Friday 29th April 2016
NEWS TICKER, TUESDAY, APRIL 29TH: NEW LISTING - Mackenzie Financial Corporation (Mackenzie Investments), one of Canada’s largest independent asset managers, opened trading this morning on TSX to celebrate the launch of four new active fixed income exchange traded funds (ETFs), which began trading on TSX last week. "We are very pleased to welcome Mackenzie Investments to our world class lineup of ETF providers and to have them list their initial products on TSX," says Nick Thadaney, President & CEO, Global Equity Capital Markets, TMX Group. “The ETF segment is growing rapidly and becoming increasingly important to the vitality of the overall TSX ecosystem. TSX is proud to play a supporting role in its success and we continue our work to provide a full spectrum of product and service offerings to suit the needs of all investors.” – SHORT POSITIONS ON AUSTRALIAN BANKS - News Markets reports that investors are heavily shorting Australian bank shares, leaving scope for a stock rebound if next week’s results round beat analysts’ bearish expectations. Macquarie analysts say in a note today that short positions in the Aussie banking sector are at their highest levels for five years, up 50% since January. Reasons for shorting are many, say analysts, bank shares are off 10% in aggregate this year, the usual global macro uncertainties and rising impairment charges. Australia and New Zealand Banking Group and Westpac are the most shorted. The Bendigo and Adelaide Bank is the most shorted overall, but isn’t one of Australia’s Big Four lenders –IPO - Following its debt on the Qatari bourse yesterday, Qatar First Bank (QFB) the stock price fell 7.7% on the day. Nonetheless the stock dominated trading on the liquidity squeezed bourse, which has only 44 listed companies. Qatar exchange is actively seeking to increase the number of listed companies and hopes that the QFB listing markets a turnaround in its fortunes – BAHRAIN - Bahrain’s economy is expected to slow further in 2016 and 2017, weighed down by weak investor sentiment and fiscal adjustments, with financial outflows expected to continue, according to the International Monetary Fund (IMF). Bahrain’s fiscal deficit will touch 19.5% of gross domestic product (GDP) this year and shows no sign of falling in the near term. Like its Gulf Cooperation Council peers, Bahrain’s top-line revenues have been stymied by slowing oil prices; as a consequence, GDP is growth this year has slowed to 3.2% (compared with 4.5% last year). The country’s current account deficit is projected to reach over 8 per cent of GDP this year, before narrowing gradually while inflation is expected to register a modest increase – driven by an increase in energy prices in the country but “easing over the medium term with weak economic activity containing the pass-through to wages – BANK RESULTS - Arab Banking Corporation (ABC) says its consolidated group net profit, attributable to the shareholders of the parent, for the first quarter of the year 2016 was $41m, 21% lower than the profit of $52m reported for the same period last year, with the usual suspects (an overly strong dollar against the dinar and the global economic slowdown). Even so, the core franchise for the group continued to show sustained performance in local currency terms with our renewed strategy having a positive impact in most of our business units. Compared to Q1 of 2015, the Brazilian real and Algerian dinar were weaker in Q1 2016 by over 25 per cent and 13 per cent respectively. Total operating income for the quarter was $209m ($168m in Q1 last year), attributable to currency movements. Operating expenses were flat over the year at $104m with some reduction benefiting from currency translation. Net impairment provisions for the quarter at $18m, were higher than the previous year’s $9m. The bank says it benefited last year from “certain write-backs, [and] the provision charge for the current quarter was in line with our expectations and past experience. The ratio of non-performing loans to gross loans remained healthy at 3.5%, compared to 3.4 per cent at 2015 year-end. Tax charge for the year was at $35m, whilst last year it was a positive $12m arising from the tax treatment of currency movements in subsidiaries”. ABC Group’s total assets stood at $29.2bn at the end of Q1, compared to $28.2bn at the 2015 year-end – MANDATES - SS&C Technologies Holdings, In. (Nasdaq: SSNC) says it has been appointed by Nicola Wealth Management (NWM) to provide a range of fund administration services for nearly $4b in assets under management (AUM). NWM has grown to be one of Canada’s leading independent wealth management firms with close to $4 billion AUM and over 130 employees in four locations across Canada, including Vancouver and Toronto. SS&C will provide NWM with a full range of administration services including fund accounting and investor services. NWM will benefit from SS&C’s expertise and service, while its technology platform will support NWM’s 15 funds and 4 limited partnerships – SPAIN - Spain's unemployment rate edged up to 21% in Q1 from 20.9% in Q4 last year. The National Statistics Institute said today that the number of people out of work rose by 11,900 January through March to a rounded total of 4.8m. The release comes as Spain heads toward fresh elections in late June as the May 2nd deadline for a new government to be in place looks set to pass without resolution – RATINGS - Moody's Investors Service has today announced that it has confirmed the Ba2 local and foreign currency long-term deposit ratings with a negative outlook and the ba2 adjusted baseline credit assessment (BCA) of Denizbank AS. At the same time Moody's has confirmed the Counterparty Risk (CR) Assessment of Ba1(cr). The bank's short term ratings and its standaloneba3 BCA were not affected from this rating action. Moody's says that the confirmation results from the confirmation of the ratings and standalone BCA of its Sberbank (FC Deposits: Ba2negative/Debt: Ba1 negative; BCA: ba2), Denizbank's Russia-based parent, which owns 99.9% of the Turkish subsidiary. The primary driver for the confirmation of Denizbank's long-term ratings is the prior confirmation of the ratings of its direct parent bank, Sberbank, from which it receives uplift due to our affiliate support assumptions. Moody's maintains its assessment of the high probability of parental support for Denizbank resulting in a one-notch uplift from the bank's ba3 BCA. Moody's bases the uplift on Sberbank's majority ownership and the history of capital injections in Denizbank – FUND FLOWS IN MARCH - The 10th March announcement from the European Central Bank (ECB) that it is committed to buying non-financial investment grade bonds to stimulate the Eurozone economy led to a new interest in fixed-income funds during the month says Morningstar. “The biggest beneficiaries of the ECB’s new policy were funds in the EUR corporate bond Morningstar category, which had March inflows of €3bn, as funds in this category invest the majority of their assets in investment-grade corporate bonds,” says the data maven. Schroder ISF Euro Corporate Bond, which has a Morningstar Analyst Rating™ of Bronze and is Europe’s largest corporate bond fund, received the category’s greatest inflows (€517m). The move into fixed income was broad-based as investors redeemed large amounts from money market funds, which saw outflows of €14.3bn during the month, and invested €11.6bn in fixed-income funds across categories. The EUR high yield bond category had its greatest monthly inflows in 12 months. Pioneer Euro High Yield, which has a Neutral Analyst Rating, was the leader in the category with estimated inflows of €346m. Morningstar says investors pulled assets out of equity funds for the third month in a row amid the first quarter’s significant market volatility. Equity funds saw total outflows of €8bn in March. As well, the global emerging markets bond—local currency category had March inflows of €1.4bn, more than in any month since May 2014, as emerging currencies continued strengthening from multiyear lows. European investors continued to reduce their US dollar-denominated fixed-income allocations. Funds in the USD high yield bond category saw outflows of € in Q1. Matias Möttölä, senior manager research analyst for Morningstar, comments: “European investors found their appetite for fixed-income funds in March after nine months of nearly continuous outflows. The sudden change in sentiment followed an ECB commitment to start buying non-financial investment grade bonds, which comes on top of the existing programs to purchase government debt, asset-backed securities, and covered bonds. The announcement drew European investors to funds in the EUR corporate bond and EUR high-yield bond categories. Both received their largest net inflows in any month since March 2015, when the ECB started buying sovereign and quasi-sovereign bonds.” - CME GROUP RESULTS – CME Group today reported record revenue of $934m and record operating income of $574m in Q1. Net income was $368m and diluted earnings per share were $1.09. Adjusted for non-recurring items, net income would have been $390m and diluted earnings per share would have been $1.15. "Our record first-quarter financial performance was driven by our highest quarterly average daily volume to date, including record volumes in energy, overall options and electronic options," said CME Group Executive Chairman and President Terry Duffy. "We delivered record revenue and operating income, and 17% growth in adjusted diluted earnings per share. These strong results reflect our continued progress in executing on our long-term growth initiatives. At the same time, we are committed to returning cash to our shareholders, as evidenced by $1.2bn in dividends being paid out during the quarter." The group reports a significant increase in global participation in our markets, with average daily volume of 3.7 million contracts traded from outside of the United States, up 24% from Q1 2015. The solid quarterly activity was underscored by continued momentum in open interest, as CME reached a record daily level of 116mcontracts in the first quarter, and open interest remains elevated -

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Twin peaks: the fire walk of UK market regulation?

Monday, 05 March 2012
Twin peaks: the fire walk of UK market regulation? Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good.

Those who were keen followers of the 1990s cult television series Twin Peaks and its prequel film, Twin Peaks: Fire Walk With Me may have experienced some concern at hearing recently in a speech by the Financial Services Authority's (FSA’s) chief executive officer, Hector Sants, that the regulator would very shortly start adopting a ‘Twin Peaks’ model of regulation.  However, rather than a drama concerning the murder of a teenage girl, which explored the gulf between the veneer of small-town respectability and the seedier layers of life lurking beneath it, this is the continuing drama of the progress of the UK’s regulatory reform programme, though it is also laced with some underlying seediness, mystery and double-think, all thrown in for good measure. Charlotte Hill, partner and head of the financial services and regulation practice at law firm Stephenson Harwood, gives a sprightly, sometimes humorous run through the implications of change, positing that it might all be too complicated for it’s own good.

The financial crisis and recession caused the FSA, the United King-dom’s financial markets reg-ulator, to be criticised for being too costly and ineffective in its approach to regulation, resulting in a complete reform of the UK's regulatory structure.

Right now the UK financial markets are governed by a tripartite system of regulation, with regulatory responsibility being shared between the Bank of England (BoE), the FSA and HM Treasury. However it looks as if this system has now had its day and change is afoot. There is much optimism that this time around, all will be well and the shortcomings of the previous system will be addressed and a new dawn is breaking.

The old structures will be replaced with an all-new, all-improved, shiny new system, where responsibility for regulation will be shared between, em ... three new regulatory bodies! These are the Financial Policy Committee (FPC), which will sit in the BoE and take responsibility for the macro-prudential regulation of the UK financial system; the Prudential Regulation Authority (PRA), which will sit as an independent subsidiary of the BoE and take responsibility for the micro-prudential regulation of financial institutions of systemic importance, such as banks and building societies; and the Financial Conduct Authority (FCA), which will inherit the majority of the FSA’s current regulatory functions and be responsible for the conduct of business regulation of all firms currently regulated by the FSA. This will include those firms that will be dual-regulated, authorised and subject to prudential regulation by the PRA.  

In two speeches on February 6th and 7th this year, Hector Sants announced what he termed a "major milestone" in the progress of the regulatory reform programme, namely, the introduction of a "Twin Peaks" model of regulation, which would be operating within the FSA from April 2nd 2012. From this date, two regulatory models (the Twin Peaks) will operate within the FSA in preparation for those models becoming separate regulatory entities early in 2013. One peak is earmarked for prudential regulation and the other for conduct regulation. So, banks, building societies, insurers and major investment firms will have two separate groups of supervisors: one focussing on prudential issues and the other on conduct.

Whilst the FSA could not completely replicate the new approach envisaged by the Financial Services Bill at this stage, the Twin Peaks model will ensure that the transition to the new regulatory structure early in 2013 (termed, in true superb FSA-speak, the "cutover") would be "seamless".  

Not only are there the two independent groups of supervisors for banks, insurers and major investment firm but also, all other firms (that is, those which are not dual-regulated) will be supervised entirely by the conduct supervisors. These separate groups of supervisors will make their own separate judgements, and against different objectives. This is an important distinction, as we are told that they will be "pursing different goals". Up to now, there has been little clarity on what all this means, but the approach is summarised in another piece of fluent FSA-speak: "independent but coordinated decision making"––an approach that will be "stressed to staff". The thrust of this appears to be a policy of sometimes working together, but sometimes not, whilst somehow managing to share all data collected from companies.  Although no detail is given, "greater clarity" apparently has been given to the objectives of the two supervisory groups. No information is given on what this "clarity" entails.

Those still reeling from the spectre of two separate sets of supervisors will exit screaming at the intelligence that the existing ARROW risk mitigation programme will be split between the Twin Peaks. The Financial Services Authority (FSA) is a risk-based regulator and ARROW is the framework it uses to make risk-based regulation operational. ARROW stands for the Advanced, Risk-Responsive Operating Framework and covers firm specific (vertical supervision), thematic (those involving several firms or relating to the market as a whole; the FSA terms this ‘horizontal’ work) and internal risks (these are operational risks that might impact the FSA).

ARROW will be split between those actions which are relevant to the conduct supervisory group's objectives and those that relate to the objectives of the prudential group. What is worse is that this is only just around the corner. From April 2nd 2012 onwards, the two separate supervisory units will run their own risk mitigation programmes and firms will have "two separate sets of mitigating actions to address".  

The two supervisory teams will assess risk separately, against their own separate objectives (and of course, firms do not as yet know what these are). Any firm currently preparing for an ARROW visit, or anticipating one later in the year will not be delighted by the knowledge that each group may well ask apparently similar questions, but that the purpose will be different.  

Conclusions drawn from the ARROW process will be coordinated with "a single pack of documentation" being presented to the firm's board––but this will have "two separate sections". However, there will not be a consolidated list of required actions arising from the ARROW visit.

Doubling up on visits
The meaning seems to be that you will still have an ARROW visit (at least, for the lifetime of the current FSA), but this will in fact be two visits. When the visit is over, the FSA will provide one, consolidated pack of documentation summarising the conclusions of the assessment. However this will be divided into two, with two separate sets of actions, to each of which firms are required to give "equal focus". So, you are indeed seeing double––your one ARROW visit has suddenly become two. Anyone who has been through the current ARROW process well knows the enormous amount of preparatory work that is necessary and the stress of the increasingly demanding interviews, so it is hardly welcome news that the amount of work involved is about to be doubled.

Firms will be required to make "behavioural changes", so that the new approach works "to the benefit of society" as a whole. In line with this, firms must comply with supervisory judgements "willingly" and "proactively"; in other words, not challenge FSA judgements, but take it like lambs. Firms must align their goals with those of their supervisors and (again) "with society as a whole". So, now companies have "the best interests of society" to contend with, along with everything else.

Unsurprisingly, no steer is given as to what these might be, or which society the regulator may have in mind. Rather puzzlingly, a further feature of this new world is that firms must "recognise that there are times when both firms and the regulator will make judgements which in hindsight are found to be wrong".  Sounds sinister!  What does this mean exactly?  

Perhaps the killer punch comes in an apparently throwaway line that is not elaborated further that firms must "recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model". Double the trouble, it seems, means double the cost. More fees and a greater cost of regulation at a time when companies are feeling the pinch of uncertain markets and falling revenues and buckling under the weight of around thirty-five (at last count) separate new legislative measures from Europe.

There is much still to be done and in his speeches, Sants provided a shopping list of the issues still to be addressed within the next twelve months, any one of which would be enough to keep an army of regulators busy for a good deal longer than this. They include amendments to the threshold conditions; the designing of a new "operating platform" for the FCA and the PRA; designing a new supervisory framework to replace ARROW; finalising the new Memorandum of Understanding detailing how the FCA and the PRA will coordinate their activities; splitting the Rulebook between the PRA and the FCA; and training (and presumably, recruiting) staff.

The next twelve months are likely to be extremely lively, as the FSA wrestles with operating within the Twin Peaks framework and labours with the complexity and volume of the issues still to be addressed.  Firms once again will be obliged to wrestle with major operational changes due to regulatory upheaval. Twin Peaks looks like being only the beginning of the fire walk.

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