February 2012

2012 – A torrent of new regulation

3 February 2012
Many observers believe that 2012 will set new records in terms of the sheer volume of regulatory develop ments that will impact the global financial services industry. Leading the charge will be the U.S. and the EU, but such is the nature of the industry that any regulations coming out of both places will likely have a global impact. Regulatory development is perhaps not the most exciting area but it is a hugely important one for our readers. FX-MM will, as always, be keeping a close eye on developments, and inviting industry experts to comment on the potential impact that specific new rules and regulations will have. In this issue we look at how the evolving regulatory framework is forcing financial institutions to overhaul the way that they process, aggregate and analyse data, we assess the possible wider impact of the FSA’s recently announced rules on the recording of mobile phone conversations and we consider what companies should be doing right now to prepare themselves for the forthcoming regulatory onslaught. In this month’s cover interview we talk to Marios Chailis of Henyep. Henyep have been around for a long time and outside their home base in Asia are perhaps not yet a household name, but Chailis says that they are a company which we are going to hear a lot more about in the future.

Sharing the load

3 February 2012
The credit crisis and the resultant spotlight on liquidity management have meant that Treasury Shared Service Centres (SSCs) are back in fashion. But, as Frances Maguire finds, this time round, technical advancements and cloud computing have meant they are an even more viable and attractive solution. Since 2009, corporate treasurers have been trying harder to bring together payments and receivables in a bid to centralise treasury and manage liquidity at a higher level but now the technology is available to enable them to have greater day-to-day control and visibility across all aspects of a centrally managed cash flow, through a shared service centre. Independent research commissioned by Logica saw 79% of 150 treasurers interviewed giving visibility and control over cash as the most important benefit in their payments factory roadmap. Tim Brew, Head of Marketing, Global Financial Services at Logica, says a shared service centre can bring greater visibility, control and insight from treasury operations. He says: “With multiple siloed systems, it can be difficult to build an accurate picture of payments patterns and find opportunities to optimise cash in the business without resorting to complex offline processes and spreadsheets. With an SSC, businesses can gain a bird’s eye view of all payment flows, processes, timelines, suppliers and costs – and use this to both more accurately forecast cash flow and find new efficiencies.”

Be prepared for the avalanche!

3 February 2012
With the industry facing an anticipated avalanche of regulatory changes, Mike Zadoroznyj, Vice President, Treasury and Regulatory Compliance, Triple Point Technology, takes a look at what companies need to be doing right now in order to prepare for the changes. At more than 2,000 pages in length, the Dodd-Frank Act is the US government’s extensive and wide-ranging response to the financial crisis. From debit card transaction fees to exchange-traded derivatives, there is almost no aspect of financial activity that has escaped its attentions. Dodd-Frank was signed into law well over a year ago – in July 2010 – but the US financial and trading landscape is still being defined. The finer points are still being negotiated, clarified by lawyers, and challenged by Wall Street players. Becoming compliant in this environment will be no easy task.

Forex Brokers: One size doesn’t fit all

3 February 2012
In the words of Henry Ford “any customer can have a car painted any colour that he wants so long as it is black.” In the Forex industry the ‘one size fits all’ approach is, however, definitely not applicable. Ella Fuller, Head of Marketing at GCI Financial explores what questions you should be asking when selecting a Forex Broker. As with all industries, (automotive, telecom, computer, pharmaceutical, etc.) the Forex industry began with a few pioneers offering online trading to the earlyadopter market. But over the last 10 years, the demand for online trading has skyrocketed. Some came to online trading because of discontent with the bailout-ridden equity markets that no longer resemble the “free market” value a savvy investor can project. Others found online trading as a means of taking control back from “hedge funds” or “money managers” whose accountability and information sources are questionable. The result has been an influx of disparate investors who want to take trading and investing into their own hands. Eager to meet this demand have been a bevy of new Forex Broker entrants – most of them copycats, with little differentiation – hoping to gain a slice of this fastgrowing market. However, the natural and healthy process of free-markets responding to evolving demands led to classic sub-segmentation with the successful brokers abandoning the “one size fits all” Forex model in favor of niche offerings aimed at meeting the needs of specific traders. As expected, the brokers that have not repositioned themselves have either closed their businesses (voluntarily or involuntarily) or merged with other institutions.

Getting to know Henyep

3 February 2012
Although not a household name in Europe, the Henyep Group is very well known in both Asia and the Middle East and has been operating in the financial services industry for over 35 years. Steve Shaw talks to Marios Chailis, Henyep’s Group Marketing Director, about their business, the operating environment and regulatory outlook in the markets in which they operate. Marios Chailis, a Cypriot, is an engaging fellow with strong opinions on many things which are happening in the markets and the forex industry in general. Chailis, a 12 year internet marketing veteran, specializing in e-commerce and online marketing, was hired by Henyep five years ago to help the group develop their online marketing and retail client acquisition thrust. Prior to joining Henyep he had been working as the marketing manager at Easy Forex for several years, where he helped create the online marketing function and structure the overall marketing strategy. He has also worked in other fast paced industries revolving around the internet and e-commerce, spending several years with notable companies such as Playtech and Empire Online. Henyep has its roots in Asia and has been around for a long time. The name is Chinese and literally means “Prosperity Forever”. Henyep Development Holdings was founded in Hong Kong back in the mid 1970s as a commodities trading business, making it one of the oldest financial services companies in Hong Kong.

Some signs of optimism

3 February 2012
FX-MM’s monthly look at the major currencies and the underlying issues which are affecting sentiment in global markets. A New Year usually brings a renewed sense of optimism, but 2012 seems to have started off with much the same underlying market sentiment that we saw through - out 2011 – continuing troubles in the eurozone and no shortage of negative headlines about the economy, the debt crisis and the inadequacy of the solutions being put forward by European leaders to save the day. Look more closely though and there have been some more positive signs of late. No doubt investors will have been delighted with the good results from the debt auctions in Spain and Italy, which exceeded expectations as they managed to sell more government debt than originally anticipated – Spain almost doubled its initial offering. Both countries saw their bond yields come down and Italy's yields dropped to 1.64% and 2.75% for six and twelve month bonds respectively.

What next for trading technology?

3 February 2012
The explosion of FX trading has made execution performance and low latency critical and with predictions that algorithms will account for more than 25 per cent of FX trade volume by the end of 2014, Frances Maguire talks to the providers of next generation trading technology to see what’s in store. Until now much of the focus of FX trading technology has been on trying to overcome the fragmented nature of the market by aggregating price streams and creating dashboards that give the trader a single view of the market, even to the extent of creating a virtual FX ‘exchange’ from what is an over the counter (OTC) market. Now the focus is on latency, and while it is accepted that it can never be lowered to the levels found in the equities market, improvements are being made, and also similar to the equities market, the possibility of being able to show best execution in the FX market is being mooted. Scott DePetris, Chief Operating Officer of Portware, says that while the focus is still very much on providing access to liquidity pools, aggregation technology for market data and analytics reporting, Portware is also providing a lot more information to make trading decisions than traders have ever had before in the FX market.

Next generation electronic options trading

3 February 2012
Electronic trading has clear benefits for the options market, as participants on both the buy- and sell-side seek the ability to improve transparency and meet new regulatory requirements while trading bespoke hedging structures. DCX is a new multi-bank electronic trading platform that is set to revolutionise the options market, connecting market takers with liquidity providers on a single global platform. The unique features of DCX stem from the combination of SuperDerivatives’ (SD) technology and FXCM’s global reach and network of price providers, bringing an instant client base to any liquidity provider. The platform, which is jointly operated by both companies, supports price discovery, negotiation and execution, all the way to option expiration, powered by the industry benchmark SD options pricing model. According to Stephen Baker, Head of EMEA Sales and Support at SD: “DCX provides, on one screen, multiple quotes for FX options from multiple marketmakers, delivering a dynamic depth of market.” The new trading platform is anonymous from both sides – both the buyers and the dealers presenting the options’ pricing. Few banks have the technology today to stream FX options’ prices directly from their desks through an API. DCX enables prices to be both published through an API or entered manually to make markets. The market taker is also protected from the fact that the market does not know who they are and what their positions are.

Interesting times for synthetic ETFs

3 February 2012
Since the birth of the European Exchange Traded Fund (ETF) market in 2000, synthetic ETFs have grown to represent almost half the market. However, with new guidelines expected from ESMA in the coming weeks, uncertainty abounds and inflows into synthetic ETFs dropped dramatically in 2011. Since their launch in Europe 12 years ago, exchange traded funds (ETFs) have grown rapidly. While the European market is still dwarfed by the $900 billion US market, it is now worth around $300 billion and is expected to continue growing at a healthy rate. A report published by Deutsche Bank in January forecast that ETFs will grow by 15-20% this year, while Howard Tai, Senior Analyst, Aite Group, predicts that: “The overall movement for exchange traded products is that they will continue to expand – and they could expand at the expense of traditional mutual fund type products.” However, at the beginning of 2012 the European ETF market is facing a significant amount of uncertainty as the European Securities and Markets Authority (ESMA) is due to release guidance imminently which could affect the position of synthetic ETFs – which rep - re sent almost half of the market in Europe today.

The impact of the FSA’s new mobile phone regulations

3 February 2012
On 14 November 2011 the UK’s Financial Services Authority introduced new regulations which mean that all conversations conducted on mobile devices between traders, brokers, investment managers and other market participants now have to be recorded. Steve Shaw talks to two industry experts about some of the wider implications of these regulations. The requirement to record fixed-line conversations has long been in place but the new regulation effectively extends the coverage to include all voice, SMS text and Instant Messaging. FX-MM put a number of questions about the potential impact of the new regulations to Paul Metcalfe, Head of Voice Trading Solutions at Orange Business Services and Martin Cross, Director at Connect Communications. FX-MM:Although the retention period is only six months the volumes of voice and data traffic to be stored will be huge. Will this regulation drive more growth of cloud-based data storage? PM: With a six month retention period and the potential of that going up to at least three years for some areas under recently reviewed MiFID II directives, there will be an increasing demand for available data storage. As some of the current solutions for mobile phone recording are hosted, perhaps with increased network carrier based solutions in the medium to long term (AKA SIM card approach), this data storage requirement is more likely to reside with the vendors rather than the firms themselves.

Reimagining risk management at major financial institutions

3 February 2012
A torrent of new regulations is forcing financial institutions to re-evaluate their risk management practices, and in the process overhaul and restructure the way that data of all types is processed, aggregated and analysed. Ashley Whitney, a principle at Lab49, takes a look at some of the challenges that FIs will face. Global regulatory changes have become an immediate concern as financial institutions look to reform their risk management practices following the events of 2008. While new regulations such as Dodd- Frank and Basel III have seeded new initiatives to address the new requirements, most institutions are not content merely to meet the letter of the law. There is a desire to identify broader best practices and to create processes and systems that will prevent a repeat of the lasting severity of the downturn. In times of greater prosperity, front office organisations tend to be widely ascendant and thus subject to less stringent control. The relative freedom from restrictions can lead to great innovation and profit, but has well-known downsides, such as incentivised risk-taking. In addition to these, there are a number of less examined repercussions, such as the development of significant technology infrastructure which ends up being not fit-for-purpose in an increased regulatory environment. For example, when reporting require - ments are relatively straightforward, trade processing infrastructure is built without control in mind and the technology needed to provide controls typically evolves in isolation and without rigour. Now driven by market and regulatory changes, firms must implement much more sophisticated processes, and due to the state of existing technology, significant re-engineering becomes a necessity.

7th Annual European Market Liquidity Conference

3 February 2012
FX-MM previews the AFME European Market Liquidity Conference which takes place in London on 8th February 2012. 2012 is set to be a defining year in terms of financial regulation and the foreign exchange industry will be no exception. So, it is opportune that a ‘must attend’ date in the European trading community’s calendar is almost upon us – the 7th Annual European Market Liquidity conference, organised by the Association for Financial Markets in Europe (AFME). Each year, this high profile conference attracts more than 400 delegates from buy and sell-side, fixed income and foreign exchange to listen to the in-depth discussions and senior speakers. This year’s conference is eagerly anticipated in light of the myriad of regulatory issues faced by the trading community and is supported by a high quality of speakers, including Steven Maijoor, Chair of the European Securities Markets Authority and Nick Robinson, the BBC’s Political Editor.

No looking back

3 February 2012
With a population of 38.3 million Poland is the 6th most populous country in the European Union and Europe’s 6th largest economy. It was the only EU country to avoid recession in the aftermath of the global financial crisis. The country’s GDP increased by 4% in 2011 and although growth is likely to cool somewhat this year it is nevertheless likely to be higher than elsewhere in Central Europe. Steve Shaw takes a look at Poland’s financial sector and the country’s economic prospects. A remarkable transformation Having emerged from the communist era in 1989 a shock therapy programme implemented by Poland’s Government in the early 1990s saw the country trans - form its economy with surprising speed from one which was centrally planned into a market economy. By 1995, thanks to a booming economy, it had already surpassed its pre-1989 GDP level, becoming the first postcommunist country to do so. Poland joined NATO in 1999 and in May 2004 became a full member of the EU.

60 Second Interview: Dominic Broom, Head of Treasury Services EMEA, BNY Mellon

3 February 2012
FX-MM talks to Dominic Broom, Head of Treasury Services EMEA, BNY Mellon, to find out his views on the impact of the Eurozone sovereign debt crisis, the current regulatory environment and the issues which are likely to impact the financial markets in the future. Which piece of market regulation is the most challenging for BNY Mellon and its clients right now and why? For our clients, it’s actually a combination of Basel III and Solvency II market regulations, which are the most challenging. Most banks are dependent to some degree or other on the funding that is made available to them by insurance companies. As Basel III encourages banks to secure sources of longer-term funding, whereas Solvency II encourages insurers to favour shorter-dated debt, it is likely that this combination will result in both corporate treasurers and bank treasurers having to go to the debt capital markets with shorter durations than the current norms. This will place a greater strain on a market place that is already struggling with constraints on the availability of sustainably affordable capital.