Coping with adversity : An interview with Muamar Behnam

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July 17, 2020

After an unprecedented start to the year Muamar Behnam, Head of Global Sales HQ at Swissquote Bank recounts how he and his team coped with the unpredictable and volatile markets.

What has been the impact of Covid-19 on FX? Which asset classes were most impacted and how – spot, forwards, etc?

It was a very interesting period to say the least. Currencies had their ups and downs during these last months, but without the shadow of a doubt, it was the precious metals, oil and other energy products, and the indices that moved beyond imagination. We saw things that we will remember all our lifetimes. The price of the WTI oil dropping to minus USD37on April 20th was for sure the biggest shock of all. Producers were paying buyers to take the commodity off their hands… unbelievable.

What long term impact do you think it will have – will this push the forward market to become more automated?

Having lived these events closely with our FX dealing team, I must say that automation is not the solution to everything. I am glad that humans took the right decisions to prevent clients from losing too much on the oil event for example. Deciding to remove a spot product, or closing a forward earlier than it’s expiry date, is never a popular decision, but it helped our clients, and Swissquote, avoid much more serious issues. I am not sure what will come out of all this at the end, or which lessons will be learned. Lots of banks and brokers took smart measures to try to protect their clients and themselves. And these decisions were made by a few brave traders all over the world – a fully automated system could have caused way further damage.

How did Swissquote manage operationally? What plans did you have in place to cope with the environment?

I was very positively surprised how our IT and logistics departments were prepared for this. From one day to another, 550 out of 600 people at our headquarters in Geneva were able to work seamlessly from home. Only some decision-makers, support teams, and essential collaborators stayed on site. Our headquarters were transformed within hours into a ‘Covid-safe’ working place, with distances between people and desks, total reorganisation of the cafeteria as well as providing masks and individual sanitisers. We’ve actually had sanitisers at many locations in the buildings way before the pandemic, so we were used to using them.

Have you seen an increase in demand?

It was a very interesting period for Swissquote. Demand in terms of new accounts reached unprecedented levels. Everything can, more or less, be done online. We have a validated online onboarding process that allows us to open Swiss bank accounts very quickly for private clients. People stuck at home during lockdown, and with limited access to their accounts at less digitalised banks often opened their second account with us.

What do you think will be the long term impact of Covid-19 on FX?

On FX, and leveraged trading in general, we will have to monitor more closely than ever what is going on in the world from now on. It seems that pure economic data (Central Bank interest rates, NFPs, etc.) has much less effect than geo-political events. What used to make the markets move, soar or drop yesterday, will be different today and tomorrow. That being said, I really hope that we will manage to avoid a bad second wave of the pandemic. Beyond the markets and FX, it might have consequences for generations, and that would be dramatic.

What challenges do you expect FX participants to have?

The challenges will probably be similar but expressed in a more acute way. Liquidity tends to dry up relatively quickly in these challenging times. The banks and brokers offering deep and diversified liquidity will be more able to cope. But Liquidity Providers are also more cautious when choosing the partners they decide to work with. They want solid partners they can rely on. Also, very volatile markets attract new traders to the market, but some have only limited knowledge of the risks they face with trading on highly leveraged products. They sometimes create considerable risks for their FX providers. Close monitoring and probably increased client education are key for the future of the business.

Aside from Covid-19, what other factors do you see impacting markets?

As said above, the major events are not any more the ones of yesterday. Covid-19 has diminished the impact of traditional economic data. The US elections this fall will probably be the focal point of the second part of the year. And, hopefully the impact of Covid-19 on the FX markets, and markets in general, will be limited with the slow decrease and end of the pandemic.

What are Swissquote’s plans for the next few months/the year ahead?

We have exciting projects that will soon be finished that will allow us to diversify our offering on the FX and CFD side. Our development and IT teams are working hard to finish them in the second part of the year. And we have new challenges here in Switzerland with ambitious new competitors entering the market. I firmly believe that competition helps everyone become better, so I am looking forward to these new actors on the Swiss market coming in with highly experienced people in the FX and CFD field.

©BestExecution 2020

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Demystifying the Russian market

By

Ian Rycott

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July 17, 2020

By Roger Balch, Head of Prime Services Sales, Europe & North America at Sova Capital.

Russian stocks enjoyed a rally surpassing all other equity markets worldwide in 2019, thanks to dividend yields that were more than double those of their developing country peers. The RTS Index generated total returns of 53% in dollar terms (including price gains of 42%), handily outpacing most other global benchmarks, however the global pandemic has unsurprisingly taken its toll on Emerging Market economies and their financial markets this year. Whilst the impact of Covid-19 on the Russian economy is still very much unknown, our view is that the investment case for Russian equities remains attractive and the dislocation of markets presents alpha generating opportunities.

The probability of dividend payouts remains high in Russia with only the industrial sector, specifically the steel industry, having announced 2H2020 postponements and no cancellations. The economy has limited exposure to the tourism industry, SMEs make up a relatively small proportion of GDP, and there is a widely held view that when the lockdowns are eased oil prices will recover. Additionally, the government’s prudent economic policies have cut the price of oil required for the budget to balance from $110 a barrel in 2013 to $65 in 2020, even with increased spending to support the economy due to the pandemic. Russia also has relatively low public debt (2019: 12.4% of GDP), and significant financial reserves (2019: $550bn or 32.64% of GDP) at its disposal to prop up budgetary spending thanks to recent trade and budget surpluses (2019: budget surplus of 1.8% GDP) and the need to become “crisis proof” since the annexation of Crimea.

Nowadays, the Moscow Exchange enjoys a more diverse ecosystem of trading participants than in years gone by and recently surpassed the milestone of 5 million retail brokerage accounts, up 1 million from a year ago. Average daily equity trading volumes for January to April 2020 were RUB 102.0 billion. In 2019 they were RUB 49.4 billion, an increase of 15.8% when compared to CY2018 and an increase of 35.5% when compared to CY2017. There is very little fragmentation of the securities market within Russia with all the liquidity found on MOEX’s CLOB¹. The volumes are concentrated in the top 10 names, with (by descending volumes) Sberbank, Gazprom, Lukoil, Norilsk Nickel, Rosneft, Surgutneftegaz, Tatneft, Alrosa, VTB and Magnit, accounting for 71.6% of the total equity order book volumes in 2019.

Ever since the index providers, FTSE and MSCI, incorporated MOEX closing prices in to their calculations, rather than using the last trade price from continuous trading, there has been a steady and consistent increase in MOEX’s closing auction volumes. Prior to October 2017, when MSCI made the aforementioned change, the percentage of daily volume transacting in the closing auction was circa 2%. This figure now sits around 6% on average but on index rebalancing days it has surpassed 45% of the day’s value traded. This increase is driven by greater participation from international institutional investors, switching from the GDRs to the ordinary shares, and the global growth trend resulting from passive investing.

Historically, concerns with investing in the Russian financial markets have revolved around geopolitical risks, and corporate governance and market structure issues, but with significant improvements in recent years these concerns have dissipated and resulted in an increase in trading the local ordinary shares in Moscow when compared to the Russian GDRs traded in London. In 2013, the split of equity volumes between Moscow and London was 50/50 but in 2019 Moscow commanded approximately 70% of the share.

Additional automated services that a number of the leading brokers now provide on the MOEX Equities Market include the ability to execute in odd lots, even though MOEX trades in round lots. For example, in Sberbank, there are 10 ordinary shares to 1 lot. MOEX rejects your order if its shape is not a multiple of 10 shares, this is where the broker steps in. In addition, many international buyside institutions face the complexity that their systems hold the books and records for Russian local stocks in USD, derived from trading the legacy RTS Standard market which ceased in 2012 after the merger with the MICEX Exchange to form the Moscow Exchange.

The Bloomberg “RU” lines, as the USD SEDOL² lines are more commonly known, still artificially exist to support these institutions’ systems but after the merger MOEX securities are only traded in RUB. These are the Bloomberg “RX” lines, with the same ISINs as the “RU” lines but with a different SEDOL. The sellside can support trading in both these lines and offer real time currency hedging capabilities by providing a USD/RUB FX on each individual RUB equity fill in FIX tag 155 of the execution report to support settlement in USD. Naturally sellside trading desks can also provide an FX once an order is complete or at whatever intervals throughout the day that the client requires.

In structural developments, in 2019 the Moscow Exchange saw Sova Capital become the first international direct clearing member firm of its CCP, the National Clearing Centre, on the Derivatives and FX Markets with the Equities rollout planned for 2020. Historically, the clearing rules dictated that only local Russian entities could act as clearing members. Therefore, this change has removed the requirement for international entities to hold collateral with a local Russian clearing broker and instead post collateral directly to the CCP, with a better credit rating profile than Russian sovereign debt. In combination with Client Asset Segregated accounts this proposition can be appealing from a counterparty risk perspective.

In addition, in June 2020, MOEX will also be introducing an evening trading session on the Equity Market spanning US trading hours, increasing trading opportunities and supporting booming retail demand.

Whilst relative value, statistical, index and basis arbitrage strategies have been operating on the Moscow Exchange Equities, Derivatives and FX markets for some time now, quant firms have benefited from the launch of Sponsored Market Access.

In conclusion, within CEEMEA, Russia stands out on a relative basis; issues in Turkey and South Africa have worked in Russia’s favour. As the Turkish lira has experienced fresh all-time lows amidst an environment of dwindling CBT dollar reserves and rampant inflation and frozen a trio of major global banks out of its currency market, Russia’s $500bn+ central bank reserves and RUB stand relatively solid. Meanwhile South Africa continues to suffer from huge Eskom power outages, struggles with Labour unions and strikes, again helping the Russian investment case; and whilst far from an outright safe haven, Russian assets are perceived as a safer investment in current markets. All positive reasons for the Russian investment case.

MOEX also offers a block trading mode but only RUB 13.1 million ADTV was executed in the dark in 2019
SEDOL stands for Stock Exchange Daily Official List, a list of security identifiers used in the United Kingdom and Ireland for clearing purposes.

©BestExecution 2020

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MeTheMoneyShow – Episode 14

By

Ian Rycott

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July 17, 2020

Dan Barnes speaks with Lynn Strongin Dodds on the push and pull of the Libor transition, the increased traction in ESG investing, and the impact of CSDR on derivatives.

©MarketsMedia 2020
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Maijoor to step down as ESMA chair

By

Lynn Strongin Dodds

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July 17, 2020

The European Securities and Market Authority’s current chair Steven Maijoor is set to step down on 31 March 2021, after serving the maximum ten-year term permitted under ESMA regulations.

Maijoor’s successor will be confirmed by the European Parliament and formally appointed by the Council of the European Union.

Based in Paris, the position is a full-time independent professional as the head and external representative of ESMA, with responsibilities including development of the authority’s long-term strategy and objectives.

During the application process, which closes on 2 September, candidates will be interviewed by both the selection board and the board of supervisors before the Commission forms a shortlist.

Following Council confirmation, Maijoor’s successor will begin on 1 April 2021 under a five-year contract.

Maijoor who was the first chair of ESMA, started in April 2011 and his term was extended five years in 2015, alongside Verena Ross, who served as the regulator’s executive director.

At the time of his extension, Maijor said “It has been a unique experience to chair ESMA in its formative years and it is an honour to have the trust from the board for another five-year term.” I am looking forward to further building on our work to enhance investor protection and the stability of EU financial markets.”

©BestExecution 2020

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Lessons learnt for meeting SFTR

By

Ian Rycott

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July 17, 2020

The deadline for compliance with the first phase of Securities Financing Transaction Regulation (SFTR) reporting obligations for sellside institutions is upon us, says Linda Coffman, EVP, SmartStream RDU, but some are still struggling to be compliant.

March 20th of this year saw a statement from the European Securities and Markets Authority (ESMA) – subsequently updated on March 26th – delaying the financial industry’s compliance with the first phase of Securities Financing Transactions Regulation (SFTR). Addressing the challenges firms were facing as a result of the coronavirus pandemic, and especially the lack of resources available to devote to meeting the compliance deadline, ESMA announced that it expected national competent authorities not to prioritise supervisory activity in relation to SFTR reporting obligations between April 13th and July 13th 2020.

While the actions of ESMA have given the industry a valuable breathing space, the new regulatory deadline is upon us. July 13th sees the implementation of phase 1 of compliance, encompassing credit institutions and investment firms. Phase 2 firms (central security depositories and central counterparties) also commence at this date. Timelines for the buyside (phase 3) have not been revised from the original October 13th go-live date, nor have those for non-financial counterparties included in phase 4.

Although sellside firms have been allowed three months’ grace, there are indications that some are still struggling to be compliant. And for the buyside, which is at present likely to be building solutions to answer the requirements of SFTR, there could be some useful lessons to be drawn from the sellside’s experience.

Clearly, banks’ efforts to prepare for SFTR have been hampered by the impact of coronavirus. In the early weeks of the outbreak, banks simply had to focus on maintaining business as usual, while the lack of resources available inevitably meant that developing new functionality took a back seat – even though meeting regulatory requirements is a priority.

Combining with the impact of coronavirus, however, and making the incoming reporting deadline even trickier to achieve, has been the inherent complexity of SFTR. Ensuring that SFTR reporting is carried out correctly is challenging: reporting is dual-sided, and both parties must make sure that the information they file matches. Reports, which must be submitted to a designated trade repository on a T+1 basis, contain over 150 fields. As a result, gathering and processing the data required is a potentially onerous operation.

To make matters worse, a lack of clarity around certain types of reference data – notably that relating to the legal entity identifiers (LEIs), security type, and security quality – has also been causing the industry a headache.

When submitting an SFTR report, counterparties must include the LEI for the issuer of the security or collateral that is the subject of the report. This is not a straightforward task, given the absence of a broadly adopted global system of LEIs. Indeed, as ESMA acknowledged in January 2020, some 88% of instruments issued by EU issuers have an LEI, while an average of only 30% of issuers from non-EU jurisdictions have one. ESMA announced in January that SFTR reports lacking an LEI for a non-EEA issuer would be acceptable for twelve months from the regulatory start date. While this has created a breathing space for the industry, it has not resolved the matter. Nor has the question of how firms should best deal with EU instruments lacking in LEIs been fully answered.

Banks have faced a further set of difficulties over the reporting of security or collateral type. Where an SFT relates to an equity, firms must state whether it belongs to a main index or not. To determine this, the reporting parties need index and constituent data. Obtaining this information, however, creates access issues, as well as added overheads.

Determining security quality is another source of bother. When assessing the quality of the security or collateral reported on, the data both parties submit must marry up. But what happens where the two counterparties derive their assessments from separate sources – for example, two different ratings agencies – and these assessments do not tally? Clearly, a break will occur, which must then be addressed, demanding further time and effort.

Preparing for SFTR reporting is a significant undertaking, so can the buyside draw any lessons from the experience of sellside institutions?

Firms in the first phase of compliance have handled the task in various ways. Some have installed specialist solutions, while others may be relying on people power, hiring large operational staffs to tackle areas such as data quality.

A number of financial institutions need additional help to get over the finishing line, for example, some of the banks that have installed specialist technology have discovered that these systems are not quite the panacea they had hoped for, and that gaps or other defects in their data still remain.

When preparing for compliance with SFTR reporting obligations it is vital – believes the author – that data quality is addressed as early on as possible, and is not simply treated as an afterthought. There are some indications that in preparing to meet the July deadline, sellside firms tended to focus more on the technical means by which data is transmitted to trade repositories and rather less on what is actually being sent. A parallel phenomenon was also observable during the approach to the MiFID II deadline. As financial institutions discovered then, regulators began – after an initial phase – to focus not just on whether reporting was occurring, but on the quality of the data transmitted – obliging some firms to review their practices in this area.

Gathering and processing the reference data needed for SFTR reporting is, potentially, a complex and time-consuming task. With the addition of the API within SmartStream’s RDU SFTR service, firms now have a helping hand. The RDU’s SFTR service removes the complexity of sourcing and deriving the instrument reference data needed for SFTR reporting purposes. It acquires instrument data from a range of industry sources, including ESMA, ANNA, GLEIF, ISO, ratings agencies and index providers, which is then normalised, enriched and mapped into the format demanded by regulators.

The RDU SFTR API is easily integrated with other systems and can be used very flexibly. Thus, it can be utilised either as part of a primary solution, or simply tapped into as an additional source of information. So, for example, if a firm has a solution in place that allows it to report transactions to a trade repository, but finds out that data is incorrect or missing, the API can be used to plug gaps – either in the UAT testing phase or beyond.

Usefully, the RDU SFTR API offers a very rapid onboarding process – firms can be up and running within a day, making it an excellent, alternative source of information for organisations facing a looming regulatory deadline.

Importantly, the API is extremely straightforward to use. Simply identify the instrument that is the subject of the SFT, make a call to a cloud-based API, and the required data attributes are returned in an easily digestible form.

In addition to filling gaps – for example, where an issuer LEI is missing, or accurate security types are lacking – the API can help verify that reference data is accurate. It also assists firms to prevent breaks between counterparties and to avoid rejected reports.

In conclusion, battling the complexities of SFTR while weathering the storm created by coronavirus has been a tough call for the financial industry. The sellside has reached the regulatory deadline, and some firms appear to be struggling to make themselves fully compliant. In the case of the buyside, ESMA seems unlikely to extend the period of forbearance, and so organisations should not be tempted to slacken off in their preparations for the phase 3 October deadline. For both the sell and the buyside, time is now of the essence. Ensuring data quality is vital, too. The RDU SFTR API can assist in both respects, providing accurate, reliable data, in an easily and rapidly accessible format, and which also aligns with regulatory requirements.

©BestExecution 2020

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Forex spreads presented the biggest hurdles for buyside traders during pandemic

By

Lynn Strongin Dodds

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July 16, 2020

Jim Kwiatkowski-Refinitiv — Jim Kwiatkowski, CEO, LTX

Jim Kwiatkowski, global head of transaction sales, Refinitiv

Managing forex spreads has been the biggest challenge for buyside traders since the pandemic and ensuing lockdowns, according to a Refinitiv global survey which polled over 1,000 FX trading clients, including 132 traders at fund management houses.

The survey found that 55% of respondents felt spreads was the biggest hurdle while access to liquidity was more of a problem for 13%. Around 15% said they had no issues at all.

Jim Kwiatkowski, global head of transaction sales at Refinitiv, says, “The changes to spreads during this period have been well documented. Spreads widened as volatility increased and providers became concerned about client credit. This was clearly a market-wide impact, but one that was mitigated, at least partially, by the utilisation of trading tools to aggregate available relationship pricing and find that elusive ‘best price’.

He added, “Many clients have taken advantage of auto execution capabilities for smaller orders so that they can focus on their larger, more difficult to execute orders.”

This perhaps explains why the majority or 84% polled pointed to streaming risk transfer as the most reliable execution method while only 10% chose voice risk transfer. “Given spreads, liquidity conditions and volatility, streaming risk transfer has the advantage of leveraging pricing from multiple relationship liquidity providers as well as the certainty of immediate risk transfer,” says. Kwiatkowski,

He notes, “the increased use of send details, which allows trades to be agreed by voice, but then automates the booking through normal straight through processing, suggests that many clients opted for electronic trading tools, even for voice trades, to reduce the risk of booking errors and satisfy compliance concerns.”

In addition, the study found that when it came to transitioning to a working from home environment, over a third said communication with colleagues was the largest obstacle while 27% cited market conditions. Around 15% said they had no issues.

“Difficulties in communicating could be part of the reason why electronic trading was found from the survey to be far more reliable for our participants than ‘voice risk transfer,’ says Kwiatkowski. “It also shows that instead of reverting to old-world methods (voice), the market is now so far down the path of electronification that it pushed even further in this direction as the crisis evolved.”

©BestExecution 2020

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European Women in Finance : Pressing the refresh button

By

Lynn Strongin Dodds

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July 16, 2020

Lynn Strongin Dodds talks to Cécile Nagel, CEO of EuroCCP about forging her own path and a new beginning with Cboe.

It is never easy taking over the reins from a long serving incumbent, but Cécile Nagel has made her mark since becoming CEO of EuroCCP, the Amsterdam based pan-European equities clearinghouse two years ago. She has injected new ideas and helped secure its future with the recent acquisition by Cboe, one of the world’s largest exchange holding companies.

Nagel replaced Diana Chan who had the role since the merger of European Multilateral Clearing Facility and European Central Counterparty in 2013. Prior to this Chan held the same position at ECCP. She had been the only women CEO of a major European clearing house and was instrumental in building EuroCCP into a clearing house that processes trades for 27 platforms across Europe. Today, it clears trades for 37 trading venues which accounts for 95% of Europe’s landscape.

Not surprisingly, though as with any new head, Nagel “wanted to put my own stamp” on the organisation. “It was an opportune time for a refresh,” she adds. “This meant focusing on the things we needed to do to take the organisation to the next stage of development, as well as increasing our market share.”

The Cboe purchase became part of the game plan. The US-based exchange behemoth initially owned a 20% stake in EuroCCP but in December last year announced plans to acquire 100% of EuroCCP’s stock. The acquisition completed in July. “We considered all the strategic options with the board and decided that full ownership by Cboe would bring several benefits and allow us to grow much faster,” says Nagel, who will remain head of the clearinghouse, which will retain its name and continue to operate as an independent subsidiary. “For example, it will enable us to continue to grow our equities and ETF (exchange traded funds) clearing businesses and expand our product offering across other asset classes, namely equity derivatives.”

She adds, “Equally important is that we share the same philosophy and ethics especially in terms of open access and the ability to offer a choice of clearing to other European exchanges and trading venues.”

Nagel ventured into the ETF space before the Cboe deal. EuroCCP struck a partnership with Tradeweb, a global bond and derivatives trading venue, last September to streamline the settlement process of ETFs in Europe while also providing important counterparty protection in the event of a default. “I saw an opportunity in ETF clearing because 70% of the market is uncleared today,” she says. “We decided that we wanted to work with leading market participants in this space to create greater efficiencies.”

The big picture
Strategic and operational thinking is second nature to Nagel but so too is a deep understanding of the regulatory landscape which is particularly important for a systematically important market infrastructure player like EuroCCP.

The foundations were laid at the Financial Services Authority (now the Financial Conduct Authority) where she spent four years before moving onto the London Stock Exchange Group. In her almost nine and half years at LSEG, Nagel had a variety of roles including head of strategic planning, global head of equities and commodities, and her last position – head of LSE markets global product development and LSE ETPs (Exchange Trading Products).

However, as Nagel admits, she did not have a carefully mapped out career path. “If you asked me 15 to 20 years ago there is no way I would have expected to be a CEO of a clearinghouse,” she says. “My career was not a straight line and has naturally had its ups and downs. I joined LSEG at a similar time as Xavier Rolet (the then CEO) and when I was promoted to head of strategic planning, I worked closely with him and the executive team to help develop the company. It was transformational because it was at the time when there were several acquisitions including trading platform Turquoise, global indexes firm FTSE and clearing house LCH. I learnt an enormous amount from him [Rolet] through the process and I grabbed the opportunity and made the most of it.”

One of the most important lessons is the ability to not only announce a strategy but to convince people it is the right path. “It is one thing to have a vision and strategy and another to implement it,” she says. “Although the way forward depends on the situation and individual circumstances, it is always important to bring all the relevant stakeholders on board. You need to present the overall vision but also be able to delve into the detail to execute. Sometimes balancing the two can be challenging.”

Being a strong communicator is of course paramount. Nagel believes as a CEO, communication should be a two-way process and for example, in the context of Cboe, it was important to explain the reasons behind the acquisition, draw a picture of the future and listen to feedback. Dialogue has become even more important in the current Covid-19 climate. “We hold weekly company-wide zoom meetings with more than 60 people, and we encourage employees to ask questions and make suggestions on how we can be more effective in the current environment,” she adds.

Unlike many organisations, EuroCCP as a systematically important, heavily regulated market infrastructure provider, did have a pandemic scenario in its business continuity planning. Nagel says the transition to working from home was smooth – the organisation was able to successfully handle the record volumes seen in March when equity markets plunged around 22.8% in the EMEA region in the first quarter, according to figures from the World Federation of Exchanges.

In terms of long-term impacts of the coronavirus and lockdown, Nagel hopes that there will be positives such as greater flexibility, while the negatives are that you lose a degree of co-operation and natural connectivity. However, “although a manager does not sit next to his or her team, we are encouraging them to engage more and be supportive of their team’s situation.”

This is something Nagel knows well with small children of her own. At the moment her husband does the bulk of the childcare although they have alternated the responsibilities throughout their careers. She is clear though that “there is no one-size-fits-all solution and the way people balance their lives is a personal choice.”

Nagel also believes there is no one magic solution to improving diversity and inclusion in financial services. “It is up to all of us to drive the agenda,” says Nagel. “The direction of travel is the right one, but I think that more attention should be paid to diversity more broadly and not just women. Progress has been made but we have a long way to go.”

IF YOU’D LIKE TO NOMINATE CÉCILE FOR ONE OF THE EUROPEAN WOMEN IN FINANCE AWARDS PLEASE CLICK HERE

©BestExecution 2020

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Greenwich study shows investors fear FTT impact on trading costs and liquidity

By

Lynn Strongin Dodds

-

July 16, 2020

The Financial Transaction Tax (FTT) is back on the European and US agendas as public purses have taken a significant hit due to the COVID-19 pandemic. However, as the Greenwich Associates report – Financial Transaction Tax – What is it Good For? – shows investors have strong concerns about the potential impact it could have in terms of liquidity, market quality and retirement savings.

Greenwich Associates took the temperature of the market by interviewing 58 market professionals, including retail brokers, wealth managers, asset managers, regulators, banks, hedge funds, broker dealers and consultants in the US, Europe Middle East Africa and Asia Pacific.

The study found 84% think the FTT will accelerate the move to passive investment by negatively impacting active managers while 66% believe there will be less liquidity available at the best bid and offer, with 64% expecting spreads to widen as a result of decreased liquidity

Moreover, 64% expect costs of capital will rise for issuers with 57% saying borrowing costs will increase for the public and private sectors.

Senior Analyst and author Shane Swanson in the Market Structure and Technology Group at Greenwich Associates, says nearly 70% anticipate a real-world reduction in their firm’s trading, with only 25% seeing no impact.

“This isn’t surprising, he explained, as the proposed FTTs will increase costs of trading. “The rational economic response to the increase in costs will be a reduction in the amount of trading,” he adds. “According to a majority of respondents, the clear view is that FTTs haven’t succeeded in the past, as the negative effects are broad-based, and the marginal potential benefits are far outweighed by the true costs.”

He notes that for the US equity markets, “which are the envy of the world, an FTT could damage that machinery, resulting in spreads widening, liquidity dropping, stock prices falling, and the possibility of volatility increasing.”

In the US, the FTT or a Tobin tax – named after Nobel-prize winning American economist James Tobin – was first mooted in 1972. It has never gained traction but the debate is being resurrected during the impending US election with high profile Democrats arguing that the tax would raise much-needed revenue and force brokers, high-frequency traders and asset managers to pay their “fair share” after a decade-long bull market.

The idea came into sharper focus in Europe after the global financial crisis in 2008. A formal proposal three years later though failed to get unanimous backing from EU countries. However, Paolo Gentiloni, the European Commissioner for Taxation is hoping that the group of 10 countries that are involved in closer cooperation will be able to reach an agreement in the next few months.

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Liquidity is the New Volatility: A Better Portfolio Model

By

junying_chen

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July 14, 2020

Liquidity is the new volatility: why we need a better model for building portfolios

By Junying Chen, MS, a Senior Associate at PGIM’s Institutional Advisory & Solutions group and principal author of Building a Better Portfolio.

The current economic crisis highlights the need to account for the liquidity characteristics of private assets in institutional portfolios

During the decadelong bull market, institutional investors poured more than $4 trillion into private assets such as private equity, real estate and private credit, seeking to diversify and enticed by returns that outpaced public assets by a significant margin. Then COVID-19 hit.

With the global economy in lockdown, there is rising concern among some chief investment officers of large institutional funds with a substantial allocation to private assets that a lack of portfolio liquidity may make it difficult to unload those assets quickly to meet cash flow commitments without taking a painful haircut. Whether cash is needed to help make pension benefit payments, meet general partners’ calls for capital due to prior commitments, or pursue attractive investment opportunities during market dislocations, portfolio illiquidity may prove to be a bigger threat than market volatility.

While portfolios generally recover from volatility shocks, a liquidity shock can be a matter of survival. For many CIOs, the crisis has highlighted a key question: What’s the right amount of private assets to maximize portfolio performance without sacrificing too much liquidity?

Grappling with this question—more than a year before the current crisis—we teamed up with Singapore’s GIC, one of the world’s largest sovereign wealth funds, to create a new risk framework that formally integrates liquidity measurement and management into a multi-asset, multi-period portfolio construction process.

It was clear that a better way was needed to quantify liquidity risk and provide an alternative to traditional risk models such as mean-variance optimization or risk parity to put liquidity needs at the forefront.

Dubbed OASIS^TM (Optimal Asset Allocation with Illiquid Assets) the framework can help CIOs better understand a portfolio’s liquidity characteristics by analyzing how top-down asset allocation changes (e.g., the mix of public stocks and bonds and private asset holdings) interact with bottom-up private asset investment decisions (e.g., private asset pacing, or commitment, strategies) to affect their ability to respond to liquidity demands.

Our framework generates an “efficient frontier,” a chart illustrating the trade-off between the frequency and severity of liquidity events (i.e., a liquidity severity score, or liquidity risk) and expected performance for a set of optimal portfolio allocations. First, investors specify their expected cash flow commitments (e.g., benefit obligations, GP capital calls and dry powder needs) their portfolio must try to meet—and choose a target liquidity severity score that is appropriate for their organization. Next, investors enter several customizable inputs, such as their own public capital market assumptions and expectations about how the private market will perform relative to the public markets. They can also adjust based on their private limited partnership fund selection skills, an important performance driver.

Importantly, CIOs can use the framework to explore how to pace their private asset investments to manage exposure and the uncertainty in timing and magnitude of their cash flows over time. The model can accommodate various private asset commitment strategies—for example, overcommitting or cash flow matching—based on different investor objectives such as targeting a higher percentage of net asset value in the overall portfolio over time; efficiently balancing quarterly private asset capital calls and distributions to minimize disruption to the public portfolio; or achieving vintage diversification.

CIOs naturally worry about how the liquidity of their portfolios might withstand various market conditions, particularly downturns. For example, the framework can be used to study how portfolios might weather a U-shaped compared to a V-shaped recovery—both of which are especially appropriate scenarios to contemplate in today’s market environment.

While the current economic crisis has brought the need for such a portfolio construction model into stark focus, the usefulness of the model goes well beyond the challenging times of COVID-19. For a CIO with a robust allocation to private assets, weighing liquidity risk against performance is better than relying on a mean-variance or risk-parity model.

Investors now have a framework for looking at liquidity and performance. Some may find they can comfortably take more liquidity risk; others may find they are taking too much. But both groups will understand their portfolios better.

Junying Shen is a Senior Associate in the Institutional Advisory & Solutions (IAS) group, focusing on quantitative research related to traditional and alternative assets and the development of asset allocation model. Ms. Shen joined IAS in June 2017 from Market Risk Capital & Analysis team at Goldman Sachs & Co. as a senior analyst, where she analyzed market risk factors for various product types including syndicated loans, public equity, private equity, and real estate assets. Ms. Shen earned her BS degrees in Finance and Mathematics from University of Illinois at Urbana-Champaign and an MS in Mathematics in Finance from New York University.

© 2020 Prudential Financial, Inc. and its related entities. PGIM, Inc., is the principal asset management business of Prudential Financial Inc., and is a registered investment advisor with the US Securities and Exchange Commission. PGIM is a trading name of PGIM, Inc. and its global subsidiaries.

ESG Data Coming to U.S. Via Nasdaq

By

Traders Magazine

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July 14, 2020

ESG data is coming to the U.S. – ASAP.

North American Investors and traders interested in gaining exposure to Environmental Social and Governance (ESG) markets are about to gain a competitive advantage thanks to Nasdaq via its recent alliance with TrackInsight. TrackInsight (www.trackinsight.com) is a leading global independent ETF analytics platform that operates a global platform dedicated to ETF search, analysis and selection aimed at professional investors.

TrackInsight currently has over 100,000 unique users and 2,500 qualified professional investors using its platform for their day-to-day ETF screening; it is recognized as the leading source of independent and reliable information for more than 6,000 Exchange Traded Funds listed globally.

According to market data, there are currently 87 ESG ETF products tracking roughly $16 billion in the U.S. — a mere fraction of the nation’s $4 trillion total ETF assets and well below Europe’s $124 billion ESG ETF business. More data should translate into more trading and innovation, the thinking goes.

BlackRock recently launched a suite of four asset allocation ESG ETFs. Similar to BlackRock’s existing four asset allocation ETFs, which launched in 2008 and have since accumulated over $4 billion in assets, these new funds are tailored for different investor risk appetites ranging from ‘Conservative’ to ‘Aggressive.’

And BlackRock isn’t the only mega asset manager offering ESG ETFs – Vanguard, Putnam and State Street Global Advisors are also. And more are to follow as newer and younger investors seek these socially-conscious investments.

Morningstar has written that sustainable funds in the United States attracted new assets at a record pace in 2019. It estimated net flows into open-end and exchange-traded sustainable funds that are available to U.S. investors totaled $20.6 billion for the 2019.

So, there is a need for the data and now.

The TrackInsight ESG data offerings now available in North America include “TrackInsight Global View,” a unique data service designed to provide professional investors with verified ETF reference data as well as advanced metrics on investment-related considerations such as ESG transparency, style exposure, liquidity, performance, risk and replication accuracy analysis. Global View is a comprehensive source of daily global ETF inflows and used by various firms such as hedge funds, portfolio managers, research institutions and fund promoters.

“If you look at how ESG ETF assets are being raised globally, you see that Europe started sooner with this, but in America it’s picking up really fast,” said Jean-René Giraud, founding C.E.O. of TrackInsight. He stressed that this initiative represents a major milestone and brings a very innovative service to the buy and sell sides of the ETF ecosystem.

“It isn’t that difficult to collect ESG data, the challenge is really that there are a number of competing methodologies out there trying to define what constitutes ‘ESG’, and investors struggle with that,” he added.

Oliver Albers, SVP and Head of Data for Nasdaq’s Global Information Services added that both TrackInsight and Nasdaq are focused on making markets more accessible through transparent and cost-effective data. This data serves a multitude of strategies, including ESG.

“Technology and data have made investing easier and more cost-effective than ever before, and this has dovetailed with increased investor demand for ESG products and data,” Albers told Traders Magazine. “Our distribution of TrackInsight ETF data is a great way to provide additional transparency and insights to more investors to help them grow and diversify their portfolios in a cost-effective way.”

TrackInsight Global View will be made available to Nasdaq customers through Nasdaq’s Quandl platform, which provides a robust source of core and alternative data and also offers Nasdaq Cloud Data Service via its storefront.

Launched in 2014, TrackInsight supports the ETF selection process of 27 of the 50 largest ETF allocators in the world.

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