Citi and World Bank Group member IFC have today announced a $1.2 billion risk sharing facility to support trade and economic development in several emerging markets.

Funding will be used to originate and fund trade finance transactions in Africa Asia, Latin America, Europe and the Middle East.

The deal marks an extension of two existing facilities under IFC’s Global Trade Liquidity Program, having previously signed their first trade finance facility in October 2009. IFC will contribute an initial $600 million while Citi will provide an additional $600 million. 

“As the availability of global trade finance continues to decline, IFC is committed to working with Citi to find innovative ways to help expand trade finance flows in the developing world – and the Global Trade Liquidity Program is one such successful effort,” said Marcos Brujis, IFC director, Financial Institutions Group. 

The funding is expected to support trade in emerging markets by up to $6 billion through 2019 and Anurag Chaudhary, global head of distribution for Citi’s treasury and trade solutions spoke of the benefits of the partnership.

"Citi has been a trusted partner to banks, corporations and the public sector across the emerging markets for many decades, and through our collaboration with IFC – as well as other development and export credit agency partners around the globe – we are firmly committed to restoring the flow of trade and commerce financing around the world.” Chaudhary said. 

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The Singapore Exchange (SGX) has launched a new index business where it plans to build custom indices for asset managers in Asia.

SGX Index Edge will allow the exchange to capitalise on the growing demand for customised index-linked investment opportunities across the region.

SGX has been conducting a beta launch on a series of futures-based indices tailored for product issuers of Exchange-Traded Notes (ETNs), OTC (Over-the-Counter) products and retail structured products since October 2014.

The Access Asia suite of 60 indices are distributed through SGX’s network of brokers, data vendors, independent software vendors, other exchanges and trading firms.

“As Asia’s most international exchange and a leading market infrastructure for investors across Asia, we are in a unique position to develop Asia-focused index capabilities, as a natural extension of SGX’s existing suite of products and services,” said Loh Boon Chye, Chief Executive Officer of SGX.

The launch of SGX Index Edge demonstrates our ability to continually innovate to position SGX strongly for the long-term as we look towards becoming the pan-Asian index provider of choice.”

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Exchange Traded Funds (ETFs) have gained increasing popularity amongst investors, with global ETF investments outperforming hedge fund investments in the second quarter. Positive investment patterns, however, have not yet translated into wider acceptance within the collateral management context. Last month, Markit launched ETF Collateral Lists in a bid to bridge the gap between ETFs and securities lending collateral. Markit’s Pierre Khemdoudi, managing director of Securities Finance, and Anthony Kruger, ETF Product Specialist, discuss the launch of the Collateral Lists and the growth of ETFs.

Can you explain what these ETF collateral lists are?

AK: We have published two lists; one is the collateral physical fixed income, and the other is collateral physical equity. These are meant to be quite high level and conservative in nature, but we don’t think we are pushing the needle too much in what is accepted currently. We are just making the process more efficient so the type of ETFs you find in each list tend to be accepted as collateral by those certain lenders.

PK: In a time where people are optimising their balance sheet and trying to make use of every single asset in terms of collateral management, ETFs seems to be the asset class that is not being as widely used. This is mainly due to a lack of risk/manual processes of evaluating and classifying the ETFs. This initiative looks to standardise management of ETFs and help market participants to integrate ETFs into their collateral management flows. 

PK: When you look at the metrics of deploying collateral, you look at the asset class; its scope and geography. When it comes down to equities you refer to the FTSE 100, and everybody knows what is in the FTSE 100 so that gives you a nice one liner to integrate equities. But at present the process to accept ETFs as collateral is actually a line-by-line process. So classification is more complex. However with our initiative, you are not looking at it line-by-line but rather using a rule-based methodology to integrate ETFs. So with this methodology you can integrate several assets and make your management of ETFs more efficient. 

What market participants are demanding increased use of ETFs as collateral?

AK: Demand is coming from both beneficial owners and asset managers. It is also from the broker-dealer community. In Europe market makers at the moment cannot make efficient use of ETFs in the repo market. They then may pass on that additional cost in their bid-ask spread. This could discourage investors because their total cost of ownership in getting into the product is higher than other products. So there is definitely a demand for the broker-dealers to post ETFs as collateral.

PK: Also as ETFs continue to grow very rapidly, more beneficial owners will end up holding these, and would want to lend them to gather added revenue. This could lead to ETFs becoming “fully fledged” financial instruments where you can go long and short or used for hedging strategies etc.

What types of firms will have to stand up for ETFs to become widely accepted?

AK: It is an industry-wide initiative. It will be led a lot by the agent lenders who will be facilitating the use of these for their clients. So I think it will come down to them to promote it, but it is also key that we are integrating into the tri-party agents to really help the operational efficiency of ETFs to go forward.

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The Alternative Investment Management Association (AIMA) has launched a joint survey to discover how ready hedge funds are to the changes Basel III will have on relationships with their prime brokers.

Many of the largest prime brokers, such as Barclays, Credit Suisse, Bank of America, Deutsche Bank and JP Morgan, are shrinking their prime services division and cutting less profitable clients in the wake of increased capital requirements.

This has led to many hedge fund clients at the mercy of these cuts, in which the leverage ratio and the liquidity coverage ratio (LCR) in Basel III are forcing prime brokers to review their hedge fund relationships, and are becoming much more selective over what parts of the portfolio they finance.

Hedge funds rely on banks to provide leverage, offer securities loans and finance their trades.

“It is clear that many hedge fund management firms are struggling to see how these capital requirements will affect the cost of doing businesses,” says Jack Inglis, CEO, AIMA. 

“With this survey, we are hoping to cut through some of the noise and better understand what managers have seen so far and how they expect their relationships with their prime brokers and other financing counterparties to change.”

A survey conducted by State Street in October last year found that of 235 hedge fund executives, only 29% see Basel III significantly increasing the cost of financing, while 42% disagreed with the notion and another 29% were unsure. In addition, when asked whether Basel III will significantly change the way their firm manages its service providers, 37% disagreed and 26% were unsure.

The survey, alongside financial analytics provider S3 Partners, also aims to establish definitions for fundamental concepts such as ‘optimisation’, ‘collateral management’ and ‘reconciliation’. 

“Hedge funds and asset managers should be used to hearing their counterparties speaking about return on assets, optimisation and collateral management, but the surprising thing is that there’s still no industry-wide understanding of what exactly these concepts mean,” says Bob Sloan, CEO, S3 Partners.

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At the beginning of 2015, JP Morgan Asset Management’s global head of equity trading Kristian West announced that global automation and standardisation of execution was a priority for the business for the year ahead.

The conformity programme was designed to unite the business under one order management system and simplify the group’s existing fragmented trading model.

For JP Morgan Asset Management, executing this in the Asia region represented one of the most ambitious trading projects that the company has undertaken due to the numerous regional differences.

Just over two years ago, JP Morgan Asset Management asked its London-based head of program trading to up sticks and move to Hong Kong.

JP Morgan AM set up more than 35 years ago in Hong Kong and has since established a network of eight offices in the region – Hong Kong, Melbourne, Mumbai, Seoul, Shanghai, Singapore, Taipei and Tokyo.

When Lee Bray took up the position as head of trading for the Asia Pacific region, he was also tasked with bringing global standards to the region’s operations.

In an interview with The TRADE Asia in 2013, he explained many of the challenges that faced him – transaction costs analysis usage, regional integration resistance and benchmark issues to name but a few. Things have moved on a lot since then.

Bray explains: “I was asked to come over to APAC where we were going through a change as to how we operate our businesses. Historically, we have always run things separately between the US, Europe and APAC. Even in APAC, there were different desk heads.

“My boss Kristian West…. created a new role for me to come into as head of the APAC region. My aim was to regionalise APAC, which had never really been the case – [looking at] approaches to execution from a systems perspective that would feed into a global model.

“We have just moved towards a global execution management system which we put in at the end of 2014. With respect to the EMS, we are now globally aligned.

“With the order management system, we hope to go live in APAC in early 2016. When you are talking about systems, they take a while to input. There is a roadmap for these things.”

In his interview with The TRADE Asia back in 2013, Bray flagged the prevalence of the VWAP benchmark across Asia as a concern.

At the time, he said that the widespread usage of VWAP across Asia could be prohibitive to using an implementation shortfall benchmark.

However, fast-forward two years and Bray is now more optimistic that this is a change that can be made as part of a longer-term plan.

Unbundling

Another of the global themes playing out across the business is the focus on unbundling.

While some buy-siders in Asia have stressed that the differences in trading models regionally mean that full unbundling should be resisted, opinion is divided.

Eugenie Shen, managing director and head of the asset management group at the trade group ASIFMA, told The TRADE Asia back in April that her members had expressed concerns about plans by European and US regulations to ‘unbundle’ research and commission fees. She said she thought that this may impact the Asian region adversely because there will be insufficient investment in research on emerging market small and mid cap companies.

She said: “I think Asia is different. If you look at China and Malaysia, there is not enough research. Who is paying for the research? It is tricky.”

Bray is more pragmatic. He acknowledges the regional subtleties but stresses that JP Morgan Asset Management is a world leader, and therefore has to adhere to the highest possible standards.

He explains: “At JPMAM there is a big focus on unbundling as a global theme. In working towards the most stringent application of any regulatory environment, we keep a close eye on what is going on in the UK and what is going on with the MIFID situation as it continues to evolve.

“I am in constant contact with Kristian (West) in terms of how we apply that to this region. It is more difficult given the nature of the region. In Japan, there is no obvious regulation that allows for a CSA (commission sharing agreement) environment and the same in Taiwan, which can be problematic.

“We have to fit in with the local regulatory environment and if it doesn’t cover unbundling, all we can do is watch. Hopefully we can come up with a solution as an asset management community in the region.”

Bray likens the concerns raised by ASIFMA members about a possible lack of research in certain areas due to insufficient funds to similar concerns raised in Europe about the quality and volume of research available for small and mid-cap companies.

He says: “There have been concerns that [this research is] less profitable and might be the first thing to be cut by the investment community. But there is a need for small and mid-cap research in Europe just as there is a need for some of this emerging market research.”

Keeping busy

Bray said the past 12 months have been particularly busy for buy-side trading bosses in Asia as a result of new algorithm regulations brought in during the early part of 2014 and with the launch of Shanghai-Hong Kong Stock Connect in November last year.

The launch of Stock Connect attracted a handful of critics due to initial teething problems (see this issue’s Derivatives Watch), but Bray is among the many supporters of the scheme who believe the turnaround of the project is to be commended.

He says: “If you look at what they achieved in such a short amount of time, from a practical trading perspective, I think it was amazing. It is a credit to the financial industry in Hong Kong and China. It is a massive undertaking and the market remained open.

“Obviously, the sticking point for many international asset management firms was some of the legality issues, beneficial ownership being one of them.

“Yes, we could learn something from that and engage with the regulators a bit more, but you can’t expect everything to go smoothly from day one and as far as I can see, it has gone relatively well.”

The biggest project for Bray that is looming large on the horizon for the next few months is the development and implementation of the new order management system.

He says: “They [JP Morgan AM] have implemented the new OMS in Europe and we are now working on rolling that out over here in APAC.

“With the regional nuances that we have here, it is quite a big undertaking.

“It is the internal accounting system of the trading function. It will take us nearly a year to sort that out.

“We have an internal TCA product that we are trying to align on a global basis. It evolved in two forms – we are now rolling that into one. We have just employed someone on the IT side to work on that. They will be working on the global team but sitting here in Hong Kong.”

Themes to watch

The growing influence of algorithm usage in the APAC region is one of the key market themes that Bray believes will have a significant impact on the business in the years to come.

He says: “For long funds like us to walk in to some automated solution for easy-to-execute orders will be about two to three years out.”

A second theme which he flags as important is the move away from focusing on individual markets to more of a liquidity profile for execution.

For JP Morgan AM this means traders split not by asset, but by the market liquidity associated with that asset.

Bray says traders are less often working in linear asset classes but instead working in teams dividend into ‘liquid’ and ‘illiquid’ operations. The latter are a specialised team of traders, which have responsibility for blocky, illiquid stocks, for example.

He says: “The right trader deals with the right question. If we are looking to unwind a large position in a particular stock, that will be tackled by the single-stock, illiquid traders. If we are looking to optimise an algo offering, it will be the liquidity desk.”

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FIX Trading Community has created new subgroups focused on six of MiFID II’s most impactful regulations.

The groups will address the relevant regulatory technical standards (RTS) as proposed by the European Securities and Markets Authority (ESMA) as the industry prepares for MiFID II, now less than 18 months away.

The groups will cover - clock synchronisation, reference data, transparency, best execution, microstructure, order data and record keeping.

“With under 18 months to go, and at a time of such regulatory change, industry collaboration is vital,” said Rebecca Healey, CEO, Incisus Group and Co-Chair EMEA Regulatory Subcommittee, FIX Trading Community.

“Shared ideas and experience will not only establish tangible guidelines but will enhance compliance through the implementation of industry standards.  By working together, the cost of regulatory change can be reduced, both from a human capital perspective as well as unnecessary IT spend.”

Each of the subgroups has held its own initial meeting and decided on the specific terms of reference and goals going forward.

FIX is welcoming new participants to the different subgroups and these are open to members and to non-members for a limited period. 

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Frankfurt-based asset manager Union Investment has completed the integration of its trading teams under one multi-asset desk as part of a strategic review.

By combining the equities and derivatives desk with the fixed income and FX teams, Union’s head of trading Christoph Hock believes the launch of the new consolidated multi-asset trading desk will enable Union to “stay ahead in today’s constantly evolving trading world”.

Hock has been pushing for the migration from a pure execution desk to a service- and solutions desk since he arrived in April 2014, telling The Trade that “one team, one dream” was his philosophy in an interview in Q4 2014.

His plan for the future of Union Investment's trading desk was to begin seeing the portfolio managers as “internal clients” and ensure they get a best-in-class service and content from the trading team as a whole. He aimed to remove the traditional barriers between the trading desk and portfolio management.

“Delivering trading-related multi-asset content and market intelligence from our trading desk, gives our portfolio managers an additional element to their focus on single stock selection and their fundamental bottom-up approach. The top-down view and the allocation element are both integral parts of our investment process. Multi-asset trading now plays a much bigger role.”

Hock and his team will report to head of equities fund management, Benjardin Gärtner, who joined Union Investment in May 2015, and to the head of fixed income fund management Frank Engels.

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The Depository Trust and Clearing Corporation (DTCC) has named Andrew Douglas chief executive of its Global Trade Repository (GTR) Europe.

He will take up the role in addition to his current responsibilities as head of Government Relations for Europe and Asia. 

“As CEO of GTR Europe, Andrew will lead day-to-day operations with responsibility for all aspects of the European business, including product development, regulatory outreach and strategy,” the DTCC says in a statement.  

Douglas replaces Ian McLelland, who stepped down from the role in the first quarter this year. 

DTCC launched GTR Europe in 2014 in the wake of trade reporting rules for derivatives, set out in the European Markets Infrastructure Regulation (EMIR).

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State Street has appointed its head of its securities finance Lou Maiuri as the new head of its global exchange business. 

State Street launched the business back in December 2013, which offers electronic trading, clearing and data management.

Replacing his previous role will be Paul Fleming, State Street's global head of enhanced custody, who will manage the global strategic direction and operations of its agency and principal lending programmes.

Prior to joining State Street in October 2013, Maiuri held various roles at BNY Mellon, including deputy CEO of asset servicing, and head of the global financial institutions group. He has also served as COO and CEO of Eagle Investment Systems. 

“By aligning our middle office business and its technology platforms with global exchange, we expect to create additional opportunities to better service our clients and manage their data,” says Maiuri.

“Having led our securities finance and investment management servicing businesses, Lou has a keen understanding of the needs of our buy-side clients,” says Rogers.

Maiuri will report to Mike Rogers, president and chief operating officer of State Street.

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The Financial Conduct Authority (FCA) today released its Thematic Review of Financial Benchmarks and warned that firms were interpreting the IOSCO definition of benchmark activities to narrowly.

In a statement released to the market, Tracey McDermott, director of supervision – investment, wholesale and specialists at the FCA said: “We have seen widespread historic misconduct in relation to benchmarks. It is now critical that firms act to restore trust and confidence in the system.

“Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.”

McDermott added that while the regulator understood the improvements represent a significant task for the industry, it was important that consistency and speed of implementation were monitored.

She said: “Firms should take our findings on board and consider further steps to improve their oversight.  Some firms have not made sufficient effort to properly identify the conflicts of interest that arise from their businesses and benchmark activities.”

Specifically, the FCA laid out five key recommendations in the Review:

1. Firms needs to strengthen governance and oversight
2. Firms should identify and manage conflicts of interest
3. Firms should identify benchmark activities across ALL business areas
4. Firms should establish in-house controls for in-house benchmarks
5. Firms should put training procedures in place for staff

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