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2. Market
Review
Forex
Review
Regulatory
Update
European
Review
by Jonathan Sudaria,
Dealer at Capital Spreads
by Alfonso Esparza,
Senior Currency Analyst,
OANDA
by Deborah Prutzman,
CEO, The Regulatory
Fundamentals Group
by Patrick Artus,
Chief Economist
at Natixis
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4. PPAAYYMMEENNTTSS
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OFFSHORE REVIEW
RROOUUNNDDTTAABBLLEE
DDEEBBTT RREEPPOORRTT
AASSSSEETT AALLLLOOCCAATTIIOONN
DERIVATIVES
CONTENTS
MARKET LEADER
OPINION
IN THE MARKETS
COVER STORY
THE BIG DATA CONUNDRUM ..........................................................................................................Page 4
There’s so much more to data management than meets the eye. Not least the
geostrategic implications of advancements made by different countries in the
race to develop hardware and software that can compute and analyse billions of
bits of information. Who will lead and who will follow in tomorrow’s
supercomputing world and what are the implications for institutional investors?
DEPDEPARRTMENTSTMENTS
REGULATION
SPOTLIGHT
2 N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
ASSESSING THE LONG TERM IMPACT OF QE ...............................................................Page 11
Is Keynes on the ascendant; or will there be a return to monetarism?
WHAT NOW FOR FUND ADMIN?.....................................................................................Page 14
Ian Kelly looks at the new business dynamics amid stories from around the markets.
WHY REGULATORS ARE LOOKING AT CONDUCT RISK? ...........................................Page 18
Michelle Bedwin, senior consultant at CCL explains the dynamics
COMPLIANCE IN BANKING MEANS MUCH MORE THAN FAIR PLAY ...................Page 20
LOC Consulting’s Rob Norton-Edwards explains why banks must now play fair
REGULATION RECALIBRATES ALTERNATIVE FUND ADMINISTRATION...................Page 22
Bill Prew, CEO INDOS Financial, looks at the cost of regulation on securities services
FIT FOR PURPOSE DERIVATIVES WORKFLOWS ............................................................Page 23
Steve Grob, director group strategy at Fidessa, on the search for operational efficiencies
THE DAWN OF THE AGE OF SEPA ..................................................................................Page 26
Deutsche Bank’s Andrew Reid assesses the opportunities in the post-SEPA landscape
THE IMPORTANCE OF MANAGEMENT ACCOUNTABILITY..............................................Page 28
Peter Brown, senior consultant at CCL explains the regulator’s expectations
THE IMPACT OF MARKET REFORM IN KAZAKHSTAN ......................................................Page 52
David Simons reports on the coming oversight of asset management.
STRESS TESTS: A CATALYST FOR BUSINESS TRANSFORMATION? ......................................Page 53
Rohit Verma, Oracle Financial Services, looks at ways for banks to enhance overall performance
THE IMPACT OF A LACK OF FORMAL STANDARDS IN REPORTING ..........................Page 29
Phil Matricardi and Adam Kott explain the need for a utility for data transformation
SPEEDING THE CONVERSION OF NON-BELIEVERS ..............................................................Page 31
Paul Latronica of Advent Capital Management outlines the pros and cons of convertibles
BOND INVESTORS FOCUS ON TOTAL RETURNS ..................................................................Page 32
How bond investors will have to deal with diverging central bank policy
TACKLING THE DECLINE IN BOND MARKET LIQUIDITY ..................................................Page 34
Why the secondary bond market needs stakeholders to contribute liquidity
NEW TRADING VENUES HOPE TO COALESCE LIQUIDITY................................................Page 35
Lynn Strongin Dodds on the evolution of the electronic fixed income landscape
T2S: IMPLICATIONS FOR THE POST TRADE LANDSCAPE..................................................Page 38
Is the ECB’s settlement platform a panacea for Europe’s post trade inefficiencies?
TRADING TECHNOLOGY IN A TIME OF MARKET CHANGE............................................Page 54
The inter la of market chan e and technolo ical innovation in the Russian market
GUERNSEY’S ENDURING FUND APPEAL ..................................................................................Page 49
How the jurisdiction is leveraging its diversified appeal for asset managers
Market Reports by FTSE Research..........................................................................................................Page 62
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 2
8. 6
systems) and Germany (26 systems).
For the fourth consecutive round,China’s
massive Tianhe-2 supercomputer,
otherwise know as“MilkyWay-2″,retained
the top spot as the world’s fastest super-
computer. Here’s the techy bit: Tianhe-2,
developed by China’s National University
of Defense Technology (NUDT,) can
operate at 33.86 petaflops per second
(Pflop/s). In other words, it can compute
33,860 quadrillion calculations per second,
at a cost of approximately $390m to build.
It’s also big; comprising thousands of Intel
Xeon E5-2692v2 12C 2.2GHz processors.
The project was sponsored by the Chinese
government’s 863 High Technology
Programme – an effort to make the
country’s hi-tech industries more compet-
itive. HP has the most supercomputers on
the list, with 179 and IBM has the second-
most with 153 systems. When it comes to
processors,though,Intel dominates.85.8%
of the supercomputers on the list use Intel
processors and 25 use Intel’s Xeon Phi co-
processors, including theTianhe-2.
The US Department of Energy hopes
its computers will be up to three to five
times faster than Tianhe-2; though it has
some way to go. The Titan computer,
installed at the Department of Education’s
Oak Ridge National Laboratory, is the
number two system in the top500, but
‘only’offers a performance of 17.59 Pflop/s.
The US also has the third ranking
computer Sequoia, which is installed at
the Department of Energy’s Lawrence
Livermore National Laboratory,with a per-
formance of 17.17 Pflop/s, while Japan’s
K computer ranks fourth.
It is unlikely however, that China will
readily cede its dominance. Already, the
National Supercomputer Center in
Guangzhou in south China,whereTianhe-
2 is installed, is reported as saying it is
close to installing an upgrade to increase
the system’s speed to over 100 Plops/s
So there’s a lot more hanging on Energy
Secretary Ernest Moniz’s statement that
the department was investing in "trans-
formational advancements in basic
science, national defense, environmental
and energy research." Clearly the invest-
ment is laying the groundwork to leapfrog
China in a field often linked to national
security and economic competitiveness.
It won’t happen overnight. Supercom-
puting technology has a long lead time.
Installation work on the two supercom-
puters is not expected to begin until 2017.
Beyond their sheer scale, the new
machines will require new technologies to
support them and to provide them with
juice in the race to solve tough scientific
problems more quickly.
While it will take time for the benefits
of super-computing to trickle down into
the markets, the benefits for the global
financial community are manifold.Super-
computers will help both in the super rapid
and safe encryption of data,with attendant
implications for theoretical issues such as
‘ownership’of assets or securities.
An early pointer as to how this might
evolve is highlighted by the Bitcoin market.
Often called digital currency, a bitcoin is a
long string of computer code protected by
a personal key which provides ownership
and security, which can be downloaded.
The protocol governing the software
controls both the rate at which bitcoins
are issued (or downloadable) and the total
number of bitcoins that can be produced.
Most projections say that the last bitcoins
will be mined around 2140 – that might
be optimistic as computers become more
advanced, but you get the gist: it is ulti-
mately a limited resource, which
proponent of bitcoins say only increases
their values.
Bitcoins are the current modern
construct; a digital currency based on Block
Chain technology. Block Chain technology
also appears to have applications in the
selling of assets such as cars, in the pro-
duction of passports and more secure bank
accounts.It also has implications in the as-
signment of irrevocable numbers attached
to tradable securities: once you buy the se-
curities the numbers are attached only to
the buyer, and therefore ownership is in-
disputable.Once the securities or assets are
sold, the numbers related to the asset
change and it becomes something else
entirely.
Supercomputers will also help regula-
tors make more sense of complex money
movements and the numbers generated
by technology such as Block Chain. At
some point in the future, the Big Data
world that regulators will inevitably inhabit
will be made manageable by advanced
computer systems that can track and
monitor asset ownership,trading patterns,
the movement of money,credit trends and
anomalies and also generate complex pre-
dictive models to manage Black Swan
events. The world can only wait on the
imagination of developers to apply
quantum based computing models to the
question of security around ownership of
assets, trading and identity.
The race to the top
Over the immediate term: say the next five
years,market evolution will largely depend
on the race to the top in terms of
computing ability. Although the US in-
vestment in super computing is clearly on
a growth trajectory, any leapfrogging of
the Chinese won’t happen overnight.
The US is however upping its game.On
December 11th, both the Senate and
Congress passed the Cybersecurity En-
hancement Act, which will standardise
best practice in information networks, as
well as codify government approaches to
research and developments. The Act
however does not legislate for government
funding, thereby encouraging private
sector involvement.
If anyone thinks that the slowdown in
the Chinese economy’s rate of growth will
somehow give time to the US to overtake
it, think again. Slower growth in China in
the race to the top is also something of a
chimera. Lower growth rates are offering
the Chinese government time to retool
the economy.In turn,this means that tech-
nology-enabled offerings will rise in
prominence, for two reasons: it offers the
promise of improved workforce produc-
tivity, and it dovetails well with the gov-
ernment’s strategic investment in the
sector,which is designed to foster sustain-
able development.In other words,China’s
taking time out to ensure that the next
phase of growth in both the economy and
technology is sustainable over the longer
term. It will require massive investment,
and it won’t just be local.Cross-border in-
vestment from China to overseas markets
is estimated to grow to around $2trn (from
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
COVER STORY
SUPERCOMPUTINGANDTHEEVOLUTIONOFINVESTMENTMARKETS
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 6
9. But a single VaR number is not the whole story
Excerpt
+44 20 7125 0492
measure itmeasure itmeasure itmeasure itmeasure itmeasure it
understand itunderstand itunderstand itunderstand itunderstand itunderstand it
apply itapply itapply it
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 7
10. 8
$500bn or so today) in value by the
Rhodium Group.
Taking a more localised view, the
markets have not been slow to embrace
the changes which technology allows.
Moreover, it looks over the long term to
have transformative effects.The banking
industry has not been slow to prepare
for change and right now, Goldman
Sachs provides an interesting paradigm
in terms of how some elements in the
market might evolve.
In late November this year Kensho, a
provider of real time computing systems,
announced that Goldman Sachs led
a $15m investment round in the firm and,
at the same time, entered a strategic part-
nership to use Kensho's real-time statis-
tical computing and analytics technology
across the firm. "Our unique partnership
with Kensho is an extension of our overall
strategy of using and investing in new
technology which allows us to deliver
insights to our clients. We are excited to
work with Kensho to develop user-friendly
big data analytics tools which can be put
into the hands of our client facing teams,"
explained Tony Pasquariello, co-head of
North American Equity derivatives sales
in the bank’s Securities Division on the
announcement of the investment.
Investment bank Goldman Sachs is now
the largest strategic investor in Kensho,
with RanaYared, managing director in the
Securities Division at the bank, joining
Kensho’s board of directors. Don Duet,
global co-head of Goldman Sachs' Tech-
nology Division, will join Kensho's
Advisory Board. It is an important move
for the bank as it seeks to move into more
advanced, accessible, real time analytics.
For its part Kensho is a next generation
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
COVER STORY
SUPERCOMPUTINGANDTHEEVOLUTIONOFINVESTMENTMARKETS
Tools to cope with the increased
process complexity not to mention
outsourced services - are particularly
in demand, as they help to manage
the relationships not just with clients
but also with trading partners and
other counterparties. Reporting,
valuation timing, trade accuracy and
estimated NAV production is also
occurring in quicker cycles, requiring
systems that can work within a daily
reporting model.
There is an opportunity to improve
the flow of this information across both
the applications and the myriad of de-
partments who manually filter and
enrich the data as input to the next
process. To date, investment managers
have typically tackled this issue by
asking the application vendor to build
localised workflow into their application.
Often-overlooked questions are: Does
the client on-boarding workflow
integrate with the dealing workflow -
identifying trade exposures and invest-
ments in high risk instruments or
markets, during the customer profiling
process?;Are there gaps that will create
a potential operational risk or slow down
the overall business process?; and Is
there a need for an end-to-end business
process management capability that
sits above the individual application
workflow, providing a full front-to-back
office viewpoint?”
Departmental silos are a common
problem for investment management
firms. For example, the client on-
boarding department receives funds
that must be invested within an agreed
timeframe. Funds must be deposited
and cleared, possibly in conjunction
with an external banking system.
Once funds are available, the dealing
team must be notified. The on-
boarding team may then need to com-
municate with the client to confirm that
their instructions have been carried
out. These silos create inefficiencies,
costing time and money.
The search for efficiencies
In investment management firms, there
is a wealth of data circulating and many
touch-points with that data. One
common problem is that the operators
touching the data are not always aware
of precisely how colleagues upstream
have manipulated that data or the de-
pendencies other departments have on
their output. There is a fundamental re-
quirement to optimise the process,
identify the key tasks within it and feed
information on the status of those tasks
both up and downstream.
In this way, investment managers
can manage client expectations for
services such as reporting as well as
managing the ‘pinch points’ or bottle-
necks in the middle and back offices
that can leave some staff under
utilised one week then overwhelmingly
busy the next. For example, the
process work done in the middle office
is often compressed in terms of time
available, due to delays in the back
office or pressures from the front.
Regulators and institutional clients
are also increasingly looking at the
operating and governance controls of
firms. Although most firms have good
controls in place, it is often difficult to
visualise them as they consist of a
mixture of manual and automated
processes including; individual appli-
cation controls, email notifications,
spreadsheet logs and shared
Against a backdrop of increasing regulation and investor due diligence, investment managers face an
analytical systems proliferation, exacerbated by cost, data management and operational risk issues.
Meanwhile, the costs of supporting trading and distribution have gone up just as fees have gone down.
As a result, more firms are considering their options such as whether to outsource their middle and back
offices. Ian Hallam, CEO, 3i Infotech (Western Europe) outlines the options.
‘INTELLIGENT’ BPM: EXITING THE SINGLE APPLICATION SILO
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 8
13. T
he Federal Reserve, finally called
time on its $4.5trn bond-buying
programme at the October Federal
Open Market Committee (FOMC), the
central bank’s policy setting meeting,
bringing to a stop six years’ worth of
monetary easing.Although the last tranche
in its bond buying programme would be
finalised at the end of October, the central
bank says it remains committed to its
strategy of keeping interest rates at a
record low level (between zero and 0.25%)
for the foreseeable future. Actually, the
words used by the Federal Reserve chair,
JanetYellen, in a subsequent press briefing
were“a considerable time”.
Once US employment figures began to
rise, it was only a matter of time before
the Federal Reserve tightened monetary
policy.The monetary policy committee ac-
knowledged a “substantial improvement
in the outlook for the labour market,”and
had grounds to believe that there was“suf-
ficient underlying strength in the broader
economy to support ongoing progress
toward maximum employment in a
context of price stability.”
In the end, quantitative easing ended
with more of a hint of a whimper rather
than a bang. A less than fitting end
perhaps for a programme that was
deemed hugely radical, when it was
launched back in December 2008
(designed to help support what looked to
be a fast collapsing house of cards). The
beginning of the end actually came in
January this year, as the underlying US
economy looked to be brightening and the
central bank began to reduce the volume
of its bond purchase from $85bn a month,
down to $15bn.
“Financial markets continue to project
a much shallower path for US interest rates
than that indicated by the Federal
Reserve,”suggests Jeff Keen, head of asset
allocation and lead manager of the
Waverton Global Fund and the Waverton
Sterling Bond Fund at London-based
boutique investment firm Waverton.“We
think this is symptomatic of a general
complacency towards the potential for
higher rates over time. In our view, just a
slightly more optimistic view of the global
economy, or perhaps less focus on
deflation risk, could lead to a much higher
level of expectations for interest rates
across the developed world. This would
represent a major headwind for the fixed
income asset class and therefore we
recommend a highly strategic approach to
this part of clients’portfolios,”he adds.
US markets reacted to the Fed’s news,
but nowhere near levels that suggested
that they were shocked by the decision:
after all, warming US economic data has
been drip feeding into the news since
August. No surprise perhaps, that the
same day of the announcement, the Dow
Jones Industrial Average dipped by only
0.2%, and the S&P500 by 0.5%.
The success and benefits of quantitative
easing are now widely debated, particu-
larly as the People’s Bank of China, the
European Central Bank and the Bank of
Japan are seemingly on a round of
monetary easing.Will they, and would the
US economy, be significantly worse off
without it? According to John Mcleod at
Citigate, yes.“The broad-based easing of
financial conditions it created and, equally
important,the signal it sent to households,
firms and investors of full commitment to
do whatever it takes to achieve the objec-
tives of the Fed’s mandate, contributed
substantially to first stabilising and later
reviving the US economy,”he avers.
However, for Mcleod, it is impossible to
disentangle the QE-effect from other
important policy measures that were
taken, such as banking sector recapitali-
sation, stress-tests and the fiscal stimulus
of 2009-2010.“QE was an important pillar
of the policy mix that enabled the US to
significantly outperform most other
regions in recent years. None of the large
economic blocks in the developed world
can match the US performance. In terms
of GDP growth, the improvement in
labour market conditions and the stability
achieved in underlying inflation (expecta-
tions) since 2009,”he insists.
Even so, Mark Mobius, executive
chairman, Templeton Emerging Markets
Group, thinks that QE is something of a
misnomer, “typical of the euphemisms
common in financial circles,“ he states.
“Easing” really isn’t an accurate descrip-
tion—in actuality, it is about expanding
rather than easing. There was QE1, then
QE2, and finally QE3, the last version of
Whether you agreed with quantitative easing or not, now that the US Federal Reserve Bank has decided to
terminate its monetary easing programme after five years, one question is: did it do more harm than
good? Moreover, as the Bank of Japan, the People’s Bank of China and the ECB look to be on the brink of
expanding their own programmes, and Europe embarks on a distinctly Keynesian growth strategy – is the
left, rather than the right in Europe now dictating tomorrow’s economic policy?
Assessing the long term impact of QE
MEASURINGTHEVALUEOFQUANTITATIVEEASING
11F T S E G L O B A L M A R K E T S • N O V E M B E R - D E C E M B E R 2 0 1 4
MARKET LEADER
President of the European Central Bank (ECB) Mario Draghi
Photograph supplied by PressAssociationImages, September 2012.
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 11
14. 12
the Fed’s money-creation program. QE1
started in late 2008 in response to the US
sub-prime financial crisis, in the form of
a program to purchase government debt,
mortgage-based securities and other
assets primarily from banks which were
suffering from the decline of the value of
those assets. The original program was
set at $600bn, but the expected economic
recovery and ending of tight credit did not
materialise as expected. Hence, QE2 was
launched in 2010,and then two years later,
QE3, as policy makers became more and
more desperate to create the required
economic stimulus.”
Mobius thinks there have been winners
and losers in the QE circus. “The low
interest rates we see globally in many
markets now disadvantage regular bank
deposit savers and pensioners, while the
equity holders have generally benefitted
as the surviving banks have grown bigger,
and perhaps are now in the “too big to
fail”territory.”
Mobius is also aware of the long
standing Fisher equation (MV=PT),which
essentially posits the inflationary effects
of the creation and mobilisation of money.
“The savers who have suffered with low
interest rates could be hit with another
problem of high inflation down the road,”
says Mobius. “Although inflation has
generally remained low in the markets
where central banks have been engaging
in easing measures, many—including
me— believe that once the banks gain
the confidence to begin lending aggres-
sively again, inflation will likely rise.This,
of course is a double-edged sword.
Countries battling deflationary forces,
including Japan and the eurozone—
would welcome inflation. But the flip side
is that inflation can quickly spiral out of
control, and it can hit emerging market
economies particularly hard, as a higher
proportion of their consumers’budgets go
to basics like food and fuel,”he explains.
So what now? Ironically, while leading
the pack, the outlook for the US is not in
the major league. ING IM expects a shift
in earnings growth leadership in 2015
whereby US companies will see earnings
growth slow down while eurozone and
Japanese companies may see it accelerate.
Explains Patrick Moonen, equity strategist
at ING IM,“We expect a less US-centric
equity market next year due to a
slowdown in earnings growth and tighter
monetary policy, while equities in the
eurozone and Japan will benefit from easy
monetary policy and positive exchange
rate effects causing earnings growth
prospects to accelerate. Generally
speaking, corporates do have money to
spend, but at the same time we observe
growing differences between the valua-
tions of equities in the various regions.
Japan is our favourite because of its very
favourable valuation-growth trade-off.US
valuations are a bit expensive, although
certainly not in bubble territory. More
buybacks in the US would even offset
lower profit growth.”
Japan’s QE
The Bank of Japan’s recent move to inject
more money into the system has resonated
well with investors,posits MichaelWoolley,
client portfolio manager for Asia equity at
Eastspring Investments.“Regardless of [the
Bank of Japan] achieving its desired
outcome, this market-oriented approach
to policymaking will likely underpin
market sentiment and stock prices in the
near term,”he avers.
Woolley thinks the Japanese stock
market will benefit from a wholesale
increase in liquidity, as a result of easing
in central bank policy.“Japanese house-
holds hold 53% of their assets in cash
(compared to 15% in the US), and a 1%
shift from household financial assets into
domestic equities over the next five years
implies $150bn of new funds into
equities,” he says. Even so, he does not
rule out attendant market volatility.“This
year has been a case in point; market per-
formance and volatility has coincided with
short term focused participants respond-
ing to thematic macroeconomic news
flow, irrespective of company fundamen-
tals,”he adds.
However, continuing headwinds
hampering growth (created by public and
private sector deleveraging) are fading and
broad-based improvements in labour
markets are being seen, believes asset
manager ING. According to Moonen,
“Together with the recent fall in oil prices,
this should help global growth to re-ac-
celerate in 2015”.
Michael Hasenstab, executive vice
president and chief investment officer,
Global Bonds Franklin Templeton Fixed
Income Group, thinks the Bank of Japan’s
QE are indicative of not only how
important quantitative easing is to both
Japanese Prime Minister Shinzo Abe’s
“Abenomics” policy and his political le-
gitimacy, but also as a driver of Japan’s
domestic economy. “QE facilitates two
major dynamics: First, it funds massive
government indebtedness. Basically, the
Bank of Japan is now directly financing
the government, which is important in
Japan because the government is running
massive fiscal deficits on top of a huge
debt stock. At the same time, the pool of
assets domestically from the private sector
is shrinking because the current account
has moved basically from massive
surpluses to flat-like deficits at times,
while at the same time the population has
been aging,”he explains.
However, there is a caveat in that
Hasenstab maintains that Japan’s policy
motivation is very different from the mo-
tivation of QE in the United States or the
motivation of QE in Europe,“which are
not really about explicit debt financing.
Japan’s debt dynamics are more of an
explicit debt financing,” he avers. “The
other component of QE that we believe
is critical in Japan’s case is that it facilitates
pension fund reform.Pension fund reform
is important because changes in the
Japanese Government Investment
Pension Fund’s asset allocation mix
toward more domestic equities, global
equities and global bonds should allow
the return on the global pension fund to
increase, which is important to help offset
the higher inflation that retirees are likely
going to face”.
Pumping money into the economy and
changing the asset allocation mix of a
trillion-dollar pension scheme has had an
impact on Japan’s domestic asset prices.
Globally, it’s also very supportive, in our
view, because money is fungible. Money
that is printed in Japan doesn’t just stay
in Japan; it flows into other markets. So
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
MARKET LEADER
MEASURINGTHEVALUEOFQUANTITATIVEEASING
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16. 14
T
he clients of fund administrators are
operating in a landscape that would
have been unrecognisable just five
years ago. The immediate post-crisis
climate triggered a deluge of new regula-
tion that continues to roll around the
globe. From FATCA to Dodd-Frank to
AIFMD and beyond,the volume and com-
plexity of data that funds are expected to
capture and report to regulators and
investors alike has ballooned. Regulation
aside,funds are also facing a more complex
landscape as ongoing globalisation opens
up a variety of new markets, all with their
own idiosyncrasies. And all the while,
competition for capital has become ever
more intense.
This changing environment has also
had a transformative effect on fund ad-
ministrators themselves.The upshot of all
this has been the rise of a new breed of
fund administrator.While accurate,quality
outsourced administration remains at the
heart of the business model,some admin-
istrators are taking advantage of their
newfound position to take on a greatly
expanded role. Unlike the role of third
party administrator (taking a bothersome
task off a fund manager’s plate),these new
roles involve actively adding value to the
client’s proposition.
One area where fund administrators are
starting to actively add value is in the area
of investor communications. Given the
trove of data administrators sit on,the best
administrators are perfectly placed to help
a fund ensure that its investors receive the
information they need. This means
providing it in the relevant format, and
allowing the investor to access in-depth
information about their investments on a
far more regular basis,tailored to their own
particular requirements.
The fact that modern fund administra-
tors now need to be absolutely on top of
the precise, technical details involved in
the new regulatory environment – details
that are ever shifting thanks to the ebb
and flow of global regulation – also puts
these providers in a perfect position to
offer wider compliance services.Given that
regulatory reporting now forms such a
crucial and large part of the wider admin-
istrative workload, administration and
compliance practices have never been
closer.
Advice-based service
More broadly, the steady accumulation of
expertise and data within the fund admin-
istration sector means that the best firms
are able to take an increasingly advice-
based, consultative role – helping
managers to improve their businesses and
tackle any challenges that may arise for
funds with unusual needs.The ideal rela-
tionship between a fund and its adminis-
trator is now an active partnership. It is
not an unthinkable leap to see this rela-
tionship develop into an expanded role
and the wider provision of back-office con-
sultancy.
Additionally, as the role of fund admin-
istrators expands, specialist knowledge of
the private equity and real estate industries
becomes ever more important.The services
described above will, as always with the
asset class, have to be modified to suit the
idiosyncrasies of the sector. Regulation
presents a good example: the AIFMD
places very different demands on private
equity and real estate funds than it does
on other alternative asset classes.
Given the distinct challenges that are
now being faced, managers are increas-
ingly looking for administrative partners
that understand the particularities of their
business model inside out.
The industry will continue to evolve in
this direction.The expertise and experience
of the best fund administrators mean that
they are well placed to transcend the lim-
itations of pure administration,and instead
offer funds a wide range of services. As
the market environment continues to
become more complex, demand for these
additional services will only increase.
So we are fast reaching a point where
the name ‘fund administrator’ no longer
paints the full picture.Fund administration
is no longer a simple facilitator of back-
office processes. Today’s service provider
is a new breed of specialised functions that
will come to fill an indispensable niche
within the private equity and real estate
industry. n
In recent years there has been a clear
upward trend in fund managers success-
fully attracting more capital for West
Coast-focused vehicles, reports Preqin,
with the aggregate capital raised by these
funds increasing year on year from
$0.8bn raised by 11 funds closed in 2011
to $2.7bn raised by 18 funds closed in
2013. 2014 so far has seen 11 West Coast-
focused private real estate funds reach a
final close, having raised an aggregate
$1.6bn in capital commitments.
Some $4.3bn has been raised by
private equity real estate funds focusing
solely on the West Coast since the start
of 2013, compared to $2.6bn throughout
2011 and 2012. In recent years there has
A step change in the volume of reporting means that the best
administrators are now a central hub for a vast array of important
information from multiple sources – information waiting to be
turned into value. Moreover, the increase in complexity combined
with the rising importance of technology and automation means
that these days leading administrators see the value in investing
heavily in higher intellectual capital. In many cases fund
administrators are no longer the bean counters of old. Ian Kelly,
chief executive officer of fund administrator Augentius explains
the new dynamics.
What now for fund admin?
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
SPOTLIGHT
REDEFININGSECURITIESSERVICES
West Coast US real
estate funds see surge
in fundraising
Uptick in US West Coast
investment
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 14
18. 16
been a clear upward trend in fund
managers successfully attracting more
capital for West Coast-focused vehicles,
with the aggregate capital raised by these
funds increasing year on year from
$0.8bn raised by 11 funds closed in 2011
to $2.7bn raised by 18 funds closed in
2013. 2014 so far has seen 11 West Coast-
focused private real estate funds reach a
final close, having raised an aggregate
$1.6bn in capital commitments.
Eighteen private real estate funds
focused on the West Coast closed in 2013
raising an aggregate $2.7bn, the highest
amount of capital raised by West Coast-
focused real estate funds in any year in the
period from 2007 to date. Some $1.6bn
has been raised by West Coast-focused
real estate funds closed so far during 2014,
accounting for 41% of capital secured by
US regionally-focused funds.This propor-
tion has increased each year since 2007
when it represented just 2%.
A significant 76% ofWest Coast-focused
real estate funds closed from 2013 to
October 2014 have met or exceed their
fundraising targets,compared to 38% that
closed between 2011 and 2012. At least
85% of West Coast-based managers told
Preqin that competition for value
added/opportunistic assets had increased,
while 58% said so for core assets, demon-
strating the challenging environment fund
managers face at present.
In the meantime, 46% of West Coast-
based real estate fund managers expect to
deploy more capital in the year ahead
compared to the last 12 months,while 46%
plan to invest the same amount of capital.
As well, 22 West Coast-focused real estate
funds are currently in market seeking an
aggregate $3.5bn, compared to 19 funds
and $3.7bn as of October last year.
Almost a third (32%) of West Coast-
based real estate investors have assets
under management of more than $1bn.
On average, West Coast-based investors
are under-allocated to the real estate asset
class.These investors maintain an average
target allocation of 9% of total assets to
real estate and an average current alloca-
tion of 8%, suggesting that they are likely
to place more capital in the asset class in
the coming year. n
T
rading in investment products and
leverage products on European
financial markets fell slightly in the
third quarter of 2014. At €26.2bn, the
trading volume was down one percent in
comparison with the previous quarter.
However, exchange turnover was up 9%
compared with the same quarter of 2013.
This is one of the findings of an analysis
by Derivative Partners Research AG of the
latest market data collected by the
European Structured Investment Products
Association (EUSIPA) from its members.
The members of EUSIPA include: Zer-
tifikate Forum Austria (ZFA),Association
Française des Produits Dérivés de Bourse
(AFPBD), Deutscher Derivate Verband
(DDV), Associazione Italiana Certificati
e prodotti di Investimento (ACEPI), the
Swedish Exchange Traded Investment
Products Association (SETIPA), the Swiss
Structured Products Association (SSPA)
and the Netherlands Structured Invest-
ment Products Association (NEDSIPA).
The trading volume of investment
products on the European exchanges in
the third quarter was €9.1bn, 35% of the
total turnover. Exchange turnover was
down 3% compared with the previous
quarter and by 10% compared with the
third quarter of 2013.
Exchange turnover in leverage products
in the third quarter was €17.1bn, repre-
senting 65% of the total turnover. The
trading volume of warrants, knock-out
warrants and factor certificates was almost
unchanged in comparison with the
previous quarter. However, year on year
the volume jumped 21%.The current low
interest rate environment has set off a
search for yield, leading to a resurgence of
high-yield products. Leverage also has
rebounded after initial signs of credit-
related deleveraging by households and
corporates in the wake of the financial
crisis. While increasing leverage can signal
returning confidence in the financial
system, according to IOSCO’s recent Se-
curities Market Risk Outlook report, it
could also“become a source of potential
risk when interest rates increase.This is of
particular concern in the case of leveraged,
complex and often opaque products and
constructions such as CDO squared”.
At the end of September, the
exchanges of EUSIPA member countries
were offering 492,753 investment certifi-
cates and 702,216 leverage products.The
number of products listed grew by one
percent overall in comparison with the
second quarter. The number of invest-
ment products listed was up 9% in com-
parison with September 2013, while over
the same period the number of leverage
products increased by 10%.
Issuers released a total of 596,647 new
investment products and leverage
products in the third quarter of 2014 – an
increase of 10% in the number of new
products in comparison with the previous
quarter. Investment products accounted
for 23% of the new issues, with 138,459
new securities. Leverage products
accounted for 77% of new issues, with
458,188 of new securities.
Market volume in Austria, Germany
and Switzerland at the end of September
was €251.9bn, about the same as in the
previous quarter, but as much as 11%
higher than in the third quarter of 2013.
At the end of the third quarter of 2014,
the market volume of investment
products was €234.4bn, a decrease of
2% in comparison with the end of June
2014, but an increase of 7% year on year.
At €17.4bn, the outstanding volume of
leverage products was up 35% in com-
parison with the previous quarter n
After a promising beginning, trading volumes on European
exchanges dipped slightly in the third quarter of the year. Even
so, Europe’s exchanges generate turnover of €26.2bin Q3 2014.
A return for Europe’s
leveraged product market?
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
SPOTLIGHT
THECOMEBACKOFLEVERAGEDPRODUCTS?
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 16
23. £350m agreement with Etihad would
shield it from financial sanctions. Even
then, FIFA ruled that although the deal
was essentially sound, some of the club’s
secondary agreements weren’t of a fair
market value.
The clarity and capacity challenge not
only manifests in having to understand
what the rules mean, but what the team
responsible for turning reams of regulation
into a set of delivery requirements can
achieve. Given that building a solution to
ensure compliance can take several
months, they are often forced to jump the
gun and start building ahead of final
technical standards being published.
A significant challenge is that it is often
the case that a statement about a rule is
issued, but the technical details of what
has to be done are not documented before
organisations start to build a solution.
There are many instances where draft rules
are published for public review and debate
close to the intended implementation date.
They are often evaluated by several
different industry bodies with banks,
insurance companies and asset managers
amongst their number (each with different
agendas), who evaluate different aspects
of the rule depending on their specific
market focus. Also, the approach desired
by larger institutions can often directly
affect the final published rule.
Not only is there the potential for various
interpretations,but also it is almost certain
that the final technical standards will be
revised in several areas. Solutions being
built to accommodate regulatory change
may or may not be heading in the right
direction. Either way, there is a good
chance that they are not going to make
the grade after final technical standards
are published. Organisations then have to
back track, undo and rejig their responses.
Joining the dots
The scale and complexity of regulatory
change is overwhelming. Global banks,
even if they are centred on just one or two
locations,might have 80 offices around the
world, so compliance calls for a global
approach. This blurring of the lines of ju-
risdiction contributed to the global financial
crisis (it wasn’t just sub-prime mortgages).
With so much information moving
around, in so many places and involving
so many people,nobody really knew what
was where, what rules applied, or what
underpinned those trades or products,and
nobody could explain or unwind how the
trades went through.
As a result, banks have increased their
focus on compliance and are making great
efforts to tackle the challenges. This is
evidenced in part by the fact that the chief
compliance officer today is quite likely to
be a board member.
A high level of investment in compli-
ance can backfire.The danger is that large
compliance departments become divided
into sub-teams and end up working in
siloes, each with its own specific remit.
These teams might not necessarily be
talking to each other directly to under-
stand cross-implications, because the or-
ganisation is too big. Joining the dots in-
ternally between compliance teams
becomes an issue in the same way that
organisations must join the dots for com-
pliance across different jurisdictions.
The protection teams that oversee the
compliance department in banks have also
grown too large and unwieldy to be as
agile as they should. Compliance is only
one aspect of three in the protection team
equation.The second element is the legal
team, who look at the rule and solution as
interpreted by the compliance team to
ensure its basis is legally sound. The third
component is the public policy team,
setting and enforcing house position in
terms of messaging, and how the bank
interacts with regulators, competitors,
markets and clients globally.
Put simply,all three elements of a bank’s
protection team have to be in lock step.
There are three key steps to achieving this.
It includes understanding what the rule
means. This means entrusting the task to
someone with an end-to-end understand-
ing of the rule and who can see the context
of how it applies to the organisation. The
second admonition is to address a rule at
the process level. Processes cut across de-
partments, so assess where the process is
compliant and where the process is
deficient and what needs to be amended
or indeed removed to make it compliant.
Third, change should be implemented in a
structured way. Firms should formalise the
steps it needs to take in order to change
the process, and identify the systems and
the people in the organisation that operate
that process to ensure change is delivered
across siloes
Finally,it is critical to get the right people
on board to run compliance programmes
as a formal project. It is already apparent
that non-compliance can result in severe
penalties and, as new regulations take
hold, these look set to increase. Implica-
tions for the business include monetary
sanctions and fines, bad press, and loss of
trading and banking licences – not to
mention certain executives being placed
under personal sanctions, such as fines,
removal from office and prison terms or
indictments.
Upping the game
The FFP rules in football have been a boon
to those who prepared for them and
adapted accordingly and an abrupt wake-
up call for the clubs who ignored them.
Last year, PSG had a net spend of almost
£100m on players, this year it has had to
be more ‘prudent’ (although this did not
prevent the reported £50m outlay to
acquire Chelsea’s David Luiz).
Similarly Manchester City agreed to limit
its spending to £49m (a 33% cut year on
year) as a result of the fine and a deal with
FIFA. The two clubs are among 76 under
investigation for breach of the fair play rules.
Meanwhile, Chelsea cut their spending in
2012 after years of heavy losses, leaving
them free from sanctions and able to deal
in the transfer market this year.
Although the world of finance is perhaps
a more complex and nuanced environment
than that of football,it is clear that in many
respects compliance presents the same
challenges: understand the rules; know
how they impact you; and how you can
prepare to move forward with the new
framework in place such that a firm’s
business can focus on its clients and
markets,rather than just trying to stay one
step ahead of the regulators. n
21F T S E G L O B A L M A R K E T S • N O V E M B E R - D E C E M B E R 2 0 1 4
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24. 22
B
asel III will have an enormous
impact insofar as it imposes capital
and liquidity requirements on
banks, which in turn will result in prime
brokerage arms being less willing to
provide financing to hedge funds.This is
going to lead to hedge funds paying
higher costs to obtain their desired level
of financing in what will hurt returns
even further.
As a result of all of these rules, some
prime brokers and fund administrators
have been curtailing the number of client
relationships they have to refocus their
efforts on larger, more profitable clients.
These actions have put some smaller to
mid-sized hedge fund managers in a
bind while simultaneously presenting a
significant opportunity for tier two banks,
independent fund administrators and
niche service providers to assist these
firms in growing their businesses in this
low return, high cost environment.
The inevitable question then is: what
exactly does this mean for smaller, sub
$500mmanagers,and which providers will
help them grow their businesses in an in-
creasingly competitive marketplace?
The impact that regulation is having on
service providers is perhaps clearest in the
prime brokerage market. Since the failure
of Lehman Brothers in 2008, hedge fund
managers have sought to diversify their
risk across multiple counterparties and
many prime brokers have taken the op-
portunity to win market share from a rel-
atively static market of managers and
funds. The Basel III capital requirements
adversely affect prime brokerage financing,
and this will ultimately result in the prime
brokers reducing their client base to renew
their focus on a select few profitable hedge
funds.This could spell an opportunity for
tier two banks to either grow their prime
brokerage businesses or launch prime
brokerage businesses to cater to the needs
of smaller hedge funds facing an uncertain
future with the tier one providers.
Like prime brokers, there has been
competition between fund administrators
to gain market share. Some firms have
grown organically while others have
grown scale through the spate of mergers
and acquisitions since 2006. A combina-
tion of factors is now likely to be causing
some of the larger administrators to scale
back the number and type of clients they
are willing to support.These include:
The impact of building market share
through competitive pricing. Due to
intense competition between fund ad-
ministrators and pressure from managers
seeking to reduce costs, fund adminis-
tration fees have reduced over recent
years. Many funds have not seen assets
grow and therefore some relationships
are un-profitable. Administrators either
need to re-price their businesses or exit
less profitable relationships.
Continuing investment in technology
and new services. Administrators face a
continual need to invest in technology.
This investment comes at a significant
cost, particularly for larger, less nimble
providers and puts increased pressure on
client profitability.
More profitable business lines being
challenged. Much of the industry con-
solidation, in AUM terms, has been
driven by larger players looking to grow
scale and generate cost savings, or
generate revenue from cross-selling
higher margin services such as custody,
securities lending, foreign exchange and
collateral management. Regulatory
changes, as well as once accepted
business practices now being challenged,
are also impacting a number of these
higher margin service lines. This has a
detrimental effect on the overall level of
revenue and profitability of some clients.
Fines and regulatory sanctions
imposed on a number of service
providers for control failures and opera-
tional shortcomings have increased sig-
nificantly since the financial crisis. As a
result, service providers are becoming
more risk averse. Some firms may feel
that larger managers, subject themselves
to greater regulatory scrutiny (for
example full SEC registration), may
present a lower level of inherent risk than
some of their smaller peers.
The traditional hedge fund market is
mature and there are limited opportuni-
ties for administrators to grow organi-
cally. Several larger administrators are
now re-allocating resources to capitalise
on growth areas, such as the burgeoning
liquid alternatives industry in the United
States. Others are repositioning their
businesses to focus on fund managers’
growing demand for middle and back
office outsourcing, or increasingly
looking to provide administration
services to private equity.
So where does this leave small-to-
medium sized managers? Many in the
industry predicted that regulation would
result in a consolidation of business with
the largest providers and that it would
become far harder for smaller players to
compete. In reality, we are seeing the
opposite – larger players are pulling back
from the smaller end of the market,
meaning small-to-mid sized managers
may have little choice but to look to
boutique service providers that cater to
their financing and administration re-
quirements. This plays into the hands
of, and will strengthen, the tier two
banks, independent administrators and
other niche service providers that will be
all too willing to step in and fill the void.
The challenge for these firms is to
provide a robust, flexible and cost
effective service without compromising
on service. n
The hedge fund industry is facing a challenging time amid growing
and costly regulatory oversight. There is an ever-growing menu of
regulations. Bill Prew, chief executive officer INDOS Financial
Limited, an independent AIFMD depositary business, looks at the
inevitable effect on securities services.
Regulation recalibrates the
tempo of fund administration
N O V E M B E R - D E C E M B E R 2 0 1 4 • F T S E G L O B A L M A R K E T S
IN THE MARKETS
HEDGEFUNDREGULATION:OPPORTUNITIESINADVERSITY
FRONT_79_2.e$S.qxp_. 17/12/2014 17:51 Page 22
![Market
Review
Forex
Review
Regulatory
Update
European
Review
by Jonathan Sudaria,
Dealer at Capital Spreads
by Alfonso Esparza,
Senior Currency Analyst,
OANDA
by Deborah Prutzman,
CEO, The Regulatory
Fundamentals Group
by Patrick Artus,
Chief Economist
at Natixis
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