therefore escape detection. periods – from overnight to one year – in ten card rates – are now indexed to LIBOR. The But trimming would not appear to different currencies, including dollars, euros, yen difference between three-month LIBOR and prevent manipulation through small changes and Swiss francs. The resulting 150 rates are short-term US government debt is considered in estimates. Internal or external traders calculated by Thomson Reuters and published by a vital measure of credit risk in the general wishing to exert influence could select a group the British Bankers’ Association. economy, and is used to calculate the risk of of banks that had reliably submitted mid- range quotes over recent weeks – using the Rules published on the BBA website state default on inter-bank loans. The Swiss National figures released by the BBA – and then focus that “rates must be submitted by members of Bank uses the three-month Swiss franc LIBOR lobbying efforts on shifting all their estimates staff at a bank with primary responsibility for as the reference rate for monetary policy and very slightly in their favour. management of a bank’s cash, rather than a sets a target range for the LIBOR. The Chicago bank’s derivative book.” Thomson Reuters runs Mercantile Exchange’s Eurodollar contracts are Questionable cases a range of tests on submitted rates to check for also based on three-month US dollar LIBOR The Canadian Competition Commission their accuracy and authenticity. rates; these are the world’s most heavily traded alleges something close to this took place between 2007 and 2010 in the case of the Depending on the size of the panel for that rate, short-term interest rate futures contracts. yen LIBOR rate, according to papers filed outlying quotes are then discarded and the mean in an Ottawa court last year. of the remaining quotes is taken. In the case of What could be the consequences It cites lawyers acting for an unnamed yen LIBOR, which has 15 banks on the panel, the of manipulation? “co-operating bank” (which the Wall Street top four and bottom four quotes are excluded. The number of retail and institutional products Journal has suggested is UBS) who allege The practice of basing LIBOR on estimated that derive their value from LIBOR show the that traders at , Deutsche Bank, borrowing rates, rather than rates at which size of the consequences for retail savers and HSBC, JPMorgan Chase, RBS and UBS – all of which are among the 15 institutions sitting business has been transacted, has long homeowners, as well as for pension funds, on the yen LIBOR panel – “entered attracted criticism because of its vulnerability banks and central banks. In a speech at the end ➳ to manipulation. It contrasts with pricing of of February, EU Competition Commissioner other benchmark rates that are based on actual Joaquin Almunia said: “Given the number transactions. For example, the London Metal and the value of transactions in interest-rate Exchange (LME) Official Prices are used as derivatives, and the crucial role these products global benchmarks for future and options play in the management of risk, any confirmed contracts for metals including aluminium, manipulation of these interest rates would copper and steel. The LME Official Price is the probably imply a very significant cost to the last bid and offer price quoted during the second European economy.” Illustration: David Angel for Debut Art Debut for Angel David Illustration:

13 cover story

into agreements to submit artificially high from LIBOR is huge,” he says. “Consider a contributors. The code could include issues or artificially low” quotes. The traders, it is swap: I am paying a counterpart a fixed rate such as which instruments to reference in alleged, decided collectively which direction of interest in exchange for LIBOR. Clearly, submitting the rate, who should be consulted they would shift the rate, before individually if LIBOR goes up, I stand to gain. There is a and whether there should be restrictions on approaching internal colleagues on the cash huge range of these products that are traded firms talking to those responsible for setting desk responsible for submitting the bank’s between banks and a small number of rates. A more extreme route, number. If they did this, it would clients.” “Clearly, this is a hinted at by O’Malia, would be to enforce have breached the Chinese walls within the benchmark to fix,” said Scott O’Malia of the banks intended to prevent such influence. Commodity Futures Trading Commission These should prevent individuals from selling (CFTC) in a speech at the end of March. “Derivatives traders derivatives to hedge funds, or those with The CFTC is examining collusion between may have manipulated proprietary positions that would benefit from derivatives traders and bank treasury either a preview of the rate or an influence departments involved in yen and dollar submissions by co-ordinating on it from shifting the rate. LIBOR rates, as well as the claim that some In a related case, the Swiss Competition banks understated their LIBOR submissions their behaviour” Commission confirmed in February that to make themselves appear stronger during “derivatives traders working for a number of the financial crisis. He noted: “The BBA is regulatory oversight on the participating financial institutions may have manipulated not a regulator, and the contributor banks banks. The process is not currently a regulated these submissions by co-ordinating their are not under its jurisdiction.” activity under the UK Financial Services and behaviour”, adding that derivatives traders Markets Act. With a number of may have colluded to benefit at the expense Time to fix? claims by traders at several investment banks of their clients. Further evidence In response to the growing number of that no internal rules existed to prevent the is provided by allegations from a sacked RBS investigations, in late March the BBA started fixing of the rate, there seems a real chance trader in Singapore in an employment claim to assemble a steering committee to examine that the investigations could result in some against his former employer. Tan Chi Min changes to the rate. The BBA told the S&IR sort of formal regulatory change. Some claims that it was common for RBS employees that this committee currently includes element of reform, concludes Hahn, is long to request that the LIBOR rate be set at specific representatives of several banks responsible overdue. “LIBOR was created in London rates to maximise profit on their positions. for setting LIBOR, a wholesale broker group 40 years ago to facilitate funding between According to Hahn, there is no and the Chicago Mercantile Exchange, the groups of consortia banks,” he says. “It was shortage of internal or external stakeholders futures exchange group. This created for another purpose, so why should who would be motivated to influence the committee will look at implementing a someone’s mortgage rate depend on the cost LIBOR rate. “The range of products derived rigorous and comprehensive code for all of inter-bank funding?”

14 May 2012 cisi.org

Still coining it? Proposed European reforms may do little to increase audit quality or loosen the grip of the Big Four firms, writesJennifer Bollen

accounting firms failed conspicuously to flag up the parlous The issue of rotation has sparked heated industry debate. According state of bank balance sheets in advance of the financial crisis. The to the Commission’s assessment, the Big Four firms audit 99% of European Commission responded in November 2011 with sweeping FTSE 100 companies. In most EU member states, they command proposals that could lead to a break-up of the audit and consulting more than 85% of the work from the major listed companies. arms of the so-called Big Four firms: PricewaterhouseCoopers But James Roberts, an audit partner at smaller firm (PwC), Deloitte, Ernst & Young and KPMG. The BDO, believes that rotation would maintain the status quo. “Our Commission’s proposed reforms followed widespread concern that concern is that mandatory rotation will operate only between the banks and financial institutions had received clean audit reports biggest four firms,” he says. “Ideally, retendering would be on a between 2007 and 2009 despite taking huge losses during that comply-or-explain basis, but we suspect it will be mandatory.” period. But the proposals to overhaul Europe’s auditing industry Compulsory retendering on a comply-or-explain basis, have prompted criticism from the biggest accounting firms and Roberts believes, would provide clients with a greater choice of opinions about the long-term impact of the new rules are mixed. service providers. Audit committees would be in a better position to Audit Policy: Lessons from the Crisis – the Commission’s benchmark the services of their current providers against the rest consultation document, published in September 2010 – followed of the market. Stuart Diack, an audit partner at Deloitte, scrutiny of the audit industry and examination of how improvements says that mandatory rotation has already been shown to increase to its practices could enhance financial stability. The the concentration of business of the major players and decrease report raised questions such as how banks could fail just months quality. “There is no evidence that mandatory rotation improves after sailing through audits. The proposals (see box) include: audit quality,” he says, “and the limited experiences with it appear to • mandatory rotation of auditor to stimulate competition and avoid indicate the opposite.” conflicts of interest • segregation of auditing practices from non-auditing services such What’s the price? as consulting, creating pure audit-only firms Accountancy firms are reluctant to comment on how reform would • greater scepticism of auditors’ scrutiny of company accounts affect profits, but many doubt that the Big Four’s revenues would • better communication with stakeholders and the public. suffer. “I do not think the EU reforms will do anything to damage the

Reform in numbers Proportion of FTSE 100 companies 99% audited by the Big Four Average number of years a FTSE 100 48 client retains an auditor The year PwC (or its predecessors) 1896 began auditing Barclays Bank. PwC has acted as Barclays’ sole auditor since 1978 Premium paid for an audit carried 20% out by a top-tier firm between 2002 and 2006 Number of responses to the 700 Commission’s proposed reforms of the Big Four, the highest level of responses of any consultation in the Internal Market and Services area since the consultation on Solvency II in 2008 Source: European Commission impact assessment

16 May 2012 cisi.org audit regulations

large firms competitively,” says Roberts. “Their profitability UK regulators agree. Last December, Andy Haldane, Executive will be unaffected.” Creating audit-only firms, Director of Financial Stability at the Bank of England, said that fair- meanwhile, may reduce the talent in the profession. Specialists in value accounting tended to over-emphasise return in the boom and tax, actuarial and technology roles may find positions that consist under-emphasise risk in the downturn. Haldane called for a distinct entirely of assisting audit teams less satisfying than roles that enable accounting regime for banks in the UK. them also to work directly for clients, where their skills are the main focus of an assignment. “The ability to attract and retain talent The next crisis? and skills will suffer,” Roberts says. “The combination While there is much support for the European Commission’s of experience, judgment and specialist skills needed in the audits belief that the 2008 crisis highlighted the shortcomings of the of complex PIEs [public interest entities] can be found only in a European audit industry, Roberts is unconvinced that the new multi-disciplinary environment,” says Mike Ashley, Head of Quality rules in their current form will help to prevent another one. and Risk at KPMG. One of the most powerful auditors He believes that reform gave legislators an opportunity in Europe, Ian Powell, Chairman and Senior Partner of PwC, goes to attack excessive concentration of business in the hands of a further. He believes that many of the proposed reforms would, few auditors, the appearance of independence and the content if adopted, seriously dent the industry’s ability to deliver quality of the audit service itself. “Regrettably, [legislators] have missed audits and would “likely have serious unintended consequences for the target in each of these areas,” he says. The business and the wider capital market”. Commission’s green paper said that huge losses revealed by banks between 2007 and 2009 had raised questions about how auditors The wood for the trees While the questions of rotation and segregation have grabbed the headlines, more fundamental questions are perhaps being In most EU member states, the Big Four ignored. Stella Fearnley, Professor in Accounting at Bournemouth University, believes that reform of accounting firms command more than 85% of the standards, particularly mark-to-market (or fair-value) accounting practices, should be the priority. “Until we get that right, we are not audit work from major listed companies going to get accounts telling us the right story,” she says. According to BDO’s Roberts, there are three weaknesses with could give the institutions clean audit reports for those periods. mark-to-market accounting. Firstly, he says, many assets have no “The proposals have strayed far away from the stated ready market to value against, meaning that models are subject objective to help prevent a future financial crisis, which the to broad value ranges. Secondly, valuation movements that bear Commission highlighted, appropriately, as the principal concern,” no relationship to underlying commercial success can distort agrees Diack. Diack’s concern represents a widespread income statements. Thirdly, by the time they are published, market sense of missed opportunity. Clearly, there is a need to improve valuations are typically several months out of date. the role and perception of auditors as objective service providers It has been widely asserted that mark-to-market accounting was in the eyes of industry and the wider public. And auditors a significant factor in the fraud at Enron, because it allowed the appear to agree with the Commission’s aim of improving company to book estimated future profits as current gains, inflating auditing standards. But the shake-up, as currently proposed, its balance sheet and clouding the true figures. Senior could bring a new set of problems.

European Commission proposals Mandatory rotation auditor, they will put their best The Commission has also Proposals to tackle this include The Commission’s proposals include resources into winning new work, proposed that pure audit providers requiring the auditor to state whether requiring audited companies to rotate rather than servicing existing work.” should not be part of a group that historical financial information is auditors every six years. This would A House of Lords report published includes non-audit service providers, untrue and requiring scepticism entail regular tenders for a new last year echoed the proposal and such as consulting firms, and that when analysing fair values and future auditor, in which a minimum number the UK’s Competition Commission no more than 5% of the pure firm’s cash flows. of firms must participate, including launched an investigation into the voting rights be held by any firm at least one non-Big Four firm. country’s auditing market. providing non-audit services if the Communication The European Commission firm is open to non-partners. The Commission said that there concedes that mandatory tendering Audit-only firms was a lack of communication will increase costs for the audited The Commission believes that the Scepticism and fraud prevention between auditors and supervisors companies, without necessarily introduction of ‘pure audit’ firms The impact study highlights regarding weaknesses at audited leading to the mandating of a would help to improve audit quality. that auditors currently have companies – particularly in the different auditor, and that audit It has proposed forcing firms that no obligation to ensure that a financial sector. firms would likely invest less in generate a third of their total audit company’s accounts are free from There is currently no requirement the tender processes. revenues from public interest entities misstatements. EU rules also do not for auditors to regularly engage with James Roberts at BDO believes to become pure audit providers. The explain how the auditor must carry supervisors of banks and insurance that rotation will erode quality: “A proposals are aimed at the large out an audit – for example, there companies beyond the obligation to concern for companies may well be auditors – those which generate is no requirement for the auditor to report breaches of rules in certain that, as accounting firms know they more than half of their fees from use scepticism, and requirements cases. In response, the Commission are going to lose a client a relatively clients with a capitalisation of more concerning the scope of an audit has proposed regular dialogue with short time after being appointed than E1bn. are unclear. the audited companies.

17 Hugo Cox talks to Professor Carol Alexander, Henley Business School at Reading academic and a champion of better financial risk management Teaching caution carol alexander, arguably the UK’s leading financial over-the-counter derivative-type characteristics.” Because risk guru, is on the warpath over the exchange-traded notes ETNs are exchange traded, they are available to retail and (ETNs) that are heralding a dangerous new era of volatility pension investors, who would otherwise have little access to trading among pension funds. The career academic, currently over-the-counter derivatives. The ETNs she is Chair of Risk Management at the International Capital talking about are based on futures written on the VIX, the Market Association (ICMA) Centre, Henley Business School Chicago Board Options Exchange Market Volatility Index. at Reading, fears that poor understanding of the notes’ risks The so-called ‘fear index’ uses options prices to measure the could precipitate the next pension-fund blow-up. market’s expectation of the S&P 500’s volatility over the next “Returns on these ETNs are impossible to forecast without 30 days. The products are being pushed hard by access to privileged information. It is no use holding them banks looking to refocus their efforts from over-the-counter as long- or even medium-term investments, because their derivatives business, which has become more expensive as expected returns are almost always negative,” she says. regulation has increased, to index products. The trend “This is going to affect people’s pensions unless funds are began when Barclays released the first of its iPath ETNs warned.” It is no surprise, Alexander believes, in February 2009; there are now more than 30 products, that pension funds are not alert to the risks inherent in ETNs, with an estimated $3bn market cap. which are debt securities that are underwritten by a bank and traded on an exchange. Several forays into the commercial Reasons against world, including a period as a fixed-income trader (see box), Alexander’s objections to ETNs are twofold. have left her convinced of the paucity of understanding of “Roll costs mean that the long-term value of tracker ETNs is risk and the relative scarcity of risk-related qualifications zero,” she says. The roll cost arises because the ETNs buy VIX among professionals at major firms. Alexander has been a futures of the two maturities that straddle the target maturity. longstanding champion for improved standards and became Each day, a little is rolled from the shorter maturity to the Chair of the Professional Risk Managers’ International longer. One characteristic of VIX futures is that the shorter Association (PRMIA) in 2010. “We need senior risk analysts maturity has a much lower price than the longer one. So ETNs to be as highly qualified as surgeons,” she says. “They are constantly selling a low-priced future and buying a high- should be trained in mathematics and then required to take priced one. These positive roll costs erode ETN performance a formal professional qualification.” Regulators, severely. More troubling is the high volatility meanwhile, are struggling to collect the position-level data that VIX ETNs display. Some have shown volatility levels of needed to better anticipate systemic risk. “This is a huge 400% – the equivalent of an annualised move of four times the requirement that has not been adequately thought through value of the index. “This means that performance returns are from a policy perspective,” Alexander says. She adds that a almost impossible to forecast, so their hedging value is very better approach would be to draft rules forcing greater risk limited,” Alexander says. She had been blowing accountability onto senior management. After the the whistle on ETNs for years – one paper on the subject, with corporate scandals at Enron and WorldCom, the Sarbanes- her PhD student Dimitris Korovilas, was released in 2010 – Oxley Act in the US introduced personal liability for senior when one of the most popular products blew up in February this year. The -managed VelocityShares Daily 2x Short-Term ETN lost half its value in just two days, “We need senior risk managers to having earlier diverged by nearly 90% from the index it was meant to be tracking after the bank stopped issuing shares. be as highly qualified as surgeons” This demonstrated both the wild levels of demand and the high volatility in these products. Investors management and boards when accounting procedures fail. had flocked to the ETNs due to worries that this year’s equity “This personal liability should be broadened to include rally might suddenly end. The tendency of the now-huge VIX market risk and credit risk,” Alexander explains, although it futures ETN market to lead rather than follow the prices of is hard to see how investment losses that are not fraudulent VIX futures has attracted comment from the US regulator, could be the basis of a criminal case. Back on the Securities and Exchange Commission. More than 30 the subject of ETNs, Alexander explains how, in recent million shares traded hands on the first day VelocityShares years, investors have piled into volatility products, which are fell to earth, giving the note similar liquidity to Microsoft. marketed as a tool for diversification. These have replaced As a result of the collapse, the Securities and traditional channels, such as commodities, which have shown Exchange Commission is looking at how ETNs are marketed. increasingly close correlations with other asset classes since For Alexander, however, as long as firms are not incentivised 2008. “The problem is that anyone can buy them,” to increase the quality of their risk management, the industry

she says. “Banks are issuing indexing products that have will continue to act after the horse has bolted. Tanner Paul Photo:

18 May 2012 cisi.org

profile: carol alexander

Academic heart An influential PhD supervisor 50 years her senior gave Carol Alexander the confidence she needed to pursue an academic career. The satisfaction of teaching has remained the central appeal of her job ever since. “The prospect of working with my PhD students is what gets me out of bed in the morning,” she says. Her CV includes a long list of credits of recent PhD students, including senior investment and strategy posts at the world’s leading banks and asset managers. But her career path changed suddenly in 1987. A combination of personal and global events drew her away from the esoteric academic world of algebraic number theory, in which she worked as a lecturer at the University of Sussex. Alexander’s first child was born a month before the 1987 stock-market crash; soon after, she and her husband separated. “The two events caused a complete re-evaluation of my motivation. It was now up to me alone to provide a stable environment for my child,” she says. She also felt a desire to provide an application for her mathematical research. The financial system seemed a good candidate. Applying her pure-maths background to the world of quantitative finance took her into the commercial sector three years later, with a consulting role at Hill Samuel. After a stint as a bond analyst at Phillips & Drew (now part of UBS), however, she took only two brief full-time positions in the industry – at Nikko Securities and software provider Algorithmics. “The mindset in most financial institutions is not compatible with mine: most individuals have not learned that great wealth, fame or power do not buy you happiness – indeed, quite the reverse,” she explains. Her commitment to the social and intellectual precepts of academia does not CV snapshot blind her to the current shortfalls of its 2010 – Chair, Professional Risk Managers’ International application. Asian students attending UK Association (PRMIA) universities is a particular concern. 1999 – Chair of Risk Management and Director of Research “Many excellent Chinese students are at the International Capital Market Association (ICMA) coming here, but end up learning only about Centre, Henley Business School at Reading aspects of financial markets and instruments 1998 – Director, Head of Market Risk Modelling, Nikko that derive directly from the US economic Securities, London establishment,” she says. The risk is that this 1996 – Academic Director, Algorithmics Inc. will store up problems in the fast-growing 1985–98 – Lecturer in Mathematics and Economics, Asian financial industry. “We need tailor- University of Sussex made programmes for these students that 1982 – Bond Analyst, Phillips & Drew, London teach them how to manage activities that suit 1980 – PhD in Algebraic Number Theory, University of Sussex their market and avoid importing the finance 1976 – BSc in Mathematics with Experimental Psychology culture of the US.” (first class), University of Sussex

19 A rule too far Designed to curb risky proprietary trading at US banks, the Volcker Rule has the fund management industry up in arms. Annabelle Palmer investigates its unintended consequences

the volcker rule, named after former in its funds. This has significant for independents to soak up and Federal Reserve Chairman Paul Volcker, is ramifications for the global fund management acquire the businesses of the largest part of the Dodd-Frank Wall Street Reform industry. Affected banks with asset asset managers. As US and Consumer Protection Act. It requires management arms will need to narrow their mutual funds are not considered to US banks to discontinue proprietary trading focus so that they only sponsor funds marketed be ‘covered funds’ under Volcker, a activities by 21 July 2012. Under to clients with savings or deposit accounts, or maelstrom of concern has emerged as the Rule, banks are prevented from engaging trust clients, and completely remove hedge foreign equivalents have not been granted in proprietary trading (taking principal funds and private equity funds from their the same privilege. positions in underlying assets). Short-term remit. US banks believe that this trades could be conducted only for hedging will put them at a competitive disadvantage. An unintended consequence? or market-making purposes. “A US bank sitting in Europe In the US, whether an entity is a hedge fund Banks are complying with this element of cannot engage in activities that its competitors or not is determined by the Investment Volcker by creating hedge funds and setting across the street can,” says Scott Cammarn, Advisers Act of 1940. However, funds up shop in other jurisdictions. Special Counsel with law firm Cadwalader. such as UCITS, Canadian mutual funds or However, for the fund management industry, As Cammarn explains, if its Japanese investment trusts do not qualify Volcker does not stop there. Banks subject competitor is a European bank with interests for exemptions under the 1940 act, and so to the Rule are also banned from managing in the US, that bank would be similarly fall within the definition of a hedge fund or any investment products – other than US hobbled. By contrast, those European asset private equity fund. As such, banks subject mutual funds – or distributing them using managers that are not part of a bank that does to Volcker are prohibited from sponsoring the bank’s brand and seeding them with the business in the US would be free to target the or investing in them. Many feel bank’s capital. The justification is customers of the US banks that are suddenly that it is unfair to treat such funds the same that the underlying activities of certain funds finding themselves hamstrung because of the as hedge funds. Europe’s UCITS funds, for are risky, so US banks, which receive federal Volcker Rule. Alan Brown, Chief example, are widely considered to be the guarantees, should not be involved with them. Investment Officer at fund manager Schroders, structural and economic equivalent to US As currently drafted, however, these rules points out that while smaller, so-called mutual funds and are heavily regulated would apply to any bank with a single branch, independents could stand to benefit from the within their countries of origin. agency or commercial lending subsidiary in business that can no longer be undertaken by “It makes no sense to regulate and prohibit the US, or those with US residents as investors these banks, there would be limited capacity sponsorship of a UCITS fund merely because

20 May 2012 cisi.org

the volcker rule

of the way that the 1940 act defines it to management business completely offshore.” be,” says Cammarn. He believes that it is The Federal Reserve’s extended wrong that a foreign bank with branches consultation period closed on 13 February in the US can no longer advise or sponsor 2012, by which time it had received 16,000 a fund regulated under its home country letters. Cammarn says that law. The European Fund and there is disagreement within Congress as to Asset Management Association (EFAMA) what was really intended. No justification has been campaigning against the covered for this unequal treatment is offered in the funds notion, arguing that the proposed rules proposed rules, and many believe that the represent an inappropriate extraterritorial capture of bank-owned fund managers was a application of US jurisdiction and will result of bad drafting and is not intentional. exacerbate the negative impact of Volcker “The Volcker Rule as applied to private fund management is one of the worst pieces in Dodd- “A US bank sitting in Europe Frank. It has not been thought out enough and has internal cannot engage in activities that its inconsistencies and circularity competitors across the street can” issues,” says Okoshi. One inconsistency is the apparent risk the Rule poses to liquidity. In a on its members. The association provision known as ‘Super 23A’, the Volcker predicts a huge burden for fund managers. Rule prohibits banking entities from entering “It is a big concern for those into Federal Reserve Act Section 23A ‘covered UCITS funds owned by European banks with transactions’, including loans, guarantees US operations. It will have an impact on who or purchases of securities or assets with any can provide services to whom, and could hedge fund or private equity fund for which lead to major restructuring of many firms’ it serves as sponsor, investment manager businesses, including costly rebranding,” or investment adviser. This will avoid the says Jarkko Syyrila, Deputy Director credit risk of banks and their affiliates from General of EFAMA. “It is one of the biggest providing implied guarantees or backstops. headaches for our members at the moment.” But there is no geographic limit stipulated for rule Super 23A. So, for a A costly oversight Singaporean bank with a branch in the US It is hoped that US regulators, charged with that chooses to advise a fund in Singapore, interpreting and applying Dodd-Frank, none of its entities anywhere in the world can will be allowed to create exemptions for the provide credit support to that Singaporean fund managers. If they do not, some banks fund. “The Super 23A provision might be tempted to get out of the business is applied globally in a way that none of the of asset management altogether, says Brown other Volcker provisions are,” says Cammarn. at Schroders. Deutsche Bank “It regulates the investment advisory and is in the process of doing just that. It has credit-support functions of foreign banks cited “recent regulatory changes” as one of everywhere in the world. I don’t think it the reasons for doing so although, when the was intended to do that, but that’s the way S&IR approached the bank, it declined to Congress wrote the provision.” comment further on whether the Volcker It remains to be seen whether a rule designed Rule was a key issue. Cammarn to prevent US banks from engaging in risky says that some banks are also questioning behaviour ought to cover the remote risks that whether to maintain branches in the US. could emerge from foreign banks advising, “There are some banks that are specifically managing or providing credit support for choosing not to open a branch in the US foreign funds. But many in the industry because they are afraid of what will happen remain confident that regulators will listen to it. People are very cognisant that there to reason. European banks with large asset is now a real downside to establishing a management operations will be hoping they branch in the US – and that downside is the do. Brown at Schroders concludes: Volcker Rule,” he says. Marilyn “I would like to think that regulators will Selby Okoshi, a partner at law firm Katten listen to reasonable arguments, because you Muchin Rosenman, says that her clients don’t want to get into the position where a J.P. are also uneasy. “I’ve had clients say they Morgan entity needs to sell off its investment might not be able to offer fund products in management arm just because it would fall the US,” she says. “Some say that they don’t under the definitions of the Volcker Rule. I need to be a bank in the US, or that they may find it hard to believe that that is what the US reduce their US headcount and do their fund authorities would want to see happen.”

21 Winds of change What can firms expect from the revised Markets in Financial Instruments Directive? The S&IR asked Christopher Bond, Timing Chartered MCSI, for his verdict It is likely to be 2015/16 before Mifid 2 and Mifir are implemented, although the European Commission hopes that it will back in november 2007, the EU regulated activity and structured loans take place in 2014. implemented the Markets in Financial a regulated investment. Instruments Directive (Mifid). It had the clear The next six months will be critical in aim of breaking down barriers to investors Will client classification be affected? shaping this legislation. If you want to making cross-border transactions outside Mifid recognises three types of clients: their national markets in the EU. professional, retail and eligible counterparty comment on this legislation, you can The traditional national exchanges’ (ECP). The greatest regulatory protection make your voice heard at the European monopolies have been broken beyond the is afforded to retail clients. Parliament and Council in Brussels either imagination of the European Commission. The Commission reviewed current by contacting them directly or through a For example, more than 50% of FTSE 100 classification of clients, but retreated from relevant trade body. trades are now made on electronic platforms some of its more radical proposals. For outside the London Stock Exchange. example, it has dropped its earlier plan to A likely timetable The G20’s regulatory response to re-categorise some professional investors the global financial crisis – and to changing as retail clients. The distinction between Now technology – has made financial stability and retail and professional clients remains (only Markus Ferber, Rapporteur of the Economic improving the transparency and regulation of local government authorities are regarded as and Monetary Affairs Committee (ECON) of markets and firms the key drivers. being in either category). The ECP category the European Parliament, finalises his report To achieve this in the EU, the Commission has continues and clients will now benefit from on Mifid 2 and Mifir, having called for reviewed the Mifid framework. Last October, greater rights to fair dealing and information comments and held a public discussion it adopted proposals for a revised directive, about complex products. dubbed Mifid 2, and a new regulation, Mifir, to cover derivatives trading, broker-crossing How about conduct of business rules? 2012 networks, third-country access rights and There will be limited change under ECON discusses report and agrees high-frequency trading (HFT). These two Mifid 2 itself, but the European Securities changes to Commission’s texts. Council draft laws are subject to review by both the and Markets Authority (ESMA) is tasked with prepares its own version separately European Parliament and the Council of making detailed rules and ensuring consistent Ministers and, therefore, are likely to change implementation throughout the EU, so expect 2013 as a result of negotiations between the two more amendments to follow. Negotiations between the Parliament, bodies. Changes will include amendments to Execution-only will continue to be permitted the Commission’s drafting in the report of the and the definition of ‘complex’ instruments Council and Commission on final texts Rapporteur, Markus Ferber, to the Economic has been slightly expanded to include (the ‘trialogue’) and Monetary Affairs Committee (ECON) of leveraged (but not synthetic) exchange-traded the European Parliament. These are likely to funds (ETFs). The best-execution rules will 2013/14 be influential to the outcome. be tightened for firms’ policies and client All three formally approve the texts and information will be increased for issues such they are published in the Official Journal Mifid 2 explained as which trading venues are actually used. Will the scope of Mifid increase? Yes, in several ways. There will be a new What changes does Mifid 2 make to the access 2014 regulated trading venue – the organised of third-country firms to the EU? The European Securities and Markets trading facility (OTF) – where clients’ The Commission proposes that branches of Authority consults on and publishes orders will be systematically crossed. Some such firms should be permitted only if they detailed technical standards under exemptions from authorisation will be are from an ‘equivalent’ jurisdiction. If they both laws (level 2) removed – in commodity derivatives where are, they will have a passport to do business the ‘own account’, ‘commodities dealers’ across the EU. Without an EU branch, such a 2015/16 and ‘ancillary business’ exemptions have firm may market only on an unsolicited basis been restricted or removed, for example, and to ECPs, but certainly not to retail. Ideally, 18 to 24 months’ implementation in HFT (see later). There are The position of professional clients, which time by local regulators and firms of new powers over commodity derivative include some buy-side institutions, remains Mifid 2. Mifir has automatic application markets and product intervention. Custody unclear. The ECON draft would extend the and safekeeping, for which there is an ban to report-up professional clients, but not unclear definition, becomes a mainstream other professionals.

22 May 2012 cisi.org

continuing professional development

How does Mifid 2 fit with the FSA’s Retail is increased from more liquid equities to all The Commission has interpreted this Distribution Review (RDR)? equities admitted to trading on a market and commitment to also require trading in Mifid 2 accepts that there should be equity-like investments, such as depository derivatives to take place on a regulated restrictions on product providers giving receipts. Bonds and structured finance market, rather than OTC. benefits to intermediaries. However, there products admitted to trading – or those with Mifir contains the general mandatory are big differences between what it and the a prospectus – are included for the first time, trading requirements, while ESMA is RDR propose. These differences as are derivatives that meet these conditions, tasked with developing detailed criteria. include to whom restrictions apply (Mifid or are ‘clearing eligible’ under the related rules These include average frequency and size restricts only independent advisers), what set out in the European Market Infrastucture of trades and the number and character investments are covered (Mifid says all Regulation (EMIR). ESMA will of active market participants. Trading on a change investments), legacy-trail commission (no co-ordinate the work of national regulators on market normally requires CCP clearing. exemption under Mifid), whether providers granting waivers using its liquidity (including can facilitate payments to advisers (no under stressed conditions), size and type-of- What new powers does Mifid 2 have for exemption), and payments to platforms order conditions. There are broadly similar commodity derivatives? (permitted under the RDR but not under post-trade price-transparency requirements, This is another controversial issue. National Mifid). Brokers are concerned regulators and ESMA will have power to that they will no longer be able to receive impose or approve a market’s request for research. The RDR starts in 2013, a long time Price transparency position limits, and for there to be position before Mifid 2 (see timeline), so firms may proposals are radical transparency and transaction reporting on need to make big changes again when Mifid and from a market. There are also substantial 2 is implemented. The FSA believes that the and will require business systems and controls under Mifid 2, in Commission will agree either to change Mifid addition to CCP clearing requirements under or allow the UK to ‘gold plate’ it, but some models to change EMIR, and increased capital requirements. doubt its negotiating strength. where national regulators and ESMA hold What are the new product intervention powers? How does Mifid 2 regulate high- the power to delay the publication for large Both ESMA and the national regulators frequency trading? orders. There will also be a consolidated tape wanted these powers. The Commission’s Many proprietary traders will be authorised of equity prices covering all venues. compromise is that both should have them, as members of central counterparties (CCPs) but ESMA has the overriding voice if it or trading venues. This will provide the How will transaction reporting change? decides that the conditions it has specified regulator with substantial and continuing The first big change is that each end customer under Mifid 2 are not met. ESMA recently information on strategy, tick size and is now identified. Second, the volume and reviewed ETFs, structured products, foreign- order/execution ratio. Traders must provide speed of transaction reporting will increase. exchange contracts and UCITS. continuous quotes, even in tough markets, There are comparable reporting requirements have robust internal controls over orders for over-the-counter (OTC) and on-exchange to prevent programme glitches (note the derivatives under EMIR. Christopher Bond, Pipeline disciplinary case in US) and police Chartered MCSI, clients with direct market access – including When must OTC derivatives be traded is Senior Adviser on Regulation preventing excessive orders and market on-exchange? to the CISI abuse. The Rapporteur would also ban direct The requirement for OTC derivatives to be market access by non-members of a venue. settled through a CCP is a G20 commitment There are fears that the buy-side for financial stability. could be caught if it slices a large order into small parts. In the meantime, HFT is affected by exchanges’ actions and the Rapporteur’s report on limiting the failed/executed order ratio, and would also be affected by the proposed financial transaction tax.

What does Mifid 2 propose for exchanges and market makers? The rules relating to regulated exchanges will now apply to multilateral trading facilities and the new category of trading venue, the OTF, a development designed to catch broker crossing networks and some dark pools (the position of voice trading and of retail service providers is unclear). There is also a wider definition of ‘systematic internalisers’ (SIs) – where a firm acts as principal using its own money on a systematic basis – in which case it has a duty to quote continuously in normal size. Physical exchanges are fighting against OTFs and are in favour of SIs.

What are Mifid 2’s price-transparency proposals? These are radical and will require business models to change. Pre-trade transparency

23 Alderman Alan Yarrow, Chartered Jo Morgan from IMI answers a question from the floor during the FCSI(Hon), CISI Chairman and Sheriff of the panel session. She is flanked by Debbie Ramsay (GoodCorporation) City of London, introduces the new initiative and Simon Culhane, Chartered FCSI (CISI)

Raising the standard Investing in Integrity is a new charter way – is at the heart of everything we do,” said Martin Lamb, Chief Executive of IMI Group. “We welcomed the Investing mark for all organisations wishing to in Integrity initiative as an independent way of checking demonstrate their commitment to doing that we are living up to the high ethical standards we set business the right way ourselves right across our global organisation.” The two-stage accreditation process involves the organisation first undertaking a self-assessment questionnaire. This the cisi is well known for its products and services asks 38 questions about its ethical policies, practices and designed to promote the highest standards of integrity, both procedures. The questionnaire is submitted using an online within and outside its membership. So far, however, these form and scored to provide feedback and comparisons against efforts have been aimed primarily at individuals. a benchmark compiled from all participants. Investing in Integrity, launched by Alderman Alan Yarrow, Assuming that the result is satisfactory, the organisation Chartered FCSI(Hon), CISI Chairman and Sheriff of the City is then invited to subscribe to Investing in Integrity as of London, represents something of a departure from this a precursor to undertaking stage two. This consists of a route in that it is aimed at businesses and other organisations. review and audit by GoodCorporation, which looks at how The programme was developed in partnership effectively the organisation’s ethical policies, practices and with the respected Institute procedures are embedded in of Business Ethics (IBE). its operations. GoodCorporation, a company A key element is a questionnaire A key part of this assessment recognised globally as is a further questionnaire, a leader in the audit of completed by a broad range of completed by a broad range of corporate responsibility and the organisation’s workforce, business ethics, is carrying the organisation’s workforce to establish that what the out the external-assessment applicant says it does is carried element. Investing in Integrity has been in out in practice. The assessment outcome is development for a long time in order to refine the end result. then presented to and considered by Investing in Integrity’s This included a full pilot of the audit process undertaken by a assessment committee and, in the event of a positive outcome number of major corporations. As a result, the launch event to the stage-two assessment, accreditation lasts for a period at Mansion House in the City included the presentation of a of five years. This is subject to an annual certification by the certificate to IMI plc, a FTSE 100-quoted engineering company accredited subscriber that there has been no material adverse that is the first firm to successfully complete the accreditation change in the policies, practices and procedures that were process. “Doing business the right way – the IMI subject to audit and confirmation that it knows of no event that

24 May 2012 cisi.org

integrity

Too close for comfort? THE VERDICT

Within the small country of Campanula, Cesar and his wife Miranda are highly influential figures. Cesar is a senior civil servant in the Ministry of Finance, while Miranda is Finance Director of L Gordo, a company that exports large quantities of raw materials upon which the country depends as a significant source of foreign currency. At Miranda’s suggestion, in view of economic uncertainties in Camanula, L Gordo sells forward its anticipated foreign- currency receipts over the next 12 months. This leads to a run on the country’s currency and suggestions from the opposition party that the Government is in the pockets of big business. Cesar and Miranda deny any discussion of confidential government information but both come under severe pressure in their roles. They consider four courses of action to help resolve the crisis while preserving their own reputations for integrity. This was the dilemma posted in the March edition of the might call into question its suitability to remain accredited. The launch event included speeches from S&IR. Readers were invited to vote in an online poll for what CISI Chief Executive Simon Culhane, Chartered FCSI, and they would do. Philippa Foster Back, Director of the IBE. In their capacity as directors of Investing in Integrity, they explained why the The CISI response scheme had been established and what is involved in seeking The dilemma produced an interesting variety of responses and accreditation. Jo Morgan, Head of Compliance at IMI plc, the view of slightly more than half of the respondents (57%) followed with a presentation about the importance of the was that neither Cesar nor Miranda should resign, since each charter mark award to the group and how the accreditation exercise had been valuable to the company. A had a clear conscience. In an ideal world, that seems entirely panel comprising representatives of Investing in Integrity, appropriate, but in the somewhat unstable environment of Good Corporation, IMI and Balfour Beatty – another pilot Campanula, that may not be a realistic option. scheme participant and ongoing subscriber – then answered Almost one-third (30%) of respondents said that Cesar questions from the audience. Several European should resign, since he could not prove beyond reasonable journalists and a camera crew from China Central TV news doubt that he was not the source of the information that caused attended the launch event. A video clip of the Chinese TV the currency movements. This can also be viewed as an footage can be viewed (together with a translation) at the Investing in Integrity website – investinginintegrity.org.uk – appropriate course of action. where more information about the scheme can be found. There was somewhat less support (9%) for the idea that Since the launch, Carillion plc, the FTSE-quoted they should both resign and leave the country. The least major support services and construction company, has popular option (4%) was for Miranda to resign for the good indicated an intention to seek the Investing in Integrity of her employer. charter mark, leading to the obvious question: “Where are Readers may have recognised that this dilemma was based the financial services companies?” upon the resignation of the Chairman of the Swiss National Bank earlier this year, as a result of currency dealing by his wife some weeks before the Swiss National Bank imposed moves to limit appreciation of the Swiss franc. In that instance, although the circumstances were different in that his wife’s actions had absolutely no impact on the value of the Swiss franc, the Chairman said that he could not provide conclusive evidence that he had been unaware of the trade and that the intense public scrutiny was compromising his credibility. In Campanula, political considerations seem particularly intrusive, leading Miranda’s employer to be ‘leant on’, for undertaking a transaction which appeared completely justified on the grounds of economic uncertainty, regardless of the relationship between Cesar and Miranda. Comments left by readers are always entertaining but suggest that some readers are determined to shoehorn the circumstances of the dilemma into the terms of the FSA From left, Andrew Hayward, Balfour Beatty; Philippa Foster Back, Institute of handbook, rather than identifying a sensible resolution to the Business Ethics; Jo Morgan, IMI; Debbie Ramsay, GoodCorporation; Simon Culhane, Chartered FCSI, and Andrew Hall, both the CISI actual situation.

25 books

new workbook and elearning edition new workbook and elearning edition Need International Certificate FSA Financial Regulation in Wealth Management This unit will ensure candidates The International Certificate in Wealth understand the regulations and legislation to read Management (ICWM) will help that underpin the financial markets and candidates find appropriate solutions to the conduct of investment business. A The latest publications clients’ needs. A new edition of the ICWM new edition of the FSA Financial Regulation and study aids workbook and corresponding elearning workbook and corresponding elearning supporting CISI product (covering exams from 11 August product (covering exams from 21 2012) is due out in May, and will include: November 2012) is due out in May and will include: qualifications • the financial services industry and economic background • the regulatory environment • fiduciary relationships • the Financial Services and Markets Act 2000 • financial assets and markets • associated legislation and regulation • investment funds • European Union directives • determining client needs • the FSA’s Conduct of Business/Client Assets Sourcebooks • investment planning. • complaints and redress.

Price: £100 for link pack (combined workbook and Price: £100 for link pack (combined workbook and elearning product) elearning product)

new workbook and elearning edition new workbook and elearning edition new workbook and elearning edition Introduction International Principles to Securities & Investment of Financial Investment Management Regulation A new edition of the CISI’s The International Certificate in The Principles of Financial Introduction to Securities & Investment Management is the Regulation unit is part of both Investment workbook and appropriate competence-based the IOC, formerly known as corresponding elearning qualification for investment the IAQ, and the Certificate product (covering exams from professionals engaged in programmes. It aims to ensure 21 July 2012 to 20 July 2013) is now available. managing investments, dealing in/advising on that candidates have an understanding of the Topics covered include: securities or derivatives and undertaking activities regulations and legislation that underpin the • the economic environment as a broker fund-adviser. A new edition of the financial markets and the conduct of investment • financial assets and markets International Investment Management workbook and business more appropriate to the wholesale sector. • equities, bonds and derivatives corresponding elearning product (covering exams A new edition of the Principles of Financial Regulation • investment funds from 1 August 2012 to 31 July 2013) is due out in workbook and corresponding elearning product • financial services regulation May, and will cover areas including: (covering exams from 1 December 2012) is due • taxation, investment wrappers and trusts • economics out shortly and will cover: They fulfil the syllabus requirements of both: • financial mathematics and statistics • the regulatory environment • the Introduction to Investment Award • industry regulation • the Financial Services and Markets Act 2000 • the Investment Operations Certificate (formerly • asset classes • associated legislation and regulation known as the Investment Administration • financial markets • the FSA Conduct of Business/Client Assets Qualification) programme, unit 1. • accounting. Sourcebooks.

Price: £100 for link pack (combined workbook Price: £100 for link pack (combined workbook Price: £100 for Link Pack (combined workbook and elearning product) and elearning product) and elearning product)

Online tool Online tool External specialists Professional Refresher CISI bookshop The CISI relies on industry practitioners to offer The CISI’s Professional their knowledge and expertise to help create and Refresher elearning maintain its exams, workbooks and elearning tool enables you to products. There are several types of specialist: remain up to date authors and reviewers for workbooks and elearning products, item (question) writers, item with regulatory issues editors and exam panel members. All of them and changes, maintain receive a number of benefits to thank them for compliance and demonstrate continuing learning. their involvement. The product now consists of more than 40 There are currently about 300 external specialists modules, including: who have volunteered to assist the Institute’s • anti-money laundering The CISI online bookshop enables you to purchase qualifications team, but more are required. • corporate actions workbooks, publications and elearning products The CISI would particularly welcome applications • investment principles and risk quickly and efficiently. from specialists to help with developing its • financial crime The ‘add to basket’ facility allows you to see regulatory titles, Corporate Finance Regulation, • professional taxation what you are buying at a glance, and there is FSA Regulation & Professional Integrity and FSA • training and competence. information on what each product covers and the Financial Regulation. exams to which it applies. The ‘checkout’ facility To register your interest, please contact Iain Worman Price: Free for all CISI members; otherwise, is easy to use and secure. on +44 20 7645 0609 or download the application it costs £150 per user. Visit cisi.org/refresher form available at cisi.org/externalspecialists for further information. Go to cisi.org/bookshop

26 May 2012 cisi.org

Diary Events to attend over the coming months ➳ CISI annual dinner Professional courses 6 september Venue: London unless otherwise stated Guildhall, Gresham Street, London, EC2 30 may Investment Principles & Risk (PCIAM)* (Edinburgh) £300 Bookings are now being taken for the CISI’s premier social event of the year, its annual 30 may Investment Principles & Risk (IAC)* (Edinburgh) £500 dinner, which will celebrate the Institute’s 20th anniversary. Please email [email protected] further details. 30/31 may Investment Principles & Risk (LSE)* (Edinburgh) £900 12 june Securities** (Manchester) £500 19 june Investment Principles & Risk (PCIAM)* £300 Conferences 19 june Investment Principles & Risk (IAC)* £500 20 june Annual Conference: Navigating 19/20 june Investment Principles & Risk (LSE)* £900 the Turning Tides of Global Finance 26 june Securities* (Birmingham) £500 Glaziers’ Hall, 9 Montague Close, London, SE1 28 june Securities* £500 2 july Pensions & Retirement Planning* £500 CISI members can attend this conference for just £200 4/5 july Derivatives* £900 (non-members £400). For further details, visit cisi.org, 12 july Introduction to Financial Markets £500 call +44 20 7645 0680 or email [email protected] 16/17 july Understanding Regulation & Compliance £900 Conference sponsorship 19 july Securities* £500 To consider taking up one of the sponsorship or exhibition *This event fulfils the requirements for qualifications gap-fill between existing CISI opportunities at a conference, please contact Hannah Steele exams and the new Retail Distribution Review exam standards on +44 20 7645 0648 or email [email protected] **This event fulfils the above criteria and requirements for qualifications gap-fill for CII exams – Advanced Financial Planning Certificate and Fellow/Associate (life and pensions route only) London CPD events 21 may Communications Skills for Client-Facing Managers Branch events America Square Conference Centre, 1 America Square, 17 Crosswall, EC3 14 may Sports Mental Game Skills for Business 23 may Regulating the Regulators Yorkshire: Priory Street Centre, 15 Priory Street, York Gresham College, Barnard’s Inn Hall, Holborn, EC1 14 may Sports Mental Game Skills for Business 25 may ShareGift – Saving and Profiting from Charitable Donations Yorkshire: Doubletree by Hilton Hotel, 2 Wharf Approach, Leeds Computershare, Vintners’ Place, EC2 17 may Annual Dinner 28 may The Coming LEI (Legal Entity Identifiers) Revolution Liverpool & North Wales: Crowne Plaza, St. Nicholas Place, SWIFT, The Corn Exchange, 55 Mark Lane, EC3 Princes Dock, Liverpool 17 may Golf Day 1 june Futures Versus ETFs Birmingham & West Midlands: Kings Norton Golf Club, BlackRock, Drapers Gardens, Throgmorton Avenue, EC24 Brockhill Lane, Alvechurch, Birmingham 8 june Passive and Active: European Active Bond Fund Analysis 18 may Bank Debt and Regulatory Changes BlackRock, Drapers Gardens, Throgmorton Avenue, EC2 Old Government House Hotel, St Ann’s Place, St Peter Port, Guernsey 19 june The Rivals: India – Is the Growth Story Intact? 30 may Ethical Investment TBC Liverpool & North Wales: Deutsche Bank, Royal Liver Building, 21 june Getting to Grips with Risk in a Fat Tail World Pier Head, Liverpool America Square Conference Centre, 1 America Square, 17 Crosswall, EC3 31 may Transparency: ETFs Under the Microscope Scotland: Glasgow 25 june Good Governance and Effective Shareholder Engagement Morningstar UK, 1 Oliver’s Yard, 55-71 City Road, EC1 31 may Transparency: ETFs Under the Microscope Scotland: Edinburgh 27 june Looking After Your Data in a Cloudy World 31 may Annual Dinner Watermen’s Hall, 16-18 St Mary-at-Hill, EC3 Birmingham & West Midlands: Hyatt Regency, For further information about London CPD events, visit cisi.org/capitalcpd 2 Bridge Street, Birmingham To book: 13 june India – Growth Story cisi.org/eventscal [email protected] +44 20 7645 0680 West Country: Exeter 15 june Absolute-Return Funds Guernsey: Old Government House Hotel, St Ann’s Place, Member and Fellow discounts St Peter Port, Guernsey Professional courses discount: Fellows 35%; Members 30%; Associates 20%. 5 july Annual Dinner East Anglia: Norwich Cathedral Refectory, Norwich The following discounts are applicable only to one workshop per year: Affiliates 30%; Students 20%. 12 july Annual Dinner Yorkshire: Doubletree by Hilton Hotel, 2 Wharf Approach, Leeds To book: To book: cisi.org [email protected] +44 20 7645 0680 cisi.org/eventscal [email protected] +44 20 7645 0652

27 diary

Retail Distribution Review roadshows Professional interest forums The CISI is again running a series of events across the UK to help practitioners comply with the RDR Data-management events 14 may Northern Ireland Radisson Blu & Park Inn, 3 Cromac Place, Ormeau Road, Belfast Keeping up to date with changes 15 may East Midlands & Lincoln in data management is a growing challenge Lincoln for those working in IT. 15 may East Midlands & Lincoln The CISI’s IT professional interest forum Leicester (PIF) will tackle these industry changes at its next meeting on 14 June, with two 17 may South Coast experienced consultants in data management, Executive Business Centre, 89 Holdenhurst Road, Bournemouth John Hakim John Hakim and Roy Chandarana, giving 24 may London their views. Brian McNulty MCSI, Chief America Square Conference Centre, 1 America Square, 17 Crosswall, London Executive, DBFS Ltd, will chair the forum. 24 may East Anglia Brian said: “Organisations that have NW Brown, 36 Unthank Road, Norwich successfully implemented a centralised 24 may East Anglia and coherent data architecture should see a NW Brown, Richmond House, 16-20 Regent Street, Cambridge quicker turnaround in their priority-change Roy Chandarana 28 may West Country projects during these challenging economic Charles Stanley, Southernhay West, Exeter conditions. This PIF session aims to provide us with an insight into how this can be successfully achieved.” With the deadline for retail investment advisers to comply with the RDR less than eight months away, the CISI is staging a series of roadshows around the UK to help On 27 September, Julia George, Chartered FCSI and practitioners to meet its requirements. Director, Julia George Associates, will chair a session of the For further information, visit cisi.org/rdrroadshows forum covering a series of questions. These will include: • Does your firm’s board understand the risks inherent in its dinner legacy systems, the full costs of replacement and its likely impact on the organisation’s workforce, and the true value of current systems and their data? • How should this drive decisions about supplier strategy and Charity benefits outsourcing choices? • Do the risk and IT functions work well in educating and advising the board? from Jersey event To join the 300 members already signed up to the mailing list of the compliance PIF, or to book a place at one of its events, please email The CISI’s Jersey branch raised nearly £3,500 for charity at its annual [email protected] dinner, which was attended by 240 industry professionals. Television presenter and comedian Clive Anderson was the guest speaker at the The compliance forum is one of seven PIFs run by sell-out event. the CISI. The others cover compliance, corporate Money collected from a raffle went to the Jersey branch of Parkinson’s finance, Islamic finance, operations, risk and wealth UK, which supports local people and their families who live with the management. Each of these discussion groups meets at disease. Sponsors donated raffle prizes, including £500-worth of least once a quarter in London to debate current issues travel vouchers. and hear presentations from industry speakers. Events Branch President Ben Shenton, Chartered FCSI, gave an entertaining are generally held at midday, with a light lunch provided speech at the dinner, held at the L’Horizon Hotel & Spa, which included and opportunities to network. Fellows, Members, an update on CISI activities in Jersey. Institute Chief Executive Simon Associates and Affiliates of the Institute can attend Culhane, Chartered FCSI, outlined developments within the CISI. meetings for free as a CPD benefit. Students may attend Guests included Michael Birt, Bailiff of Jersey and Senator Philip Ozouf, one event of each forum annually. For more information Treasury and Resources Minister, States of Jersey. about forthcoming meetings, visit cisi.org/pifs

fundraising Memorial concert A classical music concert will be staged on 24 May in memory of Robert Brown, a Fellow of the Institute who died of pancreatic cancer in 2008. The event will take place at Cadogan Hall, near Sloane Square in London, and is in aid of Pancreatic Cancer UK, which funds research into the fifth most common cancer in the UK – and supports patients and their families. The concert will feature the City of London Sinfonia, Holst Singers and leading soloists and will include a repertoire by Tchaikovsky and Mozart. A similar event in 2009 raised more than £37,000 for the charity. Robert worked in investment management for more than 35 years, Guest speaker Clive Anderson, seventh from left, with attendees. They include Jersey branch President Ben latterly at Pan-Asset Management, which he jointly founded. Shenton, Chartered FCSI, third from left; Michael Birt, Bailiff of Jersey, fifth from left; CISI Chief Executive Simon Culhane, Chartered FCSI, sixth from left; and Senator Philip Ozouf, Treasury and Resources Minister, States of Jersey, eighth from left For details of the concert and a linked charity auction, see robertbrownconcert.org.uk

28 May 2012 cisi.org

diary

Membership admissions and upgrades

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Answers to the quiz from page 10: 1:D, 2:B, 3:D, 4:C

29 people Hurley burly

Left: Terry Hall (green helmet) makes a tackle Above: Terry is in the centre of the front row

Terry Hall MCSI is enjoying success in his adopted homeland of Switzerland in a sport you would not associate with the country. Lora Benson reports

heard the one about the Hurling Championship last year. Teams from and Kosovo. Everyone is welcomed to the club Canadian-born Englishman countries including Belgium, Luxembourg, and the sport – there’s a real community feel.” working in Switzerland France, Holland and Hungary compete for The fact that the team competes so with a passion for an Irish the title over a number of tournaments. Last effectively against sides dominated by born- sport? It’s not year’s championship came down to the final and-bred Irishmen is a source of pride and a joke, but a description tournament in Leuven, Belgium, when Zurich inspiration for Terry. “The Irish of Terry Hall, Deputy edged out Den Haag of Holland to claim the expats I compete with have often been playing Global Money Laundering crown. Terry, who has a defensive since they were old enough to hold a hurley, Terry Hall MCSI Reporting Officer for Man role in the side, says: “I felt that over the season and many of the technical elements of the sport Investments in Pfäffikon, near Zurich, which we were the most consistent team and fully are second nature to them,” he says. “I have he joined in 2008. In his spare had to work hard to reach a level where I can time, Terry plays the Irish sport of hurling and be competitive; not only for a place in my own is part of a team that are the current holders of “Hurling combines the best team, but also to contribute when I am on the a title contested by sides from across Europe. elements of a number pitch. The same is true for any non-Irish player.” A friend who was originally from Because of the long Swiss winter, Dublin introduced Terry to the sport just three of other sports” there are no outdoor training facilities available years ago. “I was invited along to an open between October and April. During this period, training session to give it a try,” he says. “At the deserved to win the championship. This year, practice is restricted to one indoor session a time, my knowledge of the game was limited to we are looking to defend our title and move one week. “This is a real challenge for televised snippets of matches I had seen when step closer to the County Europe record of three our club, as the season usually starts in late I was younger. “I was immediately consecutive championships, which is also held April, meaning that we only get a few weeks hooked. Hurling combines the best elements by our club.” The club was formed of full-scale training on grass before the first of a number of other sports: the speed and ten years ago by a group of friends who had competitive tournament,” Terry says. “Most of physicality of rugby, the hand–eye co-ordination spent time in Ireland and fallen in love with the other clubs, in more temperate countries, of cricket and the tactical and positional the sport while living there. Its name, Inneoin, can access pitches much earlier and get more awareness of football. “Every derives from the Gaelic for ‘anvil’. opportunities to train. Once the pitches are open player has a stick – a ‘hurley’ – and uses this and the weather improves, we hold training to hit the ball, called a sliotar, either as a pass A diverse base sessions twice a week, with most club members to another player, or as a shot to score points. The club has developed to embrace a mix of putting in additional work on both skills and This can be done either with the ball in the air cultures and nationalities, which Terry sees fitness during their own time.” or on the ground. Players can also pass the ball as a major strength. “Most hurling teams in Terry’s new season was due to begin shortly with the flat of their palm – a hand-pass – or Europe are predominantly made up of Irish after this edition went to press, with a fixture kick the ball. “While it’s relatively expats, whereas our club has focused on in Holland. simple to pick up the basics of hurling,” says developing local interest,” he says. “As well Terry, “it requires a high level of skill to master.” as Irish and English players, we have several Got an interesting hobby? Contact Lora Benson Terry plays for the Zurich Inneoin Swiss members and others from countries with your story at [email protected]. If it is GAA Club, which won the County Europe including Finland, Germany, Scotland, France published, you will receive £25 of shopping vouchers.

30 May 2012 cisi.org