Securities & INVESTMENT November/december 2012
REthe members’ magazine of theV chartered instituteI forE securities &W investment cisi.org/sireview
Fighting talk With money laundering and the LIBOR Slow progress scandal keeping the finance industry What challenges face in the spotlight, how are the authorities the derivatives’ central policing financial crime? page 12 clearing project? p16
Christopher Adams Looking out for the fiscal cliff, p11
Securities & Investment november/december 2012 RE VIEW Editors Louise Reip and Ella Johnston Commissioning Editor Hugo Cox Senior Designer 12 Kate Copsey 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] 16 Cover illustration Darrel Rees for Heart 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 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 the enemy within 22 cpd: the new silk road 5 city view Email: [email protected] Hugo Cox takes an in-depth George Littlejohn considers New US legislation will look at how the authorities the viability and returns of have a negative impact Editorial panel are policing financial crime frontier market investment on UK organisations Peter Land, Chartered Brewin Dolphin FCSI, Chairman in light of scandals such 24 Suren Chellappah FCSI Sanford C Bernstein as LIBOR fixing and money to sell or not to sell 6 upfront Moorad Choudhry FCSI Royal Bank of Scotland laundering activity When selling products, News and views from Simon Culhane, Chartered Institute for should a bank manager Chartered FCSI Securities & Investment members of the CISI, Scott Dobbie FCSI(Hon) Deutsche Bank defer to in-house specialists? Mike Gould FCSI 16 not quite safe ground including our regular back Jeannette Lichner MCSI As the global deadline for story by Clay ‘Mudlark’ Harris Gregor Logan MCSI derivatives’ central clearing 26 need to read Paul Loughlin, Rathbone Investment Catch up with this Chartered MCSI Management approaches, Andy Davis 11 first person Robert Merrifield FCSI Legal & General examines the challenges month’s essential reading Richard Mitchell Chartered Institute for Christopher Adams reflects upon Securities & Investment and obstacles that face the effect that end-of-budget Frank Reardon, JM Finn the project Chartered FCSI 27 diary measures in the US could have Patricia Robertson, Westport Global CISI events and new on the markets Chartered FCSI Jeremy Robinson, Charles Stanley 20 applied theory member admissions Chartered FCSI Can Nobel Prize-winning 18 profile: chet helck Hamish Rowan-Hamilton TheCityUK Markus Ruetimann FCSI Schroder Investment theories translate into 30 people: paperback writer The head of the US’s Securities Management tangible policy that Len Warwick CBE, Industry and Financial Nimrod Schwarzmann FCSI Arjuna Sittampalam, Sage & Hermes actually changes lives? Chartered FCSI, on his new Markets Association talks Chartered MCSI We take a closer look life as an author of fiction regulation with Hugo Cox Nigel Sydenham, BPP Professional Education Chartered FCSI Alan Yarrow, Chartered Institute for Chartered FCSI(Hon) Securities & Investment
Average audited circulation: 16,665 for period July 2010 – June 2011 © 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 for the views expressed by contributors to the Securities & Investment Review; or for unsolicited manuscripts, photographs or illustrations; or for errors in articles or advertisements in the Securities & Investment Review. The views expressed in the Securities & Investment Review are not necessarily those held by the CISI or its members.
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city view
cisi opinion The Government should speak out against the Foreign Account Tax Compliance Act, US legislation that will impose unfair costs on UK investment managers and banks who work with Stateside clients Living in taxing times it is not a fun time to be working in the penalise firms based outside the US and impose FFI is required to search for indicators finance industry. The public does not easily significant costs and draconian individual of a US nexus, and this includes whether discriminate between the highly overpaid responsibility. For example, it will be necessary the FFI has on record any US telephone individuals in the investment banks and those for any firm that has any investment in the number, and requires the financial organisation clearing up the mess, while the clamour for US to first identify which of its customers, to monitor actively and continuously that the increased regulation continues unrestrained. or unit trust holders, are American and then individual does not become a US citizen. Against this backdrop, it is no wonder report them to the US tax authority (the IRS). There is a ray of hope that things might that the Americans have slipped in an extra If it does not comply, the firm will be deemed improve a little. In September, HM Revenue territorial requirement that will impose non-compliant and face a range of sanctions, & Customs signed an Inter-Governmental significant costs on all asset and investment including a 30% withholding of any investment Agreement (IGA) – and at the same time it managers and banks. This US requirement is in the US, such as the sale of securities. announced a consultation process with the aim resulting in a double whammy. It is completely Furthermore, the US authorities require of reducing the compliance burden. The IGA extra-territorial and seeks global compliance, each foreign financial institution (FFI) to is a reciprocal agreement and requires the IRS while imposing significant additional costs to exchange information with the UK on UK of compliance on virtually every financial investors within US financial institutions. organisation globally. It has resulted in many It is wrong to penalise This has caused an outcry from US financial financial organisations, including private client institutions that do not collect similar and wealth managers, turning away clients, firms based outside the US information to enable it to report UK simply because they have a link with the US. account holders to the IRS. That strategy alone will not get a financial appoint a so-called responsible officer. That We will wait to see which other countries institution out of the net. named individual from a foreign firm has to be sign up to an IGA, but many are interested, The legislation is the Foreign Account Tax identified during the FFI registration process including some governments in the Caribbean. Compliance Act (FATCA), the aim of which is and will receive a US Employee Identification However, the IGAs are causing a huge problem to force non-US financial institutions to identify Number (EIN). This individual will be for global financial institutions that may have to their US clients and report them to the Internal responsible for compliance with the install multiple systems and processes to cover Revenue Service (IRS). This is to enable the FATCA regulations within that financial operations in different countries, some signed IRS to recover taxes due from any US citizen institution and may be personally liable for up to FATCA, some of which are signed up to an who has accounts outside the US and has not any substantial non-compliance. IGA and some that are not signed up to either. declared them. While it is understandable This is an asymmetrical requirement and is The US is guilty of behaving like a bully. for the US to want to obtain tax dollars from causing many private client managers to think No one is advocating tax evasion, but putting the its citizens (and it estimates to be recouping carefully about providing a service to those costs on the UK is unfair and our Government almost $20bn a year in doing so), it is wrong to whom the US authorities deem American. Each should have the courage to say so. n
5 Got a story to tell or a view
to share? News and views from the CISI Upfront
dinner and awards Scotland’s roll of honour Nine financial services specialists have been former government Cabinet Minister, as guest honoured as Scotland’s top performers in CISI exams. speaker. Scotland branch President They were recognised at the Annual Dinner Stephen Barclay, Chartered MCSI, updated and Awards of the Institute’s Scotland branch, guests about regional activities and CISI which took place at the George Hotel, Edinburgh. Managing Director Ruth Martin spoke about Candidates in Scotland took more than 1,500 developments within the Institute and the CISI exams last year. The winners included Alastair latest benefits for members. Seaton MCSI of Kames Capital, who picked up two A prize draw held in aid of Children’s Hospice awards – for the Diploma in Investment Operations Association Scotland raised £1,200. The figure and Advanced Global Securities Operations. will be boosted by Gift Aid. The main sponsor of From left, CISI Scotland branch President Stephen The evening was attended by nearly 200 guests the event was BlackRock, while support was also Barclay, Chartered MCSI; Institute Managing Director and featured Michael Portillo, TV presenter and provided by Change Recruitment Group. Ruth Martin; and guest speaker Michael Portillo
Award winners CISI Diploma: Barry Stewart MCSI, Brewin Dolphin Diploma in Investment Operations/Advanced Global Securities Operations: Alastair Seaton MCSI, Kames Capital Diploma in Investment Compliance: Nichola Montgomery, Chartered MCSI, Cigna Private Client Investment Advice & Management: Vicki Linton MCSI, Speirs & Jeffrey Advanced Operational Risk: Sandra Trinidad ACSI, Morgan Stanley Certificate in Investments: Sheila McIntyre, Clydesdale Bank Investment Operations Certificate, formerly known as the Investment Administration Qualification: Melissa Holmes, Baillie Gifford & Co. Introduction to Securities & Investment: Kim Gray, Standard Life; Aileen Oliver, From left, award winners Melissa Holmes; Sheila McIntyre; Nichola Interactive Investor Montgomery, Chartered MCSI; Barry Stewart MCSI; Alastair Seaton MCSI; Sandra Trinidad ACSI; and Vicki Linton MCSI
statement of professional standing fundraising Setting standards for advisers Isle of Man raises more For retail investment advisers, their CPD is fully compliant with obtaining their initial Statement the RDR CPD requirements (they than £1,500 for charity of Professional Standing (SPS) can no longer obtain a Standard from the CISI is the start of an SPS by meeting only the CISI The Institute’s Isle of Man branch served up an annual ongoing yearly process. CPD requirements) dinner that attendees are sure to remember. Advisers will need to ensure that • basic SPSs will be available only to Professional speaker John Simonett entertained the 150-strong they meet the annual requirements newly qualified advisers obtaining audience at Mount Murray Hotel & Country Club, Santon, with and apply to renew their SPS so their initial SPS (except where six his humorous speech and phenomenal trained memory. that there is no gap between their months or more statutory leave has Branch President Sue Preskey, Chartered FCSI and CISI statements. Correctly completed been undertaken by the adviser in Regional Director Richard renewal applications, where the adviser the preceding SPS year). Bennett both addressed the has met the requirements, will be For some advisers, who need to dinner, updating guests about processed within 15 working days. add approval for an RDR specialist Institute activities. For the majority of advisers, the area, there may be some additional A charity raffle was held process of renewing their SPS will be requirements. to raise money for the a simple demonstration of having: These are detailed on page 24 of Pumps 4 Kids campaign, • maintained competence through CPD the CISI RDR booklet Implementation: which supports children with • adhered to APER Statements of Professional Standing. Type-1 diabetes, and the MS • complied with a recognised Society, generating more code of conduct, such as the CISI’s. than £1,500. The event was The booklet also provides more information Isle of Man branch President The main changes are as follows: and guidance on RDR and SPS requirements. It Sue Preskey, Chartered FCSI, sponsored by Thomas • advisers will need to ensure that can be viewed at cisi.org/rdrbooklet with guest speaker John Simonett Miller Investments.
6 November/December 2012 cisi.org
The proportion of financial services players who view the Conservatives as the political party offering the best economic plan for the UK, according to a CISI survey. 65% Labour was favoured by 22%, the Liberal Democrats by 5% and other parties by 8%. ➳
publications letters
Postbag New book gets young people Dear S&IR, Dan Barnes’ article, ‘Man v Machine’ (S&IR, October), was a salutary reminder of the off to a good financial start importance of ensuring that software changes whether large or small, routine or #yourmoney is an The CISI is a strong advocate for non routine, follow a mindful and measured innovative book that equipping young adults with the financial deployment process. Firms must also will help 16–25-year- knowledge they need to succeed in life, and invest time and thought into responding to olds to take control works closely with many schools, colleges failures in a ‘live’ environment. of their finances. and universities whose students take its The article refers to the US Securities Written by Jeannette professional qualifications. and Exchange Commission (SEC) round- Lichner MCSI, an Simon added: “The Institute believes table meeting on 14 September 2012 on experienced financial so strongly in financial education and the Promoting Stability in Today’s Markets. services professional, relevance of this book that it is donating a This discussion was deferred to 2 October and supported by the copy to every school pupil enrolled on the in order to accommodate strong interest CISI, the book is a CISI qualification programme.” from participants and covered two themes: comprehensive guide to earning, spending and The recommended retail price of the preventing errors through robust system saving. CISI Chief Executive Simon Culhane, paperback book is £13 but CISI members design, deployment and operation; Chartered FCSI, said: “While there is much can obtain it at a price of only £9, if bought and responding to errors and malfunctions discussion about how to improve financial from cisi.org/yourmoney, and in e-reader and managing crises in real-time. literacy in the UK, there is little tangible input. format from Amazon for £7. It is also The SEC is currently analysing Until now! available from Jeanette Lichner’s the findings from the round table. “#yourmoney meets a pressing need by website, yourmoneyuk.com, which In the meantime, a transcript of the providing simple, impartial information on includes book-related material and meeting is available on sec.gov/news/ many financial fundamentals.” will be continually updated. otherwebcasts/2012/ttr100212-2.shtml and responder comments can be viewed on sec.gov/news/press/2012/2012-182.htm. No firm is immune and there is no 60-second interview schadenfreude when these glitches arise. It remains clear that change management (including system and Jeannette Lichner MCSI, author of #yourmoney software deployment processes) must sit high on a firm’s top risks document.
What inspired you to Is it only for 16–25-year-olds? Suren Chellappah FCSI, London write the book? Q Q It’s aimed at that age group because I’ve watched my daughter and that is when most people start making An update on progress following the discussion son and their friends learning money-related decisions that have long-term will be carried in a future edition of the S&IR. about money and have seen implications. But anyone can read it and how tough that process can be. learn, as I did while writing it. People well member views I wanted to help equip young adults with the beyond the target age group asked for copies knowledge they need to control their financial when they heard what was in it. They said destiny, no matter how much or how little that they wished something similar had money they have. I like to think of it as my been around when they were growing up. Have your say legacy – my contribution to society. The S&IR is your CISI membership Jeannette Lichner began her career in magazine – and we want to What do you hope the book financial services in 1983 with Morgan hear your views. Q will achieve? Stanley and has held numerous executive Comments are welcome When I started out, my goal was to get roles within banks and as a consultant. She about any article you read the book into the hands of as many has always mentored young colleagues and, in this month’s edition. 16–25-year-olds as possible, so that they having gained a coaching accreditation, You can get in touch in a number of ways don’t have to learn through what I call the provides career-coaching services in addition and share your verdict with fellow members: ‘costly trial and error approach’. Thinking to running a business-advisory practice. big, the CISI and I hope that the book will be By email: Contact Richard Mitchell, CISI one solution to the need for financial-literacy Communications Editor at [email protected] education. Thinking smaller, I hope that Find out more and engage with Jeannette: everyone finds it easy and enjoyable to read, By email: [email protected] Via the S&IR online edition: Simply click on the ‘Add your comments’ box on the homepage of the and that they keep going back to it as they Online: yourmoneyuk.com S&IR digital magazine at cisi.org/sireview face new challenges. On Twitter: @jalichner On Twitter: Follow the Institute on Twitter@CISI.
7 news review
publications survey All change for regulation Forum identifies It has been a dramatic intervention and the sale of alternative securities; compliance concerns three months for financial disciplinary consequences of the UK regulator’s The FSA should raise important matters with regulation since the August theme visits, such as on money laundering and chief executives rather than at compliance- edition of Change – the corruption; and the launch of the Foreign Account officer level, according to the CISI compliance Regulatory Update. Tax Compliance Act tax data and over-the- professional forum. High-profile developments counter derivative transaction reporting for the US. A number of the 600 forum members have included the Tyrie Amid so much activity, there has been little received queries from the FSA in a ‘Dear Commission into banking attention given to day-to-day changes, such as compliance officer’ letter in June 2012. In culture (including the FSA’s the continuing pressure for firms to build liquidity response, the forum undertook a survey of ideas for more individual responsibility for a firm’s buffers, delays in processing normal applications its members to examine their views on the actions), the Wheatley review of LIBOR rate to the FSA, management and boards’ need to targeting and effectiveness of such letters. The setting and the Kay report on equity markets. address IT risk (following the RBS problems), feedback highlighted key areas for reform. In addition, there has a been a flurry of papers swaps misselling and the risk to compliance When asked if the compliance officer is the from the new UK regulators and continuing officers from their firms’ sale of unregulated funds. ‘correct person to address such queries to’, 34% discussion of moving the supervision of All these areas, and much more, are covered of respondents disagreed, while 26% disagreed banks to the European Central Bank under in the November edition of Change. A feature on strongly. By contrast, 32% agreed and 42% a European banking union. the Tyrie Commission explains why all firms (not agreed strongly that the chief executive was These important events have taken the focus only banks) should watch this carefully and there the appropriate person for the FSA to contact in off more immediate regulatory changes. These is a summary of regulatory changes for senior such circumstances. include the start of the Retail Distribution Review; management and boards. new rules for short selling and credit default cpd swaps; FSA initiatives on client assets, product View the edition at cisi.org/regupdate New rules for funds
select benefits In July 2012, the European Securities and Markets Authority Save money on the high street (ESMA) issued guidelines relating to UCITS-compliant exchange- With Christmas just around the corner, make the For more information and to apply online, visit traded funds (ETFs) and other most of your money when shopping on the high CISI Select Benefits atcisi.org/mycisi David Patterson UCITS products. street with My Cashback Cards. The new rules tighten regulations that govern The cards, available to CISI members as part Terms and conditions apply. See website for further funds generally and introduce new procedures details. Correct at time of print. CISI Select Benefits is of the Select Benefits scheme, are a simple way managed on behalf of the CISI by Parliament Hill Ltd of and requirements for UCITS ETF providers. to earn cashback on everyday purchases. Easy to 3rd Floor, 127 Cheapside, London EC2V 6BT. Neither is Providers must meet these requirements no later obtain and use, they cover a wide range of retailers. part of the same group as a provider. than the latter part of 2013 (a date has yet to You can earn cashback of between 5% and 15% be specified by ESMA), though certain factors, at stores including Sainsbury’s, ASDA, Argos, including where new UCITS ETFs are launched, Topshop, Marks & Spencer and H Samuel. will need to be complied with earlier than that. The CISI’s final London CPD seminar of 2012 will explore the current structure of ETFs online and how the new guidelines should help raise BEST OF THE BLOGS standards and understanding of ETFs and all UCITS products. tinyurl.com/rhodeslibor in a recent insider-trading case, SEC v. Obus. Bader Deutsche Bank’s David Patterson will lead 1On Finextra, Mike Rhodes asks whether traders writes: “It is entirely possible that, for any number of the discussion at the bank’s office in Great involved in LIBOR abuse were driven by their own reasons, a corporation might not want to conclude Winchester Street, London EC2, on 12 December. desires or whether their behaviour was a product of that it was a victim of one of its employees’ breaches the environment they were working in. Was traders’ of fiduciary duty to the corporation.” It is possible, For more information or to book a place, illicit activity over LIBOR abuse a desperate attempt therefore, that the SEC’s interest in deterring insider please visit cisi.org/eventscal to keep their managers happy in a highly pressured trading might conflict with the corporation’s interest in environment? Rhodes argues that understanding letting the employee off the hook. qualifications why people commit fraud is as important as being able to detect it when it happens. He states that “the tinyurl.com/processman institutions responsible had ‘conditioned’ their traders 3On the Fundweb blog, James Calder, Research Exceeding standards to make them feel good about abusing the rate.” Director at City Asset Management, calls for more rigorous systems to be established to prevent financial Nearly 80% of candidates qualifying through tinyurl.com/badertheory crime and money laundering. Calder cites examples the CISI to meet new Retail Distribution Review 2Under the ‘misappropriation theory’ of insider of where bad processes have exposed firms to risk, (RDR) requirements have exceeded the trading, a person violates US securities laws by including US Senate Committee criticism of Citibank minimum level 4 qualifications benchmark. breaching a fiduciary duty to keep information at the April 2012 hearing into money laundering. He More than 4,200 CISI candidates have confidential. ButForbes blogger Lawrence Bader asks asserts that failure to have an adequate process in completed RDR-compliant qualifications place, rather than failure to prevent a crime, is the key. what happens when the entity to whom the obligation since 2009. Over 3,300 (79%) of these was due concludes, after the fact, that the person at issue did not violate any fiduciary duty. Can the See page 12 for more about financial crime. gained qualifications at level 6 or 7. These Securities and Exchange Commission (SEC) still sue included entrants to the level 6 Certificate in that person for insider trading? The answer is ‘yes,’ as Do you have a blog recommendation? Private Client Investment Advice & Management was made clear by the Second Circuit Court of Appeals Send it to the Editor: [email protected] (PCIAM). Of 255 entrants sitting PCIAM exams in September 2012, 64% passed.
8 November/December 2012 cisi.org
➳ CLAY ‘MUDLARK’ HARRIS Back story on Jonathan Wernick ACSI, Managing Director, JW Compliance Ltd
Jonathan Wernick ACSI, President of West End of London, where he advised Ltd, acting as an independent the CISI’s East Midlands region, has a commercial clients and was able to compliance and training consultant CV that is anything but conventional. appear before practice masters in the – particularly in the wholesale sector, Jonathan, who owns an independent High Court for what he describes as where he continues to be to date. consultancy, JW Compliance Ltd, has “relatively straightforward debt-recovery Jonathan remains a teacher at heart, never worked in an ‘ordinary’ financial cases”. He stayed in law for about a which manifests itself in public speaking services job, apart from a few years as decade before changing direction. and training courses. In training Jonathan Wernick an insurance salesman – a stint even less After a two-week trial in the classroom sessions, he sometimes opens with “I relevant than his longer periods in law at Chigwell School, he became a supply know you don’t want to be here”, inviting Managing and education. teacher there for two years, and later participants to write down any risks Director, JW “When I was in sixth form,” he says, taught law and politics in a state school. that they can envisage arising from Compliance Ltd “my father told me: ‘Write a list of the Jonathan then became an insurance lack of knowledge or failure to follow Do you have a things you can do and the things you salesman in a period punctuated by correct procedures. He then tailors the back-office story? want to do.’ I wrote down ‘law, chartered presentation to address those points – mudlarklives@ surveyor, chartered accountant’, but “There’s no benefit in among others, of course. hotmail.co.uk then I realised I was better at English He says: “I am very lucky in having than maths and I couldn’t draw!” dwelling on the ‘if’ in life” a wonderful wife, a gifted and talented So law it was to be, also prompted daughter who thankfully has her by the fact that his late father was a takeovers. As the new millennium mother’s brains and looks, and a career solicitor with a practice in east London approached, he took stock and identified that I continue to enjoy after 12 years.” specialising in criminal litigation and two areas of opportunity that he hoped Law remains the road not taken. matrimonial work. would provide longer-term professional “Do I sometimes wish now that I was a Jonathan started work there and, stability: IT and compliance. He went qualified solicitor? Of course I do. But during that time, obtained an honours for the latter and taught himself the there’s no benefit in dwelling on the ‘if’ degree in law by way of part-time study ropes after persuading Complinet, in life. Nothing is really certain,” he says. from the University of East London, the compliance website, to give him a “I’ve also been lucky to get the skills then North East London Polytechnic. temporary free subscription. of a lawyer; to have been hardened He went on to study at the College of He joined a former City analyst and up by my father’s pressure to do well; Law, Lancaster Gate, but he left before financial regulator who had become an and to have had a good education,” he his exams were finished. He expected, independent compliance consultant. continues. “I run my business on nevertheless, to qualify one day, as he They worked together for five years a simple premise and hope that if you wanted to fulfil his father’s expectations. until his mentor’s early death in 2005. give a decent service to people, they’ll He then worked in a practice in the Jonathan then formed JW Compliance come back.” Illustration: Luke Wilson Luke Illustration:
Daniel Broby, Chartered FCSI (membership number 82), travelled the old Silk Road on his honeymoon. He has returned to the ‘new Silk Road’ as one of the founders Member memory of Silk Invest, an investment manager focused on Africa, the Middle East and Asia. His recent ‘Founders Series’ CPD talk to CISI members is available on CISI TV.
Daniel arrived in the City as it Institute was born out of the London Stock growth in its $4bn under management to was being transformed by Big Exchange 20 years ago, the ideals of the $17bn. After a stint with Russia’s largest asset Bang and then the 1987 crash. fledgling body, he says, “caught my attention”. manager, Daniel spotted opportunities in the For the first time, London fund He then took a Master’s degree in investment world’s frontier – as opposed to emerging – managers and brokers were analysis prior to a research role at Quilter. “At markets. “Having launched an Africa fund for rubbing shoulders with US and that time, portfolios were UK-oriented,” he says. the Russians,” he says, “I decided it was time to Daniel Broby, German business practices. “My job was to create a product that focused replicate this success myself.” Chartered FCSI “Many firms changed hands on international markets and aided portfolio The credit crisis hit during his infant firm’s around this time,” he recalls. “We saw the birth diversification. This was a lucky break: I was fundraising, but he persevered, joining forces of global investment firms. At the same time, looking for interesting companies to which with a like-minded group. The firm’s vision – that technology progressed in leaps and bounds. one couldn’t get exposure in the UK, such as frontier markets are what emerging markets were “When I arrived, the office had one technology and pharma. The markets caught on 20 years ago – has attracted enough attention flickering black-and-white screen showing that this was where to focus, and my colleagues to grow Silk Invest to 26 people, six products mid-prices rather than bid-ask spreads. Young attributed some of the resulting outperformance and offices throughout Africa and the Middle professionals like me were excitedly looking for to my stock-picking abilities.” East. “Through this journey, I have embraced the ‘backwardisations’ created largely because the When European monetary union arrived, body of knowledge that the Institute represents older generation wasn’t as fast at adapting to portfolios had to be further diversified to and believe that maintaining an ethical and the new technology as we were,” says Daniel. match risk in a European context. Nordea, professional approach is what differentiates those “I realised that survival and success in the new the largest Scandinavian bank, took Daniel to who succeed in the long run,” Daniel concludes. order called for greater professionalism and a Copenhagen as Chief Portfolio Manager. What does ‘frontier market’ status mean? better understanding of the knowledge that He moved to BankInvest as Chief See the continuing professional development lies behind our industry.” When the Securities Investment Officer, and in eight years oversaw article on page 22.
9 news review Madeleine Yates Solicitor, Clifford Chance Ask the experts...
Client money
What is it? The company must maintain records An organisation can hold client money Broadly, client money is any money held by so that it can distinguish money held for with a central counterparty (CCP) as FSA-regulated non-bank firms for clients one client from money held for another margin for clearing. However, following in connection with investment services client, or for the firm itself. Such records the firm’s insolvency, the transfer of clients provided to those clients by such companies. must be kept for five years. The rules also and their positions to another clearing The FSA’s client money rules state that all require organisations to perform internal firm (‘porting’) is difficult, because the client money is held on trust by the company. reconciliations of their own records, and client money is automatically pooled It must be held with an appropriate bank in external reconciliations between their under the client money rules. a client money account that is separate from records and those of any third party by Regulation (EU) No 648/2012 (‘EMIR’) accounts holding the organisation’s own whom client money is held (such as the contains requirements regarding porting money. The firm must pay a retail bank where the money is deposited), and clients from insolvent CCP clearing members client any interest earned on client money, to correct any discrepancies and make to other clearing members. Therefore, FSA unless the organisation has notified the good any shortfall with their own money Consultation Paper (CP) 12/22 proposes client in writing that it will not do so. until the matter is resolved. amending the client money rules so that Money ceases to be client money if, The rules also set out detailed provisions pooling on a firm’s insolvency will not include broadly, it is paid to: the client or its governing the distribution of client money either client money the company holds authorised representative; a third party on on the insolvency of the firm. with the CCP if the CCP transfers the client instructions from the client; a bank account The client money trust does not mean that positions to another clearing firm, or client in the client’s name; the firm itself where due clients recover all client money held for them money held in a separate client account with and payable to it; or the company to reconcile by the firm immediately prior to insolvency. the CCP that the CCP returns to the client or an accounting error. The organisation On a company’s insolvency, all client to the firm for the client’s account. holding client money must make adequate money held by the organisation is pooled arrangements to safeguard the client’s rights and distributed among clients, pro rata to The future and prevent the use of client money for its the amount of client money held for each Lengthy court proceedings arose from own account, and introduce organisational client at the time of insolvency. Each client’s Lehman Brothers’ administration, drawing arrangements to minimise the risk of the loss distribution will be reduced by deduction attention to concerns about client money. of client money as a result of misuse, fraud, of distribution costs and (arguably) amounts The FSA has already made some changes, poor administration, inadequate record due and payable by the client to the firm. such as limiting client money held with a keeping or negligence. The amount pooled should be equal to the group bank to 20%, but CP 12/22 considers amount received for clients, but if, in fact, the further changes, such as increased reliance Why are there rules? firm holds less client money than it should on the firm’s records and actual segregation The rules’ main purpose is to ensure that, do, all clients will bear the loss pro rata – of client money when allocating pooled client if an organisation becomes insolvent, client even if such a shortfall arises from services money following the firm’s insolvency. money is not available to the firm’s general provided to only some clients. creditors (because it is held on trust). If a firm holds client money with a bank Clients are, however, exposed to the credit in the same group, there is a risk that the risk of the bank with which the firm holds bank will become insolvent at around the client money, so, if the bank is insolvent, same time as the organisation, leaving the Do you have a question about anything from tax to the organisation holds for clients only an company holding on trust only an unsecured virtual trading? unsecured debt claim against the bank. claim against the insolvent bank. [email protected]
quick quiz Q1. Which specified investment is a type of security issued by a company that gives Test your industry knowledge the holder the right to force the company to issue new shares at an agreed price? A) Bond B) Warrant C) Equity D) Depository receipt
Q2. Holders of which class of share have no voting rights? A) ‘A’ ordinary shares B) ‘B’ ordinary shares C) Preference shares D) Non-cumulative shares
Q3. A bank with £200,000 of cash deposits and a reserve ratio of 10% can create what maximum value of loans? A) £180,000 B) £200,000 C) £900,000 D) £1.8m Illustration: Cameron Law Cameron Illustration: Q4. Which ONE of the following describes the market when a futures price is lower The S&IR’s Quick Quiz features questions from CISI than that of the underlying asset? elearning products, which are interactive revision aids to A) In contango B) In backwardation C) In-the-money D) Out-of-the-money help candidates prepare for their exams. Answers are on page 29. Top marks to those members who spotted an error in the Quick Quiz in the printed version of To order CISI elearning products, please call the Customer October’s S&IR. The correct answer to the question ‘Which one of the following would normally be Support Centre on +44 20 7645 0777 or visit cisi.org used to settle a share future?’ was ‘Cash’ and not, as listed, ‘Commodities’. Apologies for the mistake.
10 November/December 2012 cisi.org
first person
On a cliff edge The US Government’s stimulus programme is due to finish at the end of 2012. How does that country avoid plunging into recession once the helping hand has been withdrawn? ask anyone in the markets shows that long-run stock- and they will tell you that the price growth has fallen short buzzwords on everyone’s lips of GDP growth in many Expect feverish debate are no longer ‘debt crisis’, countries. Yet the impact on and angst in the markets, but ‘fiscal cliff’. investor confidence at such a right up to the wire This cliff has little to do critical juncture could be huge with Europe. Rather, it is the should Congress fail to reach precipitous drop facing the an agreement. is waking up. Yes, those tax US should Congress fail to Right now, equity markets cuts will have to go at some strike a deal that prevents steep are being propped up by point and spending will need automatic spending cuts central bank support – be it to be curbed, too, if the US is and tax rises kicking the tens of billions of dollars to reduce its debt burden. But in come January. a month injected into the move too early and you risk The end of budget measures US financial system via the a calamity. The prospects aimed at stimulating the US Federal Reserve’s open-ended of a political deal on tax and economy threaten to pull quantitative easing (QE), spending will depend on the out the rug out from under a the European Central Bank’s post-election composition of still-fragile recovery. Indeed, pledge to buy the bonds of Congress. If last year’s struggle in some of the worst-case crisis-hit countries, the Bank to reach agreement on the scenarios flying around, it of England’s QE programme or debt ceiling and avert could even send the world’s Japan’s asset purchases. sovereign default is any biggest economy back into This wave of liquidity guide, expect feverish recession. So the need for a has propelled Wall Street debate and plenty of post-presidential election deal to multi-year highs, even as angst in the markets, between Republicans and expectations for companies’ right up to the wire. Democrats is urgent – and earnings growth – arguably a For his part, Roubini that is why the markets care. more fundamental influence believes that the There is no shortage of dire over share prices – are being market rally since June warnings. Credit Suisse says scaled back. Remove that prop defies fundamentals that the worst outcome could and equities would tumble. – that transmission result in a 3.8% drag on US Moreover, leaving aside the channels for further economic growth (it thinks risk of toppling over the monetary stimulus a 1.5% drag is most likely). fiscal cliff, the outlook for to the real economy Nouriel Roubini, a renowned global economic growth is are broken and that market bear, expects the cliff already deteriorating. central banks are to wipe 1% from GDP growth Even as the US housing pushing on a string. next year – what he calls more market turns and US Personally, I think of a “bunny slope”. And even unemployment figures he’s underestimating the US Congressional Budget start to fall, there are fears the impact of the Office estimates that real GDP of a hard landing in China. next round of QE. might contract by 0.5%. And the eurozone crisis is far True, the rally on Whoever you believe, the from resolved: the hardest-hit Wall Street may consensus view is that the end nations are sinking further into soon peak, but of a temporary payroll tax cut recession as tough austerity as long as the and emergency unemployment measures bite deep. politicians behave, benefits, a freeze on Medicare The International Monetary the US recovery and the expiry of Bush-era tax Fund in October 2012 cut its should gather cuts could drain $400bn to forecast for global growth momentum. n $450bn of demand from next year from 3.9% to 3.6%. the US economy. As such, the danger posed by Christopher The link between countries’ the fiscal cliff is that it delivers Adams is the output and stock-market a blow to America’s tentative Financial Times’ returns is debatable. Research recovery just as the patient markets editor
11 The enemy within A number of recent cases have the criminal activity of employees at Mexico, Syria and Iran; the bank has put focused public attention on international banks has become the focus of a aside $1.5bn to cover fines it expects in the US. slew of recent negative publicity for the industry. financial crime, and enforcement When the Chief Executive Designate of UK policing is getting tougher. The industry the UK Financial Conduct Authority, Martin In the UK, the FSA is increasing its efforts to should continue to increase its Wheatley, announced the reform of LIBOR at pursue wrongdoers through the courts rather the end of September, he included provision for than using fines. Before 2009, the regulator had vigilance, says Hugo Cox criminal sanctions in the case of “false or not brought a single criminal prosecution for misleading statements in order to manipulate financial crime; since then, it has secured 11 LIBOR”. There have been widespread calls for convictions. Sixteen more people are currently criminal prosecutions in the UK, and the US charged, and in October the FSA brought Department of Justice is preparing a criminal prosecutions against another four men for case against banks that submitted false rates. insider dealing under Operation Tabernula, In August, the New York State Department of the regulator’s most complex investigation of the Financial Services (DFS) levied a $340m fine on practice to date, implemented in tandem with Standard Chartered for the bank’s breach of the Serious Organised Crime Agency. US-Iranian sanctions. One month earlier, a US The Serious Fraud Office (SFO), meanwhile, Senate committee said that HSBC provided a appears to be toughening its stance. In September, conduit for “drug kingpins and rogue nations” as it withdrew guidance issued with the Bribery Act part of alleged money laundering for clients in that firms which self-reported corruption would
12 November/December 2012 cisi.org
cover story
Financial crime: your responsibilities As global regulators increase their efforts terrorism, but the Standard Chartered to combat financial crime, practitioners case (see main copy) demonstrates the must ensure that they are aware of their readiness of foreign governments to legal obligations. prosecute breaches of their sanctions by firms beyond their jurisdiction. Money laundering This is the process of making ill-gotten gains Market abuse look legitimate by disguising the proceeds of The FSA Code of Market Conduct, 2008, crime or its true owners. The Proceeds of Crime defines various types of market abuse. Act (POCA), introduced in 2002, allows for • Insider dealing includes improper the civil recovery of criminal assets. It defines disclosure (disseminating insider information) offences individuals commit in concealing and misuse of information (using but not criminal proceeds or facilitating the “acquisition, trading on insider information). retention or use” of proceeds from crime. • Manipulating transactions and Under POCA, you have committed a manipulating devices involves manipulating criminal offence at work if all of the following prices by using trades or orders for trade conditions apply: to create a misleading impression about • you know or suspect someone is involved supply or demand. in money laundering; • Distortion and misleading behaviour cover • this is based on information that came non-trading activity, such as moving an in the course of business; empty container ship to suggest that a large • you can identify the money launderer commodity sale has taken place. or the location of the laundered assets or • Dissemination is giving out information you think the information will help identify that conveys a false or misleading impression be punished with civil penalties rather than either of these; about an investment or issuer. criminal, as well as assurances that “reasonable and proportionate” corporate hospitality would • you do not report it. While only insider dealing and market not fall foul of the law. manipulation are criminal, rather than civil, The SFO’s new Director, David Green, is under Companies are also liable if they do not have offences, wrongdoing is often prosecuted pressure to produce convictions after recent comprehensive internal systems for reporting, under both, says Ian Leist QC. bungles. The presiding judge described as “sheer control, education and training. These incompetence” the case against property tycoons prosecutions would be made by the FSA Fraud the Tchenguiz brothers (search warrants issued Put simply, fraud is an act of deception intended to the SFO as part of its investigations into the and carry up to five years in prison. brothers were ruled unlawful by the High Court). The UK Money Laundering Regulations for personal gain or to cause a loss to another The SFO has since apologised and is being sued (2003) include ‘know-your-customer’ party. Efforts by City of London Police are by one of the brothers for £100m in damages and guidelines specifying requirements for training, focusing on protecting firms and their clients now faces a judicial review over the matter. record keeping and internal reporting. The rules against fraud. This tougher approach contrasts with a distinguish between placement (when criminal Department of Justice consultation in May proceeds arrive in the system), layering (a Bribery and corruption on a new law that aims to settle punishments The 2012 Bribery Act, which aligned the UK for wrongdoing before cases reach the courts. series of transactions subsequently designed It proposes US-style deferred prosecution to obscure their origin) and integration (the final with international norms on anti-corruption agreements for companies that self-report their shifting of the disguised assets into legitimate legislation, makes it a criminal offence to involvement in financial crime, saving the time funds or assets). give or receive a bribe. The SFO can now and expense of investigations. prosecute foreign and domestic firms if they This won’t help individuals involved in Terrorist financing have a presence in the UK. criminal wrongdoing, since the new law is aimed The 2002 Terrorism Act makes financing or only at corporates. Besides, says criminal QC Ian Leist, the new law may be threatened by courts’ facilitating the financing of terrorism a criminal Reporting suspicion of backroom deals between firms offence, requiring workers to report suspicious The Suspicious Activity Reports (SARs) Regime and prosecutors. “There exists a longstanding offences either through a Suspicious sets out the process by which employees must mistrust of plea bargaining in this country,” he Activity Report or, when they have major report suspicious activity related to money says. “Of primary concern is that prosecutors concerns, by seeking consent before laundering or terrorist financing to the UK and defendants will come to agreements that authorising transactions. Financial Intelligence Unit, which is part of the serve their own political and commercial Serious Organised Crime Agency. SARs are interests at the expense of the public’s.” Tougher regulatory stances on financial crime Financial sanctions typically channelled through a money-laundering not only increase compliance costs. “Breaches The UK Treasury is responsible for enforcing reporting officer – the FSA requires that every of regulation are costly for the industry international sanctions aimed at combating regulated officer should have a SARs process.
Illustration: Darrel Rees for Heart for Rees Darrel Illustration: and for the institution’s reputation,” says ➳
13 cover story
David Newton, PwC’s Global Financial Services fraud was the principal source of income for 5% Tax and Insurance Leader, who expects the of organised gangs; now, the number is 17%, Data security: environment to become more demanding. with 30% of all gangs using fraudulent activity missing a trick? City of London Police Commissioner to gather money in some capacity. Adrian Leppard believes that financial firms Leppard believes that staff awareness of By ignoring the reputational costs associated underestimate the reputational risks associated money laundering is a priority, but training at with lapses in data security, the financial with client data (see box, right). financial services firms is failing to keep pace services industry is dangerously exposed, with developments in financial crime. The US according to Adrian Leppard, Commissioner Fraud target cases against HSBC and Standard Chartered of City of London Police. Still greater costs are faced as the industry suggest that there are shortfalls here, and the tries to protect itself from the boom in financial FSA has expressed concern. Its June 2011 Guide “There is a reluctance to recognise the crime facilitated by the internet. for Firms highlighted inadequate anti-money benefits of greater data security at a boardroom “There are no international boundaries,” says laundering measures that have triggered level in mitigating the reputational risks of a loss Leppard. “Share enforcement action of client’s personal data,” he explains, pointing fraud is increasingly Staff awareness of money against banks (it also to the direct impact on “shareholder value” of perpetrated by UK warned that many the theft of hundreds of thousands of customer nationals living in firms had weak laundering is a priority, but records from Sony in March 2011. Spain. Meanwhile, measures to combat the internet is training at financial services mortgage fraud). Internet-launched cyber attacks now becoming easier to Improving the “come almost on a daily basis” for major use, and you don’t firms is failing to keep pace ability to combat firms, launched by criminals trading in personal need to be a technical financial crime is information as a commodity. Personal records expert to set up criminal activity; social an important prerequisite for rebuilding the fetch between $3 and $4 each on anonymous media provides an increasingly important industry’s reputation. High-profile investigations websites. Personal details can be used to set source of information.” into wrongdoing are likely to continue, given the City of London Police, the UK’s leading police FSA’s commitment to bringing more criminal up false bank accounts or make purchases force for tackling economic crime, estimates that prosecutions. As criminals focus their attention using credit cards. profits derived from financial crime now exceed on the fraud of financial organisations, there is But the danger also comes from within, those from drug crime. Its data show that in 2002 much for firms’ management to keep an eye on. with individual employees increasingly recruited by crime networks to facilitate frauds. Leppard recommends a number of precautions to increase security. These include compartmentalising sensitive data on secure servers, controlling employee access to customer records and limiting USB or DVD access to firms’ networks via desktop terminals. He also believes that there should be direct CEO responsibility for data security. City of London Police has set up its own fraud academy. It offers training to the private sector that complements the CISI accreditation efforts (see below).
Crime qualification Combating Financial Crime is an international qualification launched by the CISI that tackles the financial crime agenda, takes a global view of transnational crime and illustrates practical defences, including the Bribery Act (2010). This level 3 qualification has been developed by established international specialists. It is relevant to compliance officers and money- laundering reporting officers; those involved in regulation, law enforcement, trade and commerce; and individuals from bilateral development institutions. There is a workbook to support candidates studying for the qualification and a Professional Refresher elearning module, Financial Crime. For further information visit cisi.org.
14 November/December 2012 cisi.org
requirements, operations and governance, among other areas. An announcement was widely expected this year and David Clark, Chairman of the Wholesale Markets Brokers’ Not quite Association (WMBA), is optimistic: “There’s still a hope in the marketplace that SEF rules will be announced some time before the end of the year.” In Europe, where ESMA is responsible for drafting the key technical standards, there is safe ground general acceptance that it will be well into next year before they are published. Until they are, market participants will not know As the global deadline for derivatives’ central clearing which contracts will have to be cleared with a approaches, it is clear that no one will meet it. Andy Davis finds central counterparty (CCP) or which rules will cover collateral requirements. “I think you’re that the project faces obstacles both in theory and in practice talking about next summer and beyond,” says Martin O’Donovan, Deputy Policy and at the end of December, the financial services to the European Commission (as part of the Technical Director at the Association of industry will pass a major milestone on the European Market Infrastructure Regulation). Corporate Treasurers. road to a safer financial system. Just over three At least at the top level, the legislation should years ago, the G20 meeting in Pittsburgh set a be in place in Europe and the US before the Safer in practice? target of 31 December 2012 for a comprehensive end-of-2012 deadline. But a large quantity of Critics of central clearing point to the overhaul of the $600tn-plus market for over- detailed rule-making is still to be enacted in concentration of systemic risk implied by the-counter (OTC) derivatives, including both regions before it is clear who in the market the need to clear all trades with a CCP (see mandatory trading on electronic exchanges, must do what, and by when. The FSB reported box, ‘Safer, in theory’, far right). With everyone central clearing of certain types of contract by in October that only the US and Japan had exposed to the risk of default by a CCP, will financial corporations and full reporting of all adopted legislation mandating central clearing. these become ‘too big to fail’? transactions. (The Financial Stability Board “People will feel comfortable when, and only (FSB) subsequently formulated the target US and Europe lag when, a resolution process is worked out for into workable objectives.) But, as the deadline The latest uncertainty concerns the timing of the these CCPs,” says David Clark at the WMBA. approaches, it is clear that the mammoth task US Commodity Futures Trading Commission’s “That is absolutely the top priority for the will not be finished on time. detailed rules on swap execution facilities regulators and the central banks: CCPs must True, the European Securities and Markets (SEFs). These are the electronic systems on have a living will agreed with their regulators.” Authority (ESMA) met its deadline of 30 which derivatives contracts will be traded To limit the risk that CCPs fail, parties September to send proposals for new laws and cleared; new rules will cover capital must lodge collateral against their open positions with the clearing house. This too has caused alarm that there will be a Impact assessment system-wide shortage of suitable collateral to post against derivative positions. Buy side Those OTC derivatives that are not subject to Pension funds argue that holding the high-grade government bonds or cash sufficient to meet central clearing will also face onerous margin collateral requirements would cost them 1%–2% in investment returns, forcing them to increase requirements. Furthermore, under Basel III, their risk appetite or demand more support from the sponsoring employer (a secondary effect less capital is required to be held back against of central clearing on corporates). The deadline for their compliance with central clearing centrally cleared trades than must be reserved requirements in Europe has been extended to 2015 and the majority of companies have avoided to trade bilaterally (CCP trades require 2% risk weight; bilateral trades require an additional committing to central clearing until they have greater clarity about the rules. ‘credit valuation adjustment’). Tougher still, Another problem is created by the separation of the derivatives business for pension funds when it comes to CCP trades, derivatives that will follow the migration of some contracts to central counterparties but not others. While brokers must pay the 2% risk charge and post interest-rate swaps, for example, are headed for central clearing, inflation swaps are not, meaning collateral with the CCP, even when their clients that pension funds will have to create two separate derivatives portfolios, increasing their costs, are exempt from posting collateral (as is the says Jeremy Taylor, Specialist in Operational Processing and Derivatives at Rule Financial. case for smaller trades by non-financial firms – see box, ‘Rolls-Royce’, right). The International Swaps and Derivatives Sell side Association (ISDA) fears that the industry will The sell side has gone much further towards achieving compliance. According to the be overwhelmed with collateral calls. ISDA Financial Stability Board, by as early as mid-2010, 47% of interest rate swaps, 22% of estimates the collateral required to cover current multi-name credit default swaps (CDS), and more than 20% of OTC commodity derivatives positions at $15.7tn. “For all practical purposes, were being cleared centrally. any number above a couple of trillion would But sell-side firms could also gain from helping the buy side achieve compliance by offering make the cost of meeting such requirements ‘collateral transformation’ – swapping, for a fee, a pension fund’s illiquid holdings for high-quality prohibitive – even if it is feasible at all to locate so much collateral,” notes its derivatiViews blog. government debt to post at the CCP. The problem is that this could merely shift risk from the ISDA’s other objection concerns the pension fund to the broker: if a major counterparty fails and the high-quality collateral it has requirement to mark centrally cleared ‘lent’ to the pension fund in this way is suddenly recalled, the derivative positions must then derivatives contracts to market each day. The be unwound and the whole system could come crashing down. resultant daily margin requirements will impose new daily liquidity challenges for users, which
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derivatives
Safer, in theory The drive to bring trading of OTC derivatives on to public exchanges stems from the widespread desire among policy-makers and regulators for safer and more transparent financial markets following the credit crisis of late 2008. OTC derivatives, which are private bilateral contracts covering areas such as currency and interest-rate swaps, were accused of exacerbating the crisis because they lacked transparency and so made it too Rolls-Royce: corporates feel the heat hard for regulators to assess build-ups of risk in these off-balance-sheet positions. Pension funds are not the only ones complaining of the costs of shifting to central The response has been an effort to move clearing. Corporates argue that new ‘initial margin’ requirements on bilateral as much of the present OTC derivatives over-the-counter (OTC) trades will curtail their growth. market as possible on to public trading Currently, non-financial counterparties will be subject to clearing and bilateral collateral platforms and to insist that all such trades requirements only if their OTC derivatives positions are large enough and are not directly are collateralised, cleared via a CCP and reducing commercial risks or related to treasury financing activity. reported to a trade repository so that But bigger positions could rapidly become expensive. In a response to March’s regulators can gain a comprehensive European consultation paper on technical standards, Rolls-Royce estimated the view of how risk is accumulating and annual costs of maintaining a $20bn derivatives hedge book to be $28m a year. being managed across the system. The firm suggests that ‘non-financial counterparties’ (NFCs) should be exempt from all Marisol Collazo is Managing Director, initial margin requirements. It notes that prudentially regulated financial counterparties – Product Management for Deriv/SERV LLC, banks and financial firms – must already hold enough capital against their OTC trades to the subsidiary of the Depository Trust & protect themselves against NFCs not meeting their side of the bargain. Secondly, unlike Clearing Corporation (DTCC) responsible banks, NFCs cannot access central banks and depositors for the cheap liquidity to meet for OTC derivatives globally. She says that margin requirements. Instead, the costs will act as a drag on performance. the first compliance date under Dodd-Frank for reporting to the depository (for interest swaps and credit derivative trades) was 12 could drain liquidity from the financial it is to get unilateral adherence to global October, although swap dealers have an system when it is most needed. rules. Asian regulators are already showing How far these objections are heeded will some variation in the speed of their extension to 31 December. be up to local regulators and central banks. enforcement of central-clearing rules. On 10 January 2013, the remaining This is the final challenge to achieving global Delays – or, worse, failure of some countries asset classes, equities, foreign-exchange implementation – it relies on unilateral adoption to implement central clearing at all – raise and commodities derivatives begin at a local level. The recent surprise decision the risk of regulatory arbitrage. With central mandatory reporting under Dodd-Frank, by the FSA to waive capital and liquidity clearing already among the financial world’s although trades involving two parties that requirements on new lending under the most complex reforms, this is one problem it are both ‘end-users’, rather than one Funding for Lending scheme shows how hard could do without. being a dealer, have until April next year. Having comprehensive reporting data available should help regulators DERIVATIVES CLEARING TIMELINE select which additional instruments to clear centrally. “The further transparency Financial Stability globally resulting from the reporting Board guidance Extended deadline on OTC derivative G20 deadline for for European pension requirement,” says Collazo, “will hopefully G20 recommendations implementation implementation fund expires help to inform the regulators even better about what mandatory clearing needs 2009 2010 2011 2012 2015 to take place and where the liquidity is in these transactions.” The DTCC is preparing for further Dodd-Frank Act European Council July: Basel Committee and reporting compliance milestones in agrees IOSCO propose extension of margin Europe (set for 1 July 2013) and Asia EMIR rules to non-cleared OTCs (Japan’s deadline is April 2013).
17 A matter of principle
Hugo Cox talks to Chet Helck of the Securities Industry and Financial Markets Association about Capitol Hill’s approach to regulating financial services in the US
when he talks about his work at the liquidity. When I ask him for more examples Securities Industry and Financial Markets about counterproductive regulation, he says Association (SIFMA), an American that we would need the rest of the week to securities-industry trade group, you list them all. sense that Chairman Chet Helck is on Instead, Helck’s prescription for something of a personal crusade. recovering trust in the investment industry “Our problem today is that many people is to return to its basic principles. Without have lost confidence and trust in the markets, a commitment to integrity and competence in the industry, in the regulators,” he says. and the need to put customers first, there is “They are worried that, no chance of winning if they put their money back the trust of at risk, it will be subject “Many people have lost customers. And to some vagary that there will be nothing they aren’t told about, confidence and trust in glamorous about don’t know about or the markets, in the this process. can’t see coming.” “That kind Helck believes that industry, in the regulators” of disciplined headline-grabbing management legislation or sweeping regulatory reform approach is not sexy,” he says. “It’s not some are not the answer and that this approach is great new idea for a law or regulation – it’s doing more harm than good by hobbling the just fundamental values that are essential for ability of financial services to drive much- the effective operation of our business.” needed economic growth. He is scathing about the Volcker rule – intended to limit Level playing proprietary trading but likely to catch One exception to Helck’s scepticism about widespread market making and reduce legislating the US investment industry out of its current troubles is the 2012 Investment Adviser Oversight Act. The appeal of the proposed act lies in its plan to bring a single CV snapshot standard of oversight to the provision of investment advice in the US. 2012 – President and COO, Raymond James Financial To date, investment advisers giving retail advice have had it much easier than 1989 – Vice President of business development their wholesale counterparts from broker- for a Raymond James Financial dealer firms. The Securities and Exchange contractor subsidiary Commission (SEC) inspects them, on 1983 – Investment representative for average, once every 11 years, compared Edward D. Jones & Co; he later with yearly inspections for broker-dealers. became the firm’s regional leader The problem has arisen because the retail for Georgia, Florida and Alabama advisory services of investment advisers 1974 – Product marketing and territory and broker-dealers have converged in recent manager for Deere & Co years. With each currently regulated by different bodies and to different standards,
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Profile: chet helck
the 2012 Act recommends the same level of examination and oversight for what is essentially the same conduct: giving A portrait of the investment advice to retail clients. (Those adviser as a young man in the UK, including the CISI, that are currently lobbying to bring professional It is easy to see why Chet Helck has succeeded standards in wholesale markets into line as an investment adviser. The CEO of the with the Retail Distribution Review’s Private Global Client Group at financial-planning exacting new rules for retail advisers firm Raymond James has a reassuring manner might find it amusing that their US peers are facing the reverse dilemma.) and his deep voice and Southern accent brings “Clients should be able to trust that, to mind country-music icon Johnny Cash. whomever they do business with, the same It may be true that his countrymen ‘do’ standards of care at the highest levels heartfelt better than their English peers. are being applied, so they can go from But his conviction that the industry has one adviser to another without having to lost sight of the “fundamental values” understand the intricacies of regulatory of trust and putting customers first strikes infrastructure to determine who they should trust,” says Helck. a more authentic note than the often-brittle Both the industry and Congress agree in messaging that many in the sector have principle with achieving equivalence in delivered since the financial crisis. oversight. But there is still a good deal “I believe we are engaged in a noble of debate about how best to get there. profession,” he said at SIFMA’s annual general Helck wants a new ‘retail-adviser regulatory meeting in October. When we meet, he entreats organisation’ along the lines of the Financial US regulators to “stop allowing those who Industry Regulatory Authority (FINRA), a private, self-regulatory organisation abuse that trust to operate in our business”. funded by the industry. The rival Most resonant, though, is his own story Investment Adviser Association of accumulating wealth – and his fears about complains of conflicts of interest in losing it – which eventually led him to work as self-regulation and favours a ‘user-fee’ a financial adviser. system in which advisers would pay Nine years into a career at Deere & Co, the fees to the SEC to cover exam costs. US agricultural-equipment manufacturers Helck’s fear is that the SEC would not spend the money effectively. The (famous for John Deere tractors in the UK), he organisation’s Chair, Mary Shapiro, has had accumulated a tidy pot of company shares said that she would need another 2,200 through the firm’s stock-purchase plan. He staff to do the job; FINRA reckons it could took a keen interest in competitor firms’ shares carry it out with 900. Helck summarises: – notably those of International Harvester, “In practice, we’ve seen that the Government Deere’s larger peer, which consistently traded is the worst management organisation you at a $10 premium to Helck’s employer. By the could find for such a job.” Comments like these may not win the early 1980s, the share price of International plain-speaking Texan many fans on Capitol Harvester stood at about $75, and Helck was Hill. But, midway through his first year at pleased to note that many senior employees the helm of the securities industry’s leading at the firm had become quite wealthy through trade group, practitioners across the Atlantic their shareholdings. should expect to benefit from both his Then, almost overnight, International candour and his commitment. Harvester’s stock plunged to $2 per share and Helck had to reconsider his financial planning. SIFMA “A large multinational company that in those days seemed indestructible had SIFMA represents the interests of more crashed and burned,” he says. “Deere than 650 securities firms, banks and asset was an excellent company but it was management companies in the US. clear to me that I should diversify my It formed in 2006 from the merger of the holdings, and so I started doing business Bond Market Association and the Securities with an investment adviser.” Industry Association and has offices in New Three years later, the very same York City and Washington DC. adviser offered Helck a job.
19 Despite this year’s exception, Hugo Cox finds that it is hard for practitioners to agree on the practical merits of the theories that win economists the Nobel Prize… Applied theory
there are two remarkable points to students, rather than teaching hospitals, make New England Program for Kidney Exchange, consider regarding this year’s Nobel Prize for the ‘offer’ in selecting their chosen place of study which created a ‘clearing house’ similar to economics. The first is that one of the winners, creates a stable outcome. Research showed that that of schools and hospitals, successfully Lloyd Shapley, once designed an algorithm to both parties were happy with where the student matching pairs of donors with compatible produce stable marriages. The second is that ended up, and therefore would not do deals on pairs of recipients before conducting the his co-winner, Alvin Roth, has provided an the side to undermine the system. When Roth operations at the same time (the surgery had to application for theoretical economics applied this rationale to public schools in New be simultaneous because US law prohibits the that everyone agrees has a benefit – about York, in 2003, his algorithm resulted in a 90% drawing-up of contracts for organ donation). as rare an eventuality as a hen’s tooth. reduction in the number of students assigned to Despite the dinner-party appeal of Shapley’s schools that were not in the youngsters’ top five. Useful tools model for matrimonial bliss (see below), most Roth can also boast a practical social It’s hard to argue against the benefit of of his work turns out to be highly theoretical impact when there are tricky ethical issues increasing the number of happy students and mathematically complicated. So far, so to consider (traditionally off limits for the or successful kidney transplants. Such a familiar, as Nobel Prize winning theories go. But rarefied intellectual purism of theoretical consensus that Nobel Prize-winning ideas Roth has used the discoveries of game theory to economics), such as the exchange of kidneys. have a practical benefit is rare. solve real-world problems, such as the supply Where someone requires a kidney transplant, In 2011, Thomas Sargent and Chris Sims of medical graduates to hospitals, children to the spouse may be prepared to donate one but collected the economics prize for their work on schools and kidneys to transplant patients. an incompatible blood group prevents this. To evaluating the macroeconomic effects of major Roth discovered that a system where medical solve this problem, Roth helped found the single changes, such as a shift in interest rates or
Stable marriage
Shapley’s marriage algorithm was devised alongside David Gale in 1962. It excited economists at the time because it solved the ‘stable matching problem’ by designing an algorithm to match a group of men and women in which all marriages are stable. It works by multiple rounds of engagement. In each round, a woman provisionally accepts a proposal from the man who loves her most. She says ‘maybe’ to that man and ‘no’ to all the rest. Then all the remaining men propose again. This time the woman can jettison her ‘maybe’ from the previous round in place of a new ‘maybe’. He goes back into the pool and makes another offer in the third round. Or she can keep her previous ‘maybe’. The process repeats until everyone is engaged. At this stage the process is stable because it’s impossible to find a man and a woman both of whom like each other more than their partners.
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the influence of theories
a hefty tax cut. The theory depended Hear no evil? heavily on a version of the vector-auto The 2002 prize also shows another limitation The dangers of regression model developed by Sims, which of applied economics – prejudice in the has proved effective in predicting the effect of face of compelling evidence. applied economics surprise or shock changes. That year, Smith shared his award with The applications of their work have been psychologist Daniel Kahneman for his work In 1997, US academics Myron Scholes and popular among many central bankers keen to uncovering the biases and mistakes in human Robert Merton shared the Nobel Prize for a predict the impact of interest rates, explains decision-making. In his recent bestselling book, new model for pricing options. This proved Peter Englund, Permanent Secretary of the Thinking Fast and Slow, Kahneman recalls portentous timing. The Black-Scholes Swedish academy that awards the Nobel Prizes presenting to a small but well-reputed firm of formula (also co-authored by Fisher Black Applied theory and Professor of Finance at Stockholm School US wealth managers about how mistakes could of Economics. “We highlighted the impact of the cloud their investment strategies. who had died by 1997) underpinned Long- work on monetary policy: almost every central On the eve of his talk, he was given data Term Capital Management (LTCM), a US bank around the world would certainly use about the portfolio returns of 25 managers over hedge fund set up three years earlier with some version of that regression.” eight years. A quick regression analysis found Scholes and Merton on its board. Following But not everyone agrees that they should. that the average correlation of performance several years of more than 40% returns, it The regression theory is woefully inadequate between individual years was as good as zero. collapsed dramatically in 1998. The fund at explaining the current fiscal and economic This suggests an ‘illusion of skill’; if skill was enjoyed fantastically high levels of leverage disorder in Europe, believes celebrated UK a factor in investment performance then, at economist John Kay, who recently chaired a least for some managers, there should have – peaking at about 250 to one as investors Government review of long-term governance in been a correlation in performance across years. ran for the exit – in part because of the equity markets. “It’s (Kahneman explains impeccable academic heritage of its theory. shocking to me that Consensus that Nobel people’s blindness to “I accept that the prize gives a special many people believe this by reference to significance to the individuals who receive the that if you announce Prize-winning ideas have cognitive illusions prize, who may then be regarded as having a a credible fiscal such as hindsight greater amount of wisdom than they have,” trajectory for countries a practical benefit is rare bias – the tendency in the eurozone then to reconsider says Peter Englund, Permanent Secretary of wages and prices across Europe will outcomes in the light of information we the Swedish academy that awards the Nobel adjust quickly. This is clearly a major influence know now but did not know at the time – Prizes and Professor of Finance at Stockholm on European Central Bank policy,” he said. and attributing the positive effect of chance School of Economics. But in this case he Jan Dehn, Co-Head of Research at Ashmore events to personal skill). notes, LTCM was firmly on the way to its Investment Management, an emerging market The next day, Kahneman presented the $5bn peak in assets under management specialist listed in the FTSE 100, says vector results of the regression analysis to the firm’s when the prize was awarded in 1997. auto-regression is a useful tool to evaluate the executives, noting that “the firm was rewarding effects of a big interest rate or oil price shock luck as if it were skill” by determining annual Nonetheless, because it proved a fairly on monetary policy but its application to asset bonuses via individual portfolio performance. accurate model for options pricing at the time, prices is limited. The response was a polite acknowledgement of the Black-Scholes formula helped fire a false “In particular, it does not allow for technical what should have been a damning revelation assumption that there was only one right price factors, such as investor flows and sentiment,” and Kahneman left with the conviction that for an option, which may have blinded those he explains. In this sense, it demonstrates a nothing at the firm would change. at LTCM when the bets started to go bad. limit to many economic theories that fall well Kahneman’s work has certainly had an short of making market predictions. impact: behavioural finance has given a compelling theoretical underpinning to passive investment managers is too hard for most, Put to the test and exchange-traded fund (ETF) investing. Kahneman explains: Certainly, there will always be disagreement By emphasising evidence, including the fact “Keeping a log of their decisions and about how effective an economic theory that, in any year, two out of three mutual funds why they make them could eventually force is in predicting events. One way to resolve underperform the market, his work and that professionals to improve performance. But these disagreements is to test theories of other behavioural economists, has helped for some reason people just hate doing that.” in the laboratory. spawn the explosion in passive and ETF What Nobel Prize-winning ideas offer Vernon Smith, who won the prize in 2002, funds. Applied as behavioural finance, these financial services professionals and policy- aimed to do just this. Smith initiated the use of ideas have significant influence in investment makers depends partly on their expectations. so-called ‘wind-tunnel’ experiments – applying management. Richard Thaler, a founding In some cases, such as the collapse of hedge the principle that racing car and aeroplane father of the behavioural finance movement, fund Long-Term Capital Management, designers would put their designs through is one half of an investment management firm excitement about advances in theoretical such testing, so why shouldn’t new markets with several billion dollars under management. economics may have misled investors (see and economic policies go through an equally There are few fund managers now that are not box above). In others, such as Kahneman’s, stringent process before they are implemented? aware of the dangers of ‘loss aversion’ or risks many professionals are not getting excited He analysed alternative market designs created by the disproportionate salience of enough about the practical implications of in the lab before they were implemented in recent news about a company. new ideas. Those hoping that Shapley’s practice. Smith employed this method in the However, the full impact of Kahneman’s marriage matching algorithm can help reduce design of government auctions to achieve work has been limited on an everyday basis divorce rates will be disappointed. But deregulation and privatisation of public because receiving the news that we are flawed every year there will be something of value monopolies. This included looking into is very hard to swallow. Even a simple for practitioners in the award announced by the auction of broadcasting rights. monitoring of personal decision-making by Peter Englund in Stockholm.
21 The new Silk Road
Frontier markets can yield glittering profits for canny investors. But what are the stakes, and how are they weighed? George Littlejohn MCSI explains
ibn battuta, a from funds, targeting specific markets that they The other major player in this arena, MSCI, household name for track. FTSE’s country classifications run from launched the first comprehensive emerging many in Asia’s fastest- developed, through advanced emerging and markets (EM) index in 1988. Since then, the growing economies, secondary emerging, to frontier. The categories MSCI EM Indices have evolved considerably, left home in Tangiers are assigned according to a set of criteria moving from about 1% of the global equity one June day in 1325. developed in conjunction with international opportunity set in 1988 to 14% in 2010. Today, He returned 24 years investors and the markets. “This rules-based they cover more than 2,700 securities in 21 later, having covered approach provides a transparent and objective markets that are currently classified as EM an immense 75,000 mechanism for assessing markets,” says countries. MSCI regularly reviews the market miles across what Chris Woods, FTSE’s Managing Director of classification of all countries included (or under Ibn Battuta became known as Governance and Policy. consideration for inclusion) in its global equity the Silk Road. His near-contemporary, Marco FTSE’s Country Classification Committee universe based on extensive discussion with the Polo, managed a mere 15,000 miles conducts an annual review of the classifications, investment community. over the same length of time. making recommendations to its Policy Group. The Silk Road was a network of interlinking “Early distinctions between developed and The glittering prize of graduation trade routes across the Afro-Eurasian land emerging markets were somewhat arbitrary,” The real prize – the graduation, in one Middle mass that connected Asia – booming, then as says Woods. “They tended to focus on the East regulator’s words, “from a cycling now – with the European and Mediterranean relative wealth of countries as the distinguishing proficiency badge to a full driving licence” – is world and parts of north and east Africa. measure, together with subjective judgments the move from frontier to EM status. This can No traveller matched Ibn Battuta’s efforts about the quality of the market.” open the floodgates to institutional investment, until the steam age some 450 years later. Now, the process is much more rigorous, notably by US pension and endowment funds. Then, commerce took global travellers along the focusing strongly on quality-of-market criteria, So how do markets move up the pecking order? same paths in search of profitable opportunities. such as regulation, the dealing landscape, Dogged determination and attention to detail The investment community followed quickly, custody and settlement procedures and the seem to be the answer. as those charged with looking after other presence of a derivatives market. Russia is a prime example. Robert Barnes, people’s money saw the rich potential in Countries are promoted or demoted Chartered FCSI, who is CEO, UBS MTF and the frontier markets. between categories via a ‘watchlist’ (see box Managing Director, Equities at UBS, and a These frontier markets are back with a right), to which they are added when the member of the CISI Board, has been actively bang, and many Institute members now comb Country Classification Committee agrees that involved in TheCityUK’s engagement with the them for exciting propositions as their clients enough scores have changed to merit a proposed nascent Moscow International Financial Centre expand their investment horizons. Daniel Broby, reclassification. This autumn, for instance, (MIFC) and many other markets. Russia is Chartered FCSI, who is profiled on page 9, Argentina was listed for possible demotion from currently ranked secondary emerging in the was one of the earliest members of the CISI to frontier status due to continuing stringent FTSE indices and follow in Battuta’s boot steps. capital controls imposed on international emerging by MSCI. investors and the perceived lack of an The development and Frontier or emerging? independent regulatory authority to protect promotion of the new But where to begin when probing these still shareholders’ rights. Argentina had already Moscow centre is close very foreign markets? Early movers can make been demoted from secondary emerging to to President Vladimir sizeable profits, but one person’s glittering frontier status in 2010. Greece, too, is on the Putin’s central plans to prize is another’s can of worms, especially in watchlist. Meanwhile, Mongolia joined the list improve the Russian some of the newer markets. A large part of the for possible inclusion as a frontier market based business climate. answer lies in the work done by the FTSE and on its progress in developing a market “An encouraging MSCI groups, which methodically allocate infrastructure that is attractive to foreign number of new
individual countries’ markets across a spectrum investors through improvements to its trading, Robert Barnes, business practices, of development. Their indices drive investment settlement and custody arrangements. Chartered FCSI meeting international
22 OctoberNovember/December 2012 cisi.org 2012 cisi.org
continuing professional development
standards, have taken root in the Russian market,” says TheCityUK’s MIFC update. “This makes it easier to do business that will support Russia’s privatisation programme and help Moscow flourish as an international financial centre.” “The most notable accomplishment was the passing of the Central Securities Depository [CSD] law on 1 January 2012. Implementation will bring greater efficiencies and transparency and lower risk to the securities markets through centralising and simplifying trading and posttrade services. It will help Russia to compete on the international stage, and we look forward to the introduction of access for foreign nominee accounts and the approval of international CSDs, CSDs and global custodians. We support and encourage the speedy development of a trade repository for financial products as proposed by the National Securities Depository [NSD], and are delighted
“Early distinctions between developed and emerging markets were answers to updated FTSE country weaker or non-existent execution services. somewhat arbitrary” questionnaires, which resulted in Russia In 2007, the European Commission’s launch earning more criteria upgrades than any of Mifid redefined best execution and, by that Euroclear Bank has recently been granted other country,” he says. specifically excluding research from the access to the NSD by Russia’s Federal Financial definition of execution criteria, effectively Markets Service. The NSD’s plans for change The gold medal of order flow extended CSAs across Europe. In the US, will make accessing the Russian market easier Financial institutions, both national and the Securities and Exchange Commission for international institutions.” international, need to see business coming approved a structure similar to CSAs, the A member of the FTSE Country Classification out of these developments to make their Client Commission Arrangement, to make Committee, Barnes has been instrumental in engagement worthwhile. “The execution it as easy as possible for investors to pay engaging the Russian market with FTSE to start arms race continues,” says Barnes. “The for independent research. Because global navigating a path towards future promotion. prize is order flow that concentrates to those clients prefer a consistent process, CSAs are “Since we discussed FTSE Country most capable, particularly with respect to becoming the new convention worldwide. Classification at our June 2011 inaugural MIFC market structures.” “With the advent of global CSAs,” says Joint Liaison Group meeting in Moscow, In recent years, regulators in the UK and Barnes, “markets are more likely to attract MICEX-RTS [the Moscow Exchange] and US, and across Europe, have pushed for incremental liquidity if they commit to a Naufor [the Russian National Association of greater transparency and accountability in high quality of markets criteria and if they Securities Market Participants] co-ordinated relation to the use of dealing commissions. join broker execution networks with clients This led to the introduction of commission that have global CSAs.” unbundling and commission-sharing In October, the Moscow Exchange pressed Current FTSE arrangements (CSAs). Under CSAs, an agreed the button on a full-scale link between its ‘watchlist’ markets portion of the commission is set aside to be domestic market and a London ‘POP’ – point used to pay for research, either by the dealing of presence – to help increase trading volume. • Argentina – possible demotion broker or another organisation from which The London server, nestled in a data centre from frontier the investor wishes to source advice. with companions from most of the big global • China ‘A’ share (traded in yuan) – possible The advantage is that CSAs enable buy- banks, claims a round-trip time to whisk data inclusion as secondary emerging side investors to avoid a conflict inherent to and from Moscow of 42 milliseconds – for • Greece – possible demotion to advanced in the previous arrangements. The market once, beating Ibn Battuta emerging convention had been to pay for ideas with • Kazakhstan – possible inclusion in frontier order flow, so that investors obtained their Robert Barnes and Chris Woods will be exploring • Kuwait – possible inclusion as secondary research from the brokers carrying out these issues at a CISI CPD event in March emerging their transactions. The conflict arose where 2013. For more information, visit cisi.org a broker with good research ideas – that the • Mongolia – possible inclusion in frontier investor wanted to use – had a weak execution • Poland – possible promotion from advanced George Littlejohn MCSI is a desk that the investor did not want to use. senior adviser at the CISI. emerging to developed Under the CSA mechanism, buy-side • Taiwan – possible promotion from advanced investors have the freedom to concentrate emerging to developed their order flow through the brokers • Ukraine – possible inclusion in frontier providing best execution, and the power to reward value-added ideas from others with
23 To sell or not to sell? A bank manager feels uneasy about selling a client a complicated interest-rate swap. Should he defer to his in-house specialist, or trust his instincts?
philip runs a successful small engineering of the bank that has supported Philip to date. concerned by Alan’s comments about hedging company, employing 40 people, that makes Alan welcomes Philip and Sunil, saying that the interest payments, since it seems a sensible specialist components for the aircraft industry. the bank is always keen to support successful thing to do, as financial commentators are He is keen to expand his firm through the businesses. He assures them that if the business saying that interest rates have been lower than acquisition of GZB, a company in a similar line plan makes sense, the bank should be happy the historic norm for some time and the next of business, whose current owner wishes to to provide the funding that Philip is seeking. series of moves are likely to be upwards. A short retire. Philip has reviewed the position with his Alan notes that Philip is looking for a term loan time later, Alan calls Philip and tells him that his accountant Sunil and they determined that the to support the purchase of GZB, to be secured funding application has been approved and, as proposed acquisition would enable his company against GZB’s property, and says that there anticipated, it is conditional upon the term-loan to take on more work, providing valuable may be some conditions, particularly hedging interest payments being hedged. Alan adds that economies of scale. Although GZB the interest-rate risk on the term loan, as he Kumar, a member of the bank’s specialist swap is only occasionally profitable, a major knows the bank is promoting its interest-rate team, will visit later that week and would like attraction is that it owns the freehold protection products. to discuss the various options with Philip; a property from which it operates, thus Alan is pleased with the approach, which will meeting is arranged. justifying the £3m asking price. help him meet his new business target, and if Before the meeting, Alan and Kumar discuss Philip and Sunil draw up a business plan he convinces Philip of the merits of interest-rate the different forms of derivatives products that envisages an additional working-capital protection, he will receive extra credit. Philip that are available, and Alan admits his lack requirement, and a term loan secured on the and Sunil leave the bank satisfied that they have of detailed knowledge about swaps and their GZB property. Having completed the plan, they made a good case and that their application strengths and weaknesses. Kumar says that make an appointment to see Alan, the manager should be approved. They are not overly is not a problem as he will do the talking, but
24 November/December 2012 cisi.org
grey matters
Alan should bear in mind that, from the bank’s and the structured derivative that Kumar perspective, the greater the ‘structuring’ in had sold him on, and asks for the necessary A costly slip-up a product, the more money it makes. So it’s documentation to be prepared. He also in everyone’s interest that structures are not asks for Kumar’s phone number, saying THE VERDICT rejected just because they might be complicated. that he wants to make sure that he properly At the meeting, Philip and Sunil sit down understands what he is signing up to. An erroneous trade by Daniel causes with Alan and Kumar, who is introduced as the A few days later, with the documentation potential financial problems for Litmus, bank’s ‘swap specialist’. Alan runs through the prepared, Alan arranges for Philip to come a small broker. Freddie, an old school friend nature of the conditional approval relating to the and sign it at the bank. While he is waiting interest-rate protection, saying that it does not for Philip, he receives a telephone call from of Daniel, is the manager at the client firm, specify what form the protection should take Derek, his regional manager. Derek informs Raptor. He offers to help Litmus by directing and therefore that it is up to Philip to decide. him that as a result of the signing of Philip’s more of Raptor’s business to the firm. Kumar sets out a range of product options, loan, and particularly the structured swap, This was the Grey Matters dilemma in the the attractions of which are determined which is a first for the region, Alan will top September issue of the S&IR. Readers were principally by the interest-rate environment this month’s league table for new business. invited to vote in a poll on the CISI website and anticipated movements in rates over the Derek invites Alan to lunch at head office, for the course of action that they felt Freddie next seven years, which is the term of the loan. an offer that Alan enthusiastically accepts. They discuss the likely direction of interest Shortly after the phone call, Alan should take, choosing from four options. rates, taking into consideration that the bank’s welcomes Philip into his office and they sit economics department predicts a steady rise down to sign the documentation. But before The results were as follows: until rates plateau about 3% higher than their they do so, Philip says that he is struggling to • Freddie can safely make his offer. present level. understand the His client is not being disadvantaged, Against that mechanics of since it would pay the same commission background, the He should bear in mind that, the structured anyway – 5%. case for protection from the bank’s perspective, the product, is obvious. despite further • Freddie should not make any offer to However, the form greater the ‘structuring’ in a conversations. Litmus, as the mistake was its fault and it of the product is He explains that must take responsibility for the cost of less clear, and they product, the more money it makes it is only because putting this right – 65%. spend some time Kumar has • Freddie should not make the offer. discussing the various options, starting with a assured him that the bank would not sell Although it is not a breach of the soft straightforward swap, to enable Philip to fix the him anything that was not in his best commission or payment for order flow or rate on the loan. Alan tells Philip that it seems a interests that he is prepared to go ahead. simple and straightforward option. On hearing this, Alan is concerned that inducements rules, since Litmus would Kumar then explains that there are more he may be a party to misselling. He tells have to pay the loss anyway and Raptor To sell or complex products, such as collars and Philip that, before he signs, he will call Kumar is not receiving any money, it is perhaps structured collars, that will limit interest-rate himself, and he asks Philip to excuse him for a against their spirit – 27%. movements within a specified range and moment while he does so. Kumar is clearly • Freddie can make the offer, because can be tailored to suit specific circumstances. He irritated by Alan’s phone call, saying that he while Raptor’s other brokers may feel adds that he strongly believes that such has explained everything several times and aggrieved, they have no right to the extra a product would be ideal for Philip’s that the client was happy. The fact that Alan, not to sell? expanding business, which would no a self-confessed dinosaur, is uncertain is no business, and Freddie’s client does not doubt welcome a bit of flexibility. reason to get cold feet at this time and he suffer – 3%. Both Philip and Sunil are interested in suggests that Alan must do whatever is the range of options offered. Philip says that necessary to reassure Philip and get the The CISI response they will not rule out anything until they have documentation signed. While a significant majority said that Raptor discussed the matter further, since they are Alan now feels pulled in several directions. (Freddie) could not make the offer, of those businessmen, not financiers, and want to make Before returning to his office, he considers the sure they do what is right for the firm. They best thing to do, mindful also of his earlier only a small number suggested that the thank Kumar and Alan, adding that they will conversation with the regional manager. proposal was against the spirit of the rules come back to the bank with a decision shortly. rather than the letter. This suggests, as we When the customers have left, Alan asks Can he safely: have commented before, that there is a Kumar what product he truly recommends as • encourage Philip to sign the documentation, tendency for respondents to these most appropriate to Philip’s needs, adding that reliant upon Kumar’s reassurance that it is in dilemmas to rely on the comfort of apparent if it were up to him, he would suggest a plain- Philip’s interest regulatory certainty. vanilla swap tied to the loan period. Kumar • say that Philip should not sign unless he is replies that he was not happy that Alan had 100% comfortable with what he is doing From a commercial perspective, appeared to support such a simple product, as • tell Philip to sign the documentation because there seems no valid reason why Raptor he felt that, with a little gentle persuasion, Philip he (Alan) will happily unwind the transactions management should allow an old personal would agree to the structured hedge. This would if anything goes wrong friendship to influence business decisions go down much better with the bank’s head • quote Shakespeare’s “There is a tide in the of this nature, and in this day and age it is office, for obvious reasons. affairs of men which, taken at the flood, unlikely to do so, but we do not believe that Alan says that, as Kumar was the expert, he leads on to fortune”, and leave it to Philip this is a regulatory issue. would not argue with him, but would wait and to make the choice? see what Philip wanted to do and then respond The suggestion that the proposal would accordingly, adding that he was beginning to Visit cisi.org and let us know your favoured fall under the terms of the Bribery Act, as feel a bit of a dinosaur these days. option. The results, together with the opinion suggested by one respondent, would be a The following day, Philip calls and tells Alan of the CISI, will be published in the February rather extreme interpretation of the Act. that he wishes to go ahead with both the loan 2013 edition of the S&IR.
25 books
new workbook edition two new workbooks and elearning editions Need International Introduction Investment to Securities & Investment Advice Diploma (Arabic) Derivatives: The aim of this to read This unit – the first to be translated Retail Distribution Review into Arabic by the CISI – provides an (RDR)-compliant unit is to The latest publications introduction to the world of financial provide those advising on and study aids services for people working outside the UK. and/or dealing in derivatives supporting CISI It looks at the economic environment and the participants in with the knowledge and skills the global financial services industry. A new edition (which required for their roles. qualifications will apply to exams until 10 January 2014) of the International Introduction to Securities & Investment (Arabic) workbook is out Securities: This RDR-compliant unit will ensure that now. Topics include: candidates can apply the appropriate knowledge and • financial assets and markets understanding of securities, markets and related functions • equities, bonds and derivatives and administration. • investment funds • regulation and ethics. Price: £100 per subject for the combined workbook Price: £75 and elearning product
NEW WORKBOOK AND ELEARNING EDITION new workbook and elearning edition new workbook and elearning edition Commodity FSA Financial Investment Derivatives Regulation Management The Certificate in Commodity The aim of this unit (part of The Certificate in Investment Derivatives is a globally portable both the Investment Operations Management is the appropriate qualification that addresses the Certificate, formerly known as competence-based qualification needs of the modern international the Investment Administration targeted at investment commodity derivatives market. Qualification, and the Certificate professionals engaged in managing It has been developed with representatives from programmes) is to ensure that candidates have an investments, dealing in/advising on securities or global financial services firms and input from major understanding of the regulations and legislation derivatives and undertaking activities as a broker exchanges to provide employees advising and/ that underpin the financial markets and the conduct fund-adviser. A new edition of the Investment or dealing in commodity derivatives on behalf of of investment business. A new edition of the FSA Management workbook and corresponding elearning professional clients with the knowledge and skills Financial Regulation workbook and corresponding product (covering exams from 22 March 2013) is required for their job roles. A new edition of the elearning product (covering exams from 21 due out in December and will cover: Commodity Derivatives workbook and corresponding November 2012 until further notice) is out now. • economics elearning product (valid for exams from 11 February Topics covered include: • financial mathematics and statistics 2013) will cover: • the regulatory environment • industry relations • underlying commodity markets • the Financial Services and Markets Act 2000 • asset classes and investment strategies • exchange-traded commodities futures/options • the FSA’s Conduct of Business Sourcebook/ • portfolio management. • principles of exchange-traded commodities client assets. futures/options • over-the-counter commodity derivatives Price: £100 for the combined workbook Price: £100 for the combined workbook • principles of clearing and margin. and elearning product and elearning product
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online tool External specialists Professional Refresher The CISI’s Professional Refresher elearning tool The CISI relies on industry practitioners to offer their knowledge enables you to remain up to date with regulatory and expertise to help create and maintain its exams, workbooks and issues and changes, maintain compliance and elearning products. There are several types of specialists: authors demonstrate continuing learning. The product now and reviewers for workbooks and elearning products, item (question) consists of more than 40 modules, including: writers, item editors and exam panel members. All receive a number of benefits to thank them for their involvement. • anti-money laundering • corporate actions There are currently about 300 external specialists who have • the Foreign Account Tax Compliance Act (FATCA) volunteered to assist the Institute’s qualifications team, but more • financial crime are required. The CISI would particularly welcome applications from • investment principles and risk specialists to assist with developing exams for Exchange-Traded • professional taxation Derivatives, Commodity Derivatives, Over-the-Counter Derivatives • training and competence and Corporate Finance Technical Foundations. • the UK regulatory structure. To register your interest, please contact Iain Worman on Price: Free for all CISI members, otherwise it costs £150 per user. +44 20 7645 0609 or download the application form available at There are also tailored module packages available for individual firms. cisi.org/externalspecialists Visit cisi.org/refresher for further information.
26 November/December 2012 cisi.org
Diary Events to attend over the coming months ➳ Professional courses Professional forums Venue: London unless otherwise stated 10/11 december Derivatives* £900 Forum welcomes 12 december Investment Principles and Risk* (PCIAM, half day)* £300 14 december Securities* £500 new Chair 17/18 december Derivatives* £900 their professional 22 january 2013 Advanced Leadership Skills for Investment Seniors £500 knowledge and 31 january Financial Crime Hot Topics for 2013 £500 skills while making 6 february Investment Principles and Risk* (PCIAM, half day)* a valid contribution (Isle of Man) £300 to the continuing development of their 6 february Investment Principles and Risk* (IAC) (Isle of Man) £500 chosen profession. 6/7 february Investment Principles and Risk* (LSE) (Isle of Man) £900 Debbie has played a key role in the *This event fulfils the requirements for qualifications gap-fill between existing CISI exams and the new Retail Distribution Review exam standards forum’s work and I wish her every From left, Debbie Clarke, CF, Chartered MCSI; guest speaker Mrs Moneypenny; and Frank Moxon, success in taking it Member and Fellow discounts CF, Chartered FCSI, at the corporate finance on to greater things.” forum’s annual dinner Professional courses discount: Fellows 35%; Members 30%; Associates 20%. Debbie added: The fourth annual dinner of “I’m delighted to be taking The following discounts are applicable only to one workshop per year: the CISI’s corporate finance over the reins of the forum Affiliates 30%; Students 20%. forum was the biggest to date, and intend to continue To book: cisi.org [email protected] +44 20 7645 0777 with 65 guests attending. Frank’s excellent work. Former stockbroker We have expanded forum and investment manager membership significantly Heather McGregor, who over recent years and aim, London CPD events writes and broadcasts as Mrs through our programme of 4 december Risk, Equality and Opportunity – the Roles Moneypenny, entertained networking and engaging, for Government Finance guests with her amusing practitioner-led seminars Gresham College, Barnard’s Inn Hall, Holborn, EC1 outlook on life in and out of on relevant topics, to attract 12 december Transparency and the New Regulatory Guidelines for the City. The evening also more corporate finance UCITS-compliant ETFs saw forum Chairman Frank professionals to join us. In Deutsche Bank, 1 Great Winchester Street, EC2 Moxon, CF, Chartered FCSI, addition, we will continue to stand down after seven years. support the development of For further information about London CPD events, visit cisi.org/capitalcpd Frank set up the forum the new Corporate Finance To book: in 2005 and has overseen Diploma, which we believe cisi.org/eventscal [email protected] +44 20 7645 0777 its growth to a membership will help bring on the next of more than 570. He is generation of corporate succeeded as Chair by Debbie finance professionals.” Branch events Clarke, CF, Chartered MCSI, Sponsored by Mazars LLP, 4 december Football Tournament Head of Corporate Finance Gowlings and mergermarket, Yorkshire: Goals Soccer Centre, Redcote Lane, Leeds at Chantrey Vellacott DFK. the dinner took place at the Debbie has been a Deputy Naval and Military Club in 4 december FATCA Update (followed by drinks) Chair of the forum since London’s West End. South East: The Spa Hotel, Mount Ephraim, Royal Tunbridge Wells its inception. 12 december Christmas Drinks Reception Frank said: “It’s been a The corporate finance forum Birmingham & West Midlands: Metro Bar, 73 Cornwall Street, Birmingham great privilege to lead the meets next on 11 December, 12 december Christmas Drinks Reception forum and, among other when Tim Linacre, Chairman of Liverpool & North Wales: Baby Blue Bar & Grill, 17 Edward Pavilion, things, to see it play a key Investment Banking at Panmure The Albert Dock role in the development Gordon & Co, will address the 14 december Christmas Drinks Reception of the new joint ICAEW/ question: ‘Corporate broking: Manchester & District: The Living Room, 80 Deansgate, Manchester CISI Corporate Finance is the obituary premature?’ 15 january Bank of England Update Diploma exams. The Book your place now at Bristol & Bath: Brewin Dolphin, the Paragon Building, 32 Counterslip, Bristol support and engagement of [email protected] 15 january The Economy and Risk Management its professional members Yorkshire: Aviva Offices, Wellington Row, York is what keeps it vitalised The corporate finance forum is 25 january Annual Dinner and relevant to practising one of seven forums run by the Guernsey: Beau Sejour Leisure Centre, Amherst, St Peter Port, Guernsey corporate financiers, CISI. For more information to whom it affords the about forthcoming meetings, To book: opportunity to enhance visit cisi.org/pfs cisi.org/eventscal [email protected] +44 20 7645 0652
27 cisi news
events anniversary Twenty years US equities find favour Is it time for equities? of ethical issues That was the question discussed at the sixth As the Institute marks its 20th anniversary, annual Guernsey we delve into the S&IR archives to highlight an Investment Briefing, article from yesteryear and consider what has which was attended changed in relation to the issue covered. by more than 100 In March 1998, George Nissen, Chairman CISI members. of the Institute’s new Ethics Committee, The audience heard wrote about the importance of integrity from three speakers: within financial services, stating that “mere Jeremy Beckwith compliance is not enough”. MCSI, Incoming Chief He said: “One committee member captures Investment Officer at the difference between compliance and ethical London Wall Partners; behaviour well when he says: ‘Ethics tell you to Kevin Lyne-Smith, do the right thing, compliance tells you to do Global Head of Equities The sixth annual Guernsey Investment Briefing, held at the Old Government things right’. The City has, over the last decade, at Credit Suisse, and House & Hotel, St Peter Port, Guernsey got used to compliance. What is needed now is Robert Jukes, Global Strategist at “entertaining and thought provoking” and self-imposed ethical behaviour.” Collins Stewart. While they gave “speakers were highly knowledgeable Noting that, on the US Derivatives varying views, there was a marked and delivered coherent and compelling Exchanges, ethical education for dealers preference for US equities over those arguments, supported by a wealth of was compulsory, he said that the Institute from the beleaguered eurozone. relevant information”. was looking to promote such training in the There was positive feedback from securities industry. attendees at the event held at the Old If you missed out, the full presentation Requesting readers’ views, he asked: “But Government House & Hotel in St Peter is available to watch on CISI TV at can people be trained to behave ethically Port, which was organised by the CISI’s cisi.org/cisitv. Watching the presentation or is that grasping at sunbeams?” Guernsey branch. Comments included: will count towards CPD hours.
A modern-day view appointments Andrew Hall, CISI Head of Professional Standards, says: “One of the objectives of the Institute when it was established was ‘to New branch President for Guernsey develop high ethical standards for practitioners in securities and investments and to promote Julian de G. Parker, having started his career at a clearing such standards in the UK and overseas’. This Chartered FCSI, has been bank. He is a member of the Guernsey remains the case today, even more so than appointed President of the Association of Compliance Officers, a when it was first written. CISI’s Guernsey branch. body he chaired for ten years, and is “Since the publication of George Nissen’s Julian has worked for a former President of the Bankers in article, industry attitudes have been on a Generali since 2003 and Guernsey, serving on its committee rollercoaster, from the days when ‘my word Julian de G. Parker, heads up the Compliance for 17 years. is my bond’ informed the behaviour of many Chartered FCSI team across its companies Outside work, Julian is busy in the practitioners – not simply London Stock regulated in Guernsey, as well as for a community with various charities. He Exchange members – through the beginning number of other jurisdictions, including is also a councillor – douzenier – for of this century, when apparently anything was Hong Kong and Singapore. the parish of St Pierre du Bois, and acceptable, to post-crash, when ethics are With more than 30 years’ experience co-ordinated successful celebrations again to the fore and at all levels, from in financial services, Julian has worked in that locality earlier this year to mark the newest recruit through to the Chairman. in private banking on the lending side, the Queen’s Diamond Jubilee. “Over this period, the Institute has been consistent in its message and, in pursuit of this, has developed a range of tools to help members to recognise ethical dilemmas, football the first stage in learning how to respond to them. These include a series of Integrity at Team scores second consecutive tournament victory Work books, IntegrityMatters, an online workshop and test, and an Integrity at Work Pershing came out victorious for the Liverpool & North Wales President Jon interactive presentation. second year running in the annual CISI Walker, Chartered MCSI, said: “Ten teams “While the CISI is not seeking to ‘train people Liverpool & North Wales five-a-side from across the region took part in what to behave ethically’, since most people do so as football tournament. turned out to be the highest standard of a matter of course, we are seeking to help our Led by captain Neil Lester ACSI, football we have seen in the tournament’s members to navigate their way through what Pershing secured a hard-fought 3-2 win four-year history.” can be tricky situations, which inevitably crop against Investec Wealth & Investment in Jon, Associate Investment Director at up from time to time.” the final. Investec’s Danny Smith had the Investec, lined up for Invesco Perpetual, consolation of being the tournament’s top the event sponsors, as its team was a For further information, visit cisi.org/ethics scorer, netting 12 times. player short.
28 November/December 2012 cisi.org
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Answers to the quiz from page 10: 1:B, 2:A, 3:D, 4:B
29 people Paperback writer
A new chapter has opened for Len Warwick CBE, is Chairman and Compliance Director at Warwick Butchart Associates, a firm Chartered FCSI – as a fiction writer.Lora Benson reports of independent investment and financial advisers in Cheltenham, Gloucestershire, having enjoyed a outside their farmhouse in 1922. Len says: “It that he founded in 1981. distinguished 50-year career reveals how the secrets of the past play on to the He has been at the forefront of key in financial services, Len future. It is about deception caused by silence developments within the financial services Warwick is still relishing and how a failure to speak spoils relationships.” industry. Between 1989 and 1996, he was a new challenges. He spent three years researching and writing director of the Securities and Investments He has achieved his the novel, mainly early in the morning or late Board (SIB), a precursor to the FSA. In 1996, Len Warwick, ambition to publish a novel, at night. He says: “I might scribble down some he was awarded a CBE in the Queen’s birthday Chartered FCSI The Unspoken, which is set in ideas on a train journey. Sometimes, rarely, I honours for services to financial regulation. Ireland over a period of eight decades. Len says: found I could not write at all. I felt I had come In more recent times, Len was a founder “I’ve written for many financial and business to a dead end and, on those occasions, I just director of the Association of Independent publications over more than 30 years, including walked away from it for another day. Financial Advisers. He says: “I’m pleased with my first book,Making a Difference, which was how my book turned out and have received a personalised view of the life-assurance some very complimentary comments on my industry. However, for some time I had “There has to come a point website from people who have read it. wanted to write a novel.” when you say ‘enough is “I would like to publish another novel He tapped into his personal passions as and have got a couple of ideas, including for inspiration for the book – a love of Ireland and enough’, and ‘this is it’” a sequel to The Unspoken. I also have a great its history and delving into the Irish roots of passion for football and the history of the both himself and his wife, Rosaline. “I learned that whatever I wrote could be game, and have been told that I should use Four generations ago, Len’s ancestors improved upon,” he continues. “It was not my knowledge to produce a book.” lived in Ireland before moving to north-east unknown for me to be constantly editing, England. Rosaline’s parents were from Cork rewriting or moving whole sections into The Unspoken is available and Westmeath. “While the story is entirely another part of the book. There has to come at leonardwarwick.co.uk and fictional, it does draw on real-life people for a point when you say ‘enough is enough’, and through booksellers’ sites some of the characters, on locations with ‘this is it’. I shudder to think what it must have which I am familiar from our frequent visits, been like when Dickens wrote everything by Got an interesting hobby? particularly West Cork, and on the country’s hand. Thank goodness for ‘cut and paste’!” Contact Lora Benson with your history from its civil war to the present day.” The golden rule that Len followed story at [email protected] The book is based on the cause and throughout the process, he says, was: “never If it is published, you will receive repercussions of the shooting of two brothers interrupt or interfere with the day job.” That job £25 of shopping vouchers.
Len Warwick and wife Rosaline enjoy Ireland’s scenery
30 November/December 2012 cisi.org