Corporate Advisory

Regulators prepare the Guillotine on retail selling of ‘Complex’ Derivative products

On Friday the FCA proposed making temporary curbs on the sale of complex derivative products to retail customers permanent.

EU regulators agreed in June to a temporary ban on the sale of “binary options” and imposed restrictions on the sale of CFDs, aiming to protect retail investors from heavy losses.

The FCA, in a statement, also proposed applying the restrictions to similar products such as “turbo-certificates” in the UK, widening the scope of the current EU curbs to stop variations getting round the restrictions.

The FCA is acting to tackle widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them, that has led to harm to consumers in the UK and internationally through large and unexpected trading losses,” the watchdog said.

Germany’s financial watchdog said last month that it also plans to ban private investors from buying binary options.

A permanent ban on binary options could save retail consumers up to 17 million pounds a year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products, it added.

The FCA will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers.

EU regulators have said their ban on selling binary options would be extended in January for three months.

The FCA will publish final rules by March 2019, however its has also said that if there is no Brexit transition period and it was unable to finalise its proposed rules by March, it would likely adopt emergency measures to replicate the bloc’s curbs so that investors are still protected.

The FCA is also seeking feedback on whether its proposed curbs on CFDs should be extended to other complex retail derivative products, including futures contracts.

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Corporate Advisory

The Libor replacement headache – Use of the Benchmark is actually on the Rise

Regulators and banks always knew investors’ dependence on the Libor interest rate benchmark was going to be difficult. The UK’s Financial Conduct Authority would like banks and institutions to move to other benchmarks by the end of 2021.

While they have made a start, a new problem has emerged. The use of Libor is still rising and it is down to the transition itself. The notional value of long-dated derivatives contracts referencing sterling Libor that mature after 2021 is double that of July last year, according to the Bank of England’s latest Financial Stability Report. It was 18 months ago that the FCA told the market Libor was on borrowed time.

Libor has become so pervasive in the past 30 years that it is still central to thousands of derivatives, bonds, credit cards and loan contracts. The BoE stats are in part misleading because a notional number on a derivatives contract does not remotely reflect the actual exposure in the market. Even so, the interest rate benchmark is a vital component of a derivatives contract.

However as the BoE notes, the rise here is because investors are transacting swaps that exchange cash flows in Libor for cash flows in Sonia as its quoted at a lower rate than Libor. In effect it looks like more Libor swaps are being created as a hedge to the transition from Libor. This really begs two questions: who is acting as a counterparty on these swaps and what risks are they taking? It may need a forward-looking term benchmark based on Sonia and a fallback if Libor is discontinued to resolve the issue.

They are only in early-stage development, which will take years. The 2021 transition date looks ever more fragile.

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Corporate Advisory

Brexit and MiFID III – What does the future hold?

Not the most appealing thought to anyone within the financial Services sector, however the potential for changes to the ‘newish’ MiFID II could well be upon us in any future Brexit environment.

Brexit and other European political factors will be the main driver of any European regulatory change in the near future, including any changes to MiFID II or the introduction of MiFID III, according  MEP Kay Swinburne.

Delivering a keynote address at the Fixed Income Leaders Summit, MiFID II author Swinburne highlighted the UK’s upcoming departure from the European Union in March next year as key influencing factor on how regulatory change may play out.

While Swinburne maintained that the introduction of MiFID III is a “reality”, this is more likely to be formed through a series of reviews to existing MiFID II standards and other technical amendments, primarily driven by political motivations.

“Even though I am a politician, I take no pleasure in bringing politics into financial legislation and I firmly believe that any review of any highly technical dossier, anything like MiFID II, should be kept at a distance from serious political influence,” said Swinburne. “But, I’m afraid it is a reflection of the reality that I have observed in Brussels over the last few months that it would be foolish to consider future regulatory change without considering the political drivers that are there right now.”

Citing Brexit as the “single biggest driver right now for MiFID III-type changes”, Swinburne said that the UK was “fairly guilty about not looking beyond other political developments” but underlined the importance of other fundamental changes occurring across Europe that will also play a significant role in how regulation is reviewed.

“We need to consider the upcoming changes that will take place in the EU and the EU’s own institutions,” Swinburne said, pointing to the upcoming European Parliament elections in May 2019, which in turn will place a greater emphasis on fringe political parties that traditionally “vote against legislation, regardless of its content.”

Addressing the possible timeline for when the industry could expect to see a review of MiFID II occurring, Swinburne said she would “write off the first six months after the European Parliament mandate”, instead highlighting a number of changes currently underway in Europe that will impact on regulatory changes, such as the SME performance review and post-trade transparency rules for the fixed income space.

“My concern now is that MiFID III will be shaped not by data resources, but by purely political objectives, and above all, it is going to be shaped very differently by the relationship going forwards between the UK and the EU, and that will override all the fundamentals of market analysis,” she said. “So, MiFID III, as it is known in that nomenclature, may be a long time coming. But changes are happening now.”

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Corporate Advisory

Apple and Facebook call for EU-style privacy laws in US

Facebook and Apple have called on the US government to adopt tough EU-style data privacy laws, challenging White House objections that European regulation is imposing red tape on American technology businesses.

In separate addresses in Brussels on Wednesday, Apple’s chief executive Tim Cook and Erin Egan, Facebook’s privacy chief, threw their weight behind legislation that would give American citizens equivalent protections to those given to Europeans under the EU’s General Data Protection Regulation.

GDPR, which came into force in May, is one of the toughest personal privacy regimes in the world, giving EU citizens the right to demand companies disclose and delete information held about them. The regulation also gives Europe’s national regulators the power to impose fines of as much as €20m, or 4 per cent of annual revenues, on companies that break the law.

The Trump administration has complained GDPR risks creating barriers to international trade by imposing unnecessary burdens on companies struggling to comply with the rules. Writing in the Financial Times in May, US commerce secretary Wilbur Ross said the criteria for applying GDPR was “too vague” and would impose a “significant cost” on small businesses.

In a meeting with Vera Jourova, EU justice commissioner, in Brussels last week, Mr Ross expressed concerns GDPR was creating difficulties for US business and law enforcement, according to an EU official familiary with the matter. Mr Ross also invited Brussels to send comments on how GDPR operates to the White House for its consultations on drafting a US privacy law.

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Corporate Advisory

Brexit – FCA Discloses No-Deal plans


The FCA has stepped up its preparations for a no-deal Brexit by outlining detailed plans for the oversight of EU financial services firms with operations in Britain. The FCA published a blueprint for how it would issue temporary authorisations for EU firms doing business in the UK.

The regulator also revealed that 1,300 EU firms that have activities in Britain would be willing to sign up to its proposal that they have time-limited permits lasting three years.

This figure represents fewer than 20 per cent of the 8,000 EU entities that hold authorisations from the bloc, called passports, to do business in the UK.

However, the FCA does not know how many of these entities have multiple passports.

The FCA will roll out its three-year temporary authorisations regime for EU firms in the event of a no-deal Brexit to try to smooth the end of passporting arrangements.

See full article here

Corporate Advisory

Lehman – The last ten years could & should have been so different

In 2008, the collapse of Lehman Brothers triggered a global financial crisis. A decade later, commentators are debating whether federal officials could have prevented the crisis by supporting Lehman as it did other banks soon afterwards.

Commentary from Lehman’s chief administrative officer on the day it closed its doors forever. ‘Speaking as someone who was on the inside looking out, the answer is clear: Lehman could have and should have been saved’

Realising that may sound self-serving he points to the the facts. ‘Lehman was refused assistance, it was explained weeks afterwards, because it lacked the collateral to secure a loan from the US Federal Reserve and the Fed was therefore barred from providing assistance. Many of us first heard that explanation from the then-Fed chairman Ben Bernanke at the Economic Club of New York in October 2008′

He continues, ”by way of context, Lehman had delivered record net revenues and earnings in 2007, giving it the second-best revenue and earnings growth in the industry over the previous five-year period. That year, net leverage was in line with that of our peer and by 2008, we had meaningfully reduced that leverage, increased our equity and expanded our liquidity pool”

“Were those numbers real, or were we cooking the books? Well, the three investigations over the past decade, including one by the Securities and Exchange Commission, have all concluded that our balance sheet valuations were legal. In other words, there was adequate collateral to secure a loan from the Fed after all”

It’s not as though Lehman sprang its need for support from federal decision makers at the last minute, leaving too little time to make a thoughtful decision. Quite the opposite. “In June, being on a call with Dick Fuld and several other top Lehman executives when then the president of the Federal Reserve Bank of New York, was ask to allow Lehman to become a bank holding company:

“Tragically, they said no, saying it would send the wrong message. Ironically, the Fed turned Goldman Sachs and Morgan Stanley into bank holding companies one week after Lehman filed for bankruptcy, sending the right message and giving them exactly what we had been denied”.

The decision to rescue Goldman and Morgan Stanley was instrumental in preventing the collapse of the entire financial system. Lehman could have been saved in exactly the same way at any point that summer which would have prevented the carnage the world experienced.

A bad decision was made because of suffocating political pressure. As we prepare for the next time a crisis happens and there will be a next time, even if it doesn’t look exactly like 2008  policymakers need to remember this lesson, learn from it and avoid an unnecessary repeat.

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Corporate Advisory

Asset Management – No fee Passive Fund launch sets challenge to the market

Shares in US fund firms took a beating as Fidelity Investment took the price war to a new level by launching two no-fee funds.

The Boston-based manager announced plans to launch a pair of stock index funds that will carry an expense ratio of zero. It also unveiled plans to cut fees on a host of other index funds and scrap investment minimums on all of its mutual funds and minimum account balances on its brokerage platforms.

Shares of other asset managers plunged on the news. BlackRock, the world’s biggest asset manager, fell 4.6%, while Franklin Resources and Invesco dipped by 5.5% and 4.3% respectively. AllianceBernstein and T Rowe Price slipped by 1.8% and 1.5% respectively.

The zero-expense ratio index funds, the Fidelity Zero Total Market Index fund and the Fidelity Zero International Index fund, will go live on the firm’s brokerage platform on Friday, the firm said.

Access to the zero-expense ratio funds will be restricted to retail investors on Fidelity’s brokerage platform, Fidelity said in a prospectus filed with the Securities and Exchange Commission.

The firm said it would cut expenses across its existing index funds by an average of 35%, which Fidelity said would save investors $47 million annually. Fidelity said all of its stock and bond index funds would have lower expense ratios than Vanguard’s comparable funds and nine out of 10 of Charles Schwab’s comparable index funds.

Charles Schwab said the move was a good one for investors.

‘Anytime costs go down, investors win,’ a Charles Schwab spokeswoman said. ‘We remain laser focused on delivering straightforward, transparent and low-cost products.’

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Corporate Advisory

Brexit – Another bank chooses Frankfurt

Credit Suisse has picked Frankfurt as a key post-Brexit centre for its investment banking and capital markets business and has already moved several hundred million dollars of assets to support the new hub.

The Swiss group, one of the last big international banks to reveal its post-Brexit plans, is also moving a number of traders to Madrid, as reported earlier this week and recently confirmed it had been granted a new brokerage licence in Paris.

In Frankfurt, Credit Suisse is re-purposing an existing entity so that it can become part of the group’s Investment Banking & Capital Markets unit.

A person familiar with the plans said the change in structure was “certainly part of the Brexit strategy” and would facilitate Credit Suisse doing investment banking and capital markets business out of Germany.

Credit Suisse will move some bankers to other EU corporate centres, as well as its Paris brokerage, bringing the total moves from London to about 250 from the Swiss bank’s 5,500 headcount there.

Frankfurt and Paris, the favoured post-Brexit choices of large US banks, had long been mooted as potential homes for Credit Suisse’s EU businesses after Brexit, along with Amsterdam.

see full article here

Corporate Advisory

BoE probe KPMG

The Bank of England has probed the strength of KPMG’s business after a string of high-profile corporate scandals damaged the reputation of the Big Four accounting firm.

The BoE’s Prudential Regulation Authority, has raised questions with financial institutions and other regulators to see whether there were risks to KPMG’s viability. People involved in the discussions said the PRA had sought assurance on whether KPMG’s existing clients were planning to cut ties with the firm or whether it was struggling to win new business following heavy criticism of its work in South Africa and for British outsourcer Carillion.

The regulator was also keen to understand whether KPMG’s problems in South Africa where it has haemorrhaged clients and cut hundreds of staff over the past 12 months is due to its role in a sprawling government corruption scandal could jeopardise the rest of its international network.

Bill Michael, chairman of KPMG UK, said: “KPMG is in robust financial health. KPMG is seeing outstanding growth right across our audit, tax and advisory arms, we have a strong balance sheet and are well funded with a growing pipeline. The Bank of England has a legitimate duty to scrutinise the market. But they have not approached KPMG formally or informally. If they were to, we would be happy to reassure them of our robust financial health.”

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Corporate Advisory

Brexit – FCA gets punchy as it plans for no-deal

The UK and the European Union’s financial regulations may “evolve” after Brexit but that should not impede access to one another’s markets, a senior UK regulator has said.

In a pointed rebuttal of criticism from EU regulators, Nausicaa Delfas, executive director for international at the Financial Conduct Authority, said that UK regulators were planning for a scenario in which the UK crashes out of the EU in March with no deal, but were pinning their hopes on the transition deal through late 2020 that has been agreed but not ratified. She upbraided her European counterparts for not introducing temporary permissions to operate, as the UK is doing for EU firms.

Ms Delfas warned that financial firms expanding their EU operations because of Brexit must still have sufficient top brass in the UK who can be answerable to British watchdogs, and that whatever their new structure it must not impede direct oversight of firms’ UK businesses by UK regulators. EU regulators have been just as demanding in saying senior managers must be located in the EU, and they are also insisting on direct oversight.

Her comments come a week after the UK government published its white paper detailing its Brexit negotiating position, including for the first time detailed proposals about how to approach financial services. The UK jettisoned a previous idea for “mutual recognition” of standards between the EU and the UK and instead proposed building on the existing legal mechanism of so-called equivalence, which allows access to financial firms beyond the EU in some areas. But it is currently patchy and can be withdrawn with just 30 days’ notice.

“Common outcomes should be the criteria by which we judge one another’s regulatory position, and thus the access that we are prepared to grant to one another’s markets. What matters more is not what road we take, but what that final destination is — and as long as the UK and the EU maintain a commitment to protecting consumers and to strong, open markets, there is no reason this cannot work in practice,” Ms Delfas said in a speech in London on Thursday, according to prepared remarks.

EU firms that are still planning to access the City of London will be given temporary permission to operate in order to smooth the effects of having to seek full new regulatory authorisation in a short time period, the government has already confirmed. The FCA is giving firms a “landing slot” to then apply for full authorisation, with the first expected in late 2019, Ms Delfas said on Thursday.

EU regulators are yet to present a parallel backstop for UK firms seeking to retain access to the bloc, however.

The challenges this presents, in terms of lack of commercial certainty, and business disruption, is clear from my speaking to senior leaders in regulated firms,” said Ms Delfas. “Needless to say, we think this is necessary to provide certainty and smooth the transition, and it is something we stand ready to discuss with our EU counterparts.

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