Corporate Advisory

Rate Cut possible from the BoE this Thursday

The Bank of England is poised to slash interest rates to close to zero this week as fears mount over a Brexit-induced recession.

Economists believe the Monetary Policy Committee (MPC) will cut rates to a new low of just 0.25% on Thursday, while markets have priced in a 75% chance of more easing.

Bank of America Merrill Lynch believes policymakers will reduce rates to as low as 0.1%.

A cut would be the first change in interest rates since March 2009, when the base rate was slashed to 0.5%.

Global investors have rowed back their hopes for higher interest rates following the UK’s decision to leave the EU. Ahead of last month’s poll, markets were priced for 0.19 percentage points of rate cuts from the G7 central banks over the coming year. Now, they expect almost a full percentage point of cuts to be unleashed in the next 12 months.

Money managers believe that the Bank of England’s cuts will be the deepest, slashing rates from their historic low to just above 0.1% The next interest rate rise in Britain is not expected until 2022.

While some economists expect policymakers to wait until August to slash rates, others urged swift action. “If the MPC has already decided monetary easing will be needed, there is little point waiting,” said HSBC analysts.

The Bank of Japan and Bank of Canada are also expected to unleash stimuli in the next year, while the US Federal Reserve’s plans for further rate rises have been all but abandoned, despite last week’s robust jobs figures.

The nine MPC members are also expected to signal a fresh round of quantitative easing to support growth.

Analysts believe the Bank will start adding to its £375bn stockpile of asset purchases next month, when policymakers will publish an analysis of the likely impact of the Brexit vote on growth and inflation.

Mark Carney, the Governor of the Bank, has said he expects some monetary easing will be required. However, he warned of the potential consequences of ultra-low rates.


Two founder MPC members urged policymakers to proceed carefully.

See full article here

Corporate Advisory

MiFID II – Data is the Backbone

Access to reliable, accurate and timely data will help ensure the successful implementation of best execution policies. Knowing what to ask of your data to interrogate and analyse execution processes correctly will be critical.

The core objective of MiFID II is to improve the efficiency and integrity of European capital markets. Covering all types of trading, across all manner of financial services anywhere in the European Union, MiFID II’s final regulatory impact will reverberate far beyond Europe’s borders. From brokers and asset managers to custodians and third-party data providers, the far-reaching requirements will fundamentally re-engineer market infrastructure.

For all aspects of a trade, from initiation and client facilitation to final settlement, the need to accumulate, assimilate and evaluate data will be multi-dimensional, cross-asset and cross-regional. Buy side or sell side, large or small, confidence in meeting MiFID II’s requirements will hinge on access to reliable and accurate data.

The announcement that the implementation of MiFID II would be delayed to enable ESMA sufficient time to implement its data infrastructure highlights the extent to which regulators intend to rely on the provision of accurate and reliable data to govern the markets. Trading and execution venues, the members who use them, and the NCA’s responsible for monitoring them will need to provide and use data more effectively to deliver a more transparent, robust and efficient market.

Successfully managing the increasing volume and complexity of data across individual firms and industry-wide will require wholesale changes to policies and procedures, as well as greater harmonisation of standards. From operating conditions to organisational and reporting requirements, every investment firm and relevant service provider will be impacted across multiple business lines.

See full article here

Corporate Advisory

Know Your Client Compliance – Meeting the evolving needs

Maintaining the same business-as-usual environment to comply with Know Your Customer (KYC) requirements is no longer good enough. In response to regulatory requirements and the need to drive operational efficiencies, financial institutions are starting to take a closer, but cautious, look at several new utilities that focus on KYC processes. 

PWC have published a paper exploring this further

Corporate Advisory

Brexit – The Morning After

The decision has been made, now time to reflect, look forward and figure out what this all means

Leave’ won, but it is not a clear victory, despite the numbers. Brexit has revealed deep divisions across Europe, and the consequences have been swift. But amid the chaos, there are some important factors that need to be considered. What does it mean for MiFID, and what’s next?

So ‘Leave’ won, but it is not a clear victory, despite the numbers. Brexit has revealed deep divisions that exist not only in the UK, but that are representative of views across Europe – between political classes and generations; between centralists and the regions.

The consequences have been swift – the sterling and the Euro are in freefall, with the pound suffering its biggest fall for ANY currency in 40 years; the UK Prime Minister announced his resignation; the Labour leader Jeremy Corbin now looks set to be ousted; and Scottish First Minister Nicola Sturgeon is set to hold a second referendum, with even the new London Mayor, Sadiq Khan, demanding the UK must remain part of the single market. Nationalist politicians in France, Italy and the Netherlands are calling for their countries to also leave the EU. Even Spain is now demanding Gibraltar back. In short: total chaos.

See full article here

Corporate Advisory

Brexit – Bank of England Statement

The full statement from the Governor of the Bank of England following the EU referendum result 

See attached to the BoE media release

“The people of the United Kingdom have voted to leave the European Union.

Inevitably, there will be a period of uncertainty and adjustment following this result.

There will be no initial change in the way our people can travel, in the way our goods can move or the way our services can be sold.

And it will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world.

Some market and economic volatility can be expected as this process unfolds.

But we are well prepared for this.  The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.

The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.

These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
The Bank of England has stress tested them against scenarios more severe than the country currently faces.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.
Why does this matter? 
This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to UK businesses and households, even during challenging times.
Moreover, as a backstop, and to support the functioning of markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities.
The Bank of England is also able to provide substantial liquidity in foreign currency, if required.
We expect institutions to draw on this funding if and when appropriate, just as we expect them to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy.
In the coming weeks, the Bank will assess economic conditions and will consider any additional policy responses.
A few months ago, the Bank judged that the risks around the referendum were the most significant, near-term domestic risks to financial stability.
To mitigate them, the Bank of England has put in place extensive contingency plans.
These begin with ensuring that the core of our financial system is well-capitalised, liquid and strong.
This resilience is backed up by the Bank of England’s liquidity facilities in sterling and foreign currencies.
All these resources will support orderly market functioning in the face of any short-term volatility.
The Bank will continue to consult and cooperate with all relevant domestic and international authorities to ensure that the UK financial system can absorb any stresses and can concentrate on serving the real economy.
That economy will adjust to new trading relationships that will be put in place over time.
It is these public and private decisions that will determine the UK’s long-term economic prospects.
The best contribution of the Bank of England to this process is to continue to pursue relentlessly our responsibilities for monetary and financial stability.
These are unchanged.
We have taken all the necessary steps to prepare for today’s events.
In the future we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward.”

Corporate Advisory

Staying ahead of Regulatory Change

All firms within and across financial services need to stay abreast of existing and emerging regulations that dictate what, how, when, and where they need to report about their activity. A major consideration for firms that are either global or that trade with counterparties outside their home jurisdiction is that regulations across regions are not harmonised and continue to evolve.

For instance, take the Derivatives reporting requirements. In the EU under EMIR for OTC Derivatives Trade reporting differs from the US requirements under the CFTC, which in turn is fundamentally different to proposed reporting requirements in the US under the SEC for reporting Securities Based Saps (regulation SBSR). Besides the granular details of which elements should be reported (or not), basic concepts such as which trade participant is required (or not) to report which essential data elements varies across regulatory regimes.

Besides these divergent requirements, new reporting regimes are on the near horizon, e.g. the aforementioned SEC Regulation SBSR, MIFIR/MiFID II, HKMA Phase II, and SFTR under ESMA. Additionally, existing regulatory reporting specs are going through second and third rounds of revision, e.g. ESMA implemented Level 2 for EMIR reporting last year and a new RTS/ITS was proposed in November 2015, and proposed changes to the CFTC RTS were issued for comments in December 2015.

OCREUS recommend that firms take a macro matrix approach to staying ahead of regulations. This means understanding the matrix of regulations, directives and legalisations along with dates that impact compliance decisions.

…And its not simply about pure compliance decisions. It’s the practical translation and implication of these rules which firms need to think about, their business, products and operating models. Its potentially transformational, however once firms then begin to tackle the wave of endless change across regulation by function the macro matrix approach can bring longer term benefit to their nearer term regulatory change and compliance programmes.

Corporate Advisory

Lehman Brothers Lives On – Through a Generation of Entrepreneurs

“Lehman Brothers is not afraid of risks. The biggest risk sometimes is to take no risk at all.” So said Robert Lehman, who for many decades ran the company that his father had founded in 1850 as a cotton trading operation but grew to become the fourth-largest investment bank on Wall Street.

Lehman junior might just as easily have been referring to the attitude of dozens of former Lehman employees, who have gone on successfully to set up their own businesses following its bankruptcy in 2008 at the nadir of the financial crisis.

Mass layoffs and market chaos followed the now infamous collapse of Lehman, which triggered the worst banking crisis the world had experienced for almost 80 years. Investors’ money was wiped out. From what remained, Barclays bought Lehman’s US investment banking and trading business, while Nomura acquired the company’s European and Asian franchises. However, many of Lehman’s top people who had already left in the bank’s final years or in the aftermath of its collapse decided to strike out on their own.

The result is the dawn of a generation of entrepreneurs who have risen from the carnage. These include former Lehman executives who have founded private equity firms JRJ Group and Trilantic Capital Partners, corporate finance boutiques Ondra Partners and Noah Advisors, and a swath of other businesses outside finance.

See full article here



Corporate Advisory

Volcker Rule – Challenges Lingering ?

When the Volcker Rule went into effect in July 2015, it was a significant revolution in the trading practices of US banks. Millions were spent preparing for compliance, and lots more on the new business as usual. Despite all of the effort, however, there are still some aspects that aren’t running smoothly. This article looks at some of those lingering problems and asks whether the VR will help or hurt the safety of the banking business.
When the Volcker Rule (VR), one of the major parts of the Dodd-Frank Act, went into effect in July 2015, it was a significant revolution in the trading practices of US banks. Millions were spent on preparing for compliance, and lots more on the new business as usual; but it shouldn’t surprise us that, despite all that effort, there are still some aspects that aren’t running smoothly. Let’s take a look at some of those lingering problems, sorted by exemption.


This was always regarded as the most troubling aspect of the VR, so it was where banks spent most of their time and effort in preparation. Perhaps the most resources were applied to the tracking of trade volumes in comparison to reasonably expected near-term demand (RENTD). As it turns out, the tracking was much easier than determining RENTD in the first place.

It hasn’t helped that most markets have been more volatile than everyone had expected, or that one major market, fixed income, has been decidedly less volatile than expected. And the future is full of possible sea-change events, such as a Brexit, the long-awaited Fed tightening, or the possibility of a hard landing in China. To top it off, lower trading margins and profits have prompted banks to reduce staff and positions, and to rely more and more on algorithmic trading.

All those factors, taken together, lead to a very murky view of RENTD, to the point of calling into question the very idea of a “reasonable expectation.” Those market makers that expected the Fed to tighten by now, with the resulting paroxysm in the fixed income markets, have prepared for customer demand which, however reasonable to expect, never materialised. After one or two repetitions of that exercise, they probably backed off. Inevitably, somewhere down the line we will see those events come to pass, but by then most people’s RENTD won’t be anything close to reality.However, even if the VR had never happened, those market events would be most likely to occur. Long periods of low volatility and low spreads, with the resulting drop in liquidity, followed by sea changes in monetary policy, will invariably lead to market dislocations. If market makers feel constrained by RENTDs that are unrealistically low, based on past experience, they will be hanging back just when they are needed on the front lines. When that happens, critics may blame the VR, but it’s hard to see how it could play out any other way, even without the rule.

Liquidity Management

This exemption got much less press than market-making, but its lingering problems may be significantly worse. The culprit here is a combination of the hold-to-maturity basis of the exemption and the extraordinarily low short-term rates. With historically low loan demand, and suppressed earnings throughout the banking industry, this has led to banks’ reaching for yield in their liquidity portfolios.

The same impending market changes that bode ill for RENTD will have significant impacts on the liquidity exemption. If banks have been moving out on the yield curve and down the quality spectrum for yield, their liquidity portfolios are exposed to high degrees of volatility whenever rates start rising. Any attempts to liquidate those portfolios in the face of rising rates faces a double whammy – losses on the portfolio and questions about compliance with the held-to-maturity exemption rules.

There doesn’t appear to be much a bank can do about this conundrum, short of giving up on the idea of getting yield from the portfolio. Even repositioning the portfolio in advance of a rate rise gives the appearance of excessive trading as defined by the VR, and waiting for the inevitable will only make matters worse. Here, again, we can ask whether the projected financial consequences of reaching for yield and then having to liquidate have anything to do with the VR, or are simply the result of market forces. Either way, we would be explaining a bad situation.


This exemption was probably the most far-reaching of the VR reforms, and undoubtedly the least discussed – in the press, anyway. The hallmark of this exemption is metrics and math; the quantification of both the risk and the hedge, the tracking of the correlation, and making mid-course corrections to any hedge positions.

All of these requirements look like good business processes, bringing discipline to what was often a seat-of-the-pants practice. But we must remember that the exemption applies to all hedging, not just the hedging of market risk. In other words, risks associated with such basic banking practices as loan origination, asset-liability management, or even cross-border expansion must follow the same rigorous requirements.

In many of these cases, banks may not have good foundations for either the risk assessment or the hedge construction. Even where they have history to rely on, it may not be a good yardstick for an uncertain future. It may not only mispredict the risk, it may mispredict the hedge performance as well.

Of course, risk is inherently about the unknown, but there are two kinds of unknowns to be confronted here. The first is the path of what we can think of as the independent variables, the things that could cause the losses. The second is the relationship between the independent and dependent variables, particularly in the more arcane risks.

One possibility of these complications and higher rigor may be a decision to bypass the hedge entirely as too difficult to construct. If banks feel they may face criticism for attempting a hedge that didn’t work, taking on the risk itself may look like the easier path.

Is the Rule to Blame?

Given the ample opportunities for things to go wrong in banking, we should anticipate a certain amount of finger-pointing in the future. One discussion I fully expect to hear is about whether the VR helped or hurt the safety of the banking business in general. That discussion will likely focus on results, without taking into account the alternatives, but we need to understand both sides, and preferably before the big changes happen. Some questions that need to be asked:

To what extent does the rule encourage good processes while discouraging bad ones, and vice versa? The intentions of rules are always good, but the results aren’t always what we expected. Where rules complicate a good process to the point of making it unattractive, they can have exactly the opposite of their intended effect.

How much can any results be traced to the rule itself and how much are a function of market forces? Many of the changes in bank trading over the last five years have been due to those market forces, and not to rule changes. In the future, as we assess additional impacts on the structure of the banking industry, we need to separate out those things caused by rule changes from those things that would have happened anyway.

What is the difference between rules and good management? The VR drafters, and its enforcers, sincerely believe that they are fostering good risk management across the banking industry. But, if risk is about the unknown, then no rule, no matter how specific, will cover the waterfront. So to the extent that rules lock banks into specific behaviours, they may actually inhibit risk management.

The future of the banking sector in the US is a function of many things, among them the Fed’s actions as a central bank and management’s skill and flexibility in dealing with uncertainty. Since almost all the money in the country is made up of banks’ promises to pay, we all have a major stake in how well they do their jobs. To the extent that the VR prompts better risk management, it will have been worth it. To the extent that it is a burden, we may all live to regret it.

See full article by George Bollenbacher here

Corporate Advisory

MiFID II – Investor Protection

The FCA has published a speech from its recent MiFID II conference entitled Investor protection under MiFID II.

Key points from the speech include:

  • As firms prepare for MiFID II implementation over the next year the FCA will continue to examine the application of its existing conduct requirements.
    • The FCA will also challenge firms about whether they have in place the changes needed to ensure their future compliance. For example, firms may need to make changes to deal with new requirements like:
      • (i) the application of RDR-style rules on inducements to portfolio managers;
      • (ii) the shift from domestic guidance to tough new rules on product governance; and
      • (iii) the introduction of new requirements governing frontline staff remuneration;
  • The FCA is currently in the middle of a thematic project on due diligence. This is a discovery exercise to understand current practice, and potentially to provide guidance on good and poor practice to help improve standards.
    • The FCA has looked at the roles of the different players in this market, including unregulated third-party providers of what might be called ‘due diligence solutions’, as well as advisers and product providers.
    • Whilst the project is a discovery piece, the FCA has also been assessing firms against current suitability rules. This work is particularly important in the context of MiFID II because the implementing legislation is set to introduce more specific requirements for firms to conduct due diligence and ensure the products they recommend are suitable for their clients;
  • MiFID II will refocus the FCA’s attention on inducements more generally, both for firms that give advice or manage portfolios and for those that do not. Since the introduction of the RDR, the FCA has maintained a supervisory focus on inducements, carrying out thematic work and continuing to communicate its expectations. Whilst it is encouraged by many advisory firms changing their practices to ensure their advice is not influenced by payments from product providers, the FCA remains concerned that some firms may still be receiving benefits and payments that have the potential to bias the advice they provide, in other words, that their culture may have remained unchanged;
  • MiFID II will, for the first time, bring in a European regime governing the way that asset managers purchase and consume third-party research. The FCA is currently waiting to see the final implementing legislation that will determine the exact shape and operational details of the new regime. That said, it encourages investment managers and brokers, in particular, to continue to focus on driving improvements based on the findings from its dealing commission review, which it reported on last year in Discussion Paper;
  • MiFID II will expand the types of products that are to be considered complex for investors to understand. Defining a product as ‘complex’ means that firms selling these products without advice will need to assess whether a potential purchaser has the necessary experience and knowledge to understand the product they wish to purchase (the appropriateness test).
    • The FCA is alive to industry concerns in this area because of the need to make practical changes to distribution strategies. However, it does not yet know how easy it will be for these tests to be adopted and operated by online distributors.
    • The FCA does know that firms are unlikely to be able to meet the appropriateness requirements when selling complex products through direct offer financial promotions, meaning that this channel will no longer be available for distributing some products.
    • In addition, firms will need to assess what sorts of knowledge and experience may be sufficient for a firm to rely on when selling particular instruments.
    • The FCA recognises that some complex products are more complex than others. The FCA will be looking at how it might be able to differentiate its expectations between products.

Corporate Advisory

MiFID II – The Road Ahead

The FCA has recently published a speech from its recent MiFID II conference entitled MiFID II – the road ahead.

In the speech Mr Lawton covers both the EU and UK timeline for finalising MiFID II / MiFIR by 3 January 2017. In particular he notes:

  • That ESMA recently published the draft technical standards and that these draft standards have been sent to the European Commission for endorsement which can take up to three months.
    • After this the draft standards are subject to scrutiny by the European Parliament and the Council of the EU, a process that can in theory last several more months.
    • If the Commission, Council and Parliament do not want to make any changes, the technical standards could be finalised in Q1 2016.
    • Ultimately the FCA will have to wait and see if this all goes smoothly although Mr Lawton states that the FCA has no reason to think it won’t;
  • Last December ESMA submitted to the Commission its advice on the Delegated Acts.
    • The Commission has not yet reached a position where it has been able to finalise and publish the Delegated Acts.
    • While these were expected to be published over the summer, November or December now looks much more likely
  • The FCA’s and HM Treasury’s work is heavily dependent on seeing the near final EU rules.
    • The FCA’s current expectation is to publish a first consultation paper this December. It expects to publish at least one more in early 2016.

In relation to the FCA’s expectations regarding authorisations Mr Lawton notes that:

  • MiFID II / MiFIR will require certain firms such as Organised Trading Facilities, firms undertaking speculative trading in commodity derivatives and firms utilising high-frequency trading methods to be registered for their status or activities for the first time. For some, this will mean applying to the FCA for new permissions, but others will have to go through the FCA’s authorisation process for the first time; and
  • The FCA’s current intention is to start making new application forms available in early 2016 and start accepting draft applications from April.