The Financial Services Club's Blog

The Finanser's Week: 25th January - 31st January 2010

The biggest news stories of the week include ...

Davos 2010: More Bankers This Year at Davos, but Mood Remains Glum - New York Times
Bankers fight back against Obama - The Independent
Alistair Darling dismisses Obama plan to break up banks as ineffective - The Telegraph
Fed chief Bernanke gets second term - BBC

And our biggest stories of the week are ...

Technoverload

So the iPad comes out. Guess what?  Just as I bought an iPod, the iPod Touch came out. Now, just as I buy the iPod Touch, the iPad comes out.  It’s annoying 'cos I want one, but I just bought one.  The wrong one.  The old one.  And what's even more annoying is the computer that crashes all the time.

SCTs second birthday

Today is the second birthday of SEPA Credit Transfers (SCTs), which launched on January 28th 2008 and has now achieved a 5.3% volume of total European credit transfer ... I had completely forgotten about this major milestone until Jonathan Williams, of Experian Payments, sent me this note ...

You might miss this regulation, but don't

With so much hullabaloo about banker's bonus taxes, taxes on liabilities, a return to narrow banking, the closure of leveraged prop trading, bankers versus Obama, Sarkozy and Davos, you might miss a few key changes in emphasis. For example, the one I bet you miss completely, unless you're looking, is the speech of the Executive Director for Financial Stability of the Bank of England.  Andrew Haldane suggested a radical change to banking regulations this week.

More on remittances

I mentioned a dinner which I chaired about remittances the other day, and the firm that organised the dinner sent me a white paper as a follow-up.

Does PR matter for financial firms?

Just found a survey in my inbox today from Broadgate Mainland and the Financial Services Forum. The survey asked 89 folks in mainly UK financial services firms – 52 in PR and 31 marketers - about their views on the measures for evaluating public relations.

Davos trials, investigations and procrastinations

Like everyone, I’m amazed by how much pure madness there is in the markets right now. Not the madness of crowds, the madness of bankers or the madness of investors. No, it’s the madness of politicians and regulators.  Most of it is a debate about Obama's plans to split proprietary trading from mainstream banking.

Is MiFID working?

Just had an enjoyable morning floating around the City and talking with folks about MiFID 2. Now you may think that’s not so enjoyable, but it has been interesting. For a while now, MiFID has been of concern as it has not achieved what it set out to do, namely to improve trade execution by providing guarantees of processing in terms of the best price, cost, speed of processing.  So what do the regulators nee to focus upon as they redraft the Directive?

Are you taking the PSD?

Interesting article on the guide to all things Europe today, Euractiv, about the Payment Services Directive stating that the Directive “has been transposed in all but 11 of the 31 EU/EEA countries” but "favours banks and card companies over the merchants, retailers and consumers who will be using the scheme.”  The article isn't accurate, but does demonstrate that the PSD is moving up the agenda.

And, in other news:

Social media and financial services
We will soon be closing our survey focused upon Social Media in Finance.  Click here to take the survey.

 

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Technoverload

Warning: this is a rage against the machine

So the iPad comes out. Guess what?  Just as I bought an iPod, the iPod Touch came out. Now, just as I buy the iPod Touch, the iPad comes out.

It’s annoying 'cos I want one, but I just bought one.  The wrong one.  The old one.

It’s like I just upgraded to Sky HD TV and Virgin Media come out with something better. Or just as I buy a new HDTV, a super thin LED HDTV comes out.

Grrrrrrrrrrrrrrrr ...

I’m a tech freak but it’s really getting my goat that a new funky gadget comes out every month that’s better and sexier than the one I’ve got.

Grrrrrrrrrrrrrrrrrrr...

I can’t keep up with all this stuff and so my first source of tech rage is technoverload – the fact that I’m upgrading, replacing and just dumping good mobiles, laptops, TVs and more far too often.

But technology is disposable today, and it’s cheap, so that’s no bad thing is it.

After all, my attic is now full of more screens, hard drives, wires and jalopy than Arnold Schwarzenegger’s insides in the Terminator movies.

Note to self: must give all old tech to charity.

Even if I have a massive clearout however, there’s my second source of tech rage: computer crashes.

I used to blame my crashes on Vista, and it’s proving really hard to break out of Vista.

For example, after my dreadful early experience, I decided to switch to Apple. But it’s not that easy as the only way to convert to Apple is to get rid of all Microsoft products. In my case, this would mean replacing a desktop, large and small laptop. And don’t say it’s easy, as I tried and failed (long story).

So no can do. Stuck with Microsoft.

Now, that’s no bad thing is it, especially now there’s Windows 7, the saviour of Microsoft and the answer to all our dreams and Vista frustrations.

And yes, it’s better. Anything that improves on the 20 minutes it takes to restart a Vista PC has to be an improvement, and Windows 7 restarts in less than five minutes. So there’s a reason to celebrate?

I can’t believe I’m writing that we should celebrate sub-five-minute turnaround times in 21st century home computing ... imagine taking minutes to turn on or restart your phone or TV.

But yes, it’s an improvement.

Then, the other day, for the first time, my Windows 7 PC came out of hibernation mode, and started behaving strangely.

So no big deal. Turn off and restart.

Oh dear.

The restart didn’t work well.

I had obviously interrupted some auto update cycle or something else unbeknownst to me that was happening.

Whirr, whirr, jigger, jigger, judder, judder and then success.

But no, it was slow.

Very slow.

Not the superfast responsive Windows 7 PC it had been before.

So I launched Task Manager and found the CPU was 100% loaded ... and this continued for about three hours. Then it calmed down.

But this isn’t right.

Three hours of a PC being locked up and nothing you can do about it but wait, with absolutely no idea what it’s doing or why.

And this is a Windows 7 PC?!

What it should be doing is giving me a note: “I’m having to reorganise my knickers, which are in a bit of a twist due to X, Y and Z. This will take about two hours, and really sorry. Bear with us.”

At least then, I might tolerate this whirring, jiggering, juddering operating system, rather than trying to throw the machine against the wall.

And then, to cap it all off, the USB drives have stopped working: “unable to find device driver” pops up each time I plug one in, even though they’re fine on other machines.

Rage against the machine.

So I ring up my technical support guys on 0800 UR BUGGERED, and ask what to do.

He spends an hour on the phone with me and that’s what I’ve been doing all day today so far, fixing a PC.

The calm chap in technical support on the other end of my telephone line proceeds by running a remote Citrix session.

Then he starts to mess with my PC and my head when, after a while, he says: “what’s this ‘ere then?” pointing to my very easy-to-use, very secure Firewall and Antivirus package that I’ve used for years and love to bits.

“It’s my very easy-to-use, very secure Firewall and Antivirus package that I’ve used for years and love to bits”, I tell him.

“Aha. That could be your problem. Let’s uninstall it”, he replies.

“Argh”, I scream. “You can’t do that”, my hair starts falling out. “I’ll have loads of hackers and criminals using my PC as a mule for criminal purposes”, I plead.

“No you won’t”, my friendly agent responds. “You don’t need a firewall if you have a router. The firewall is on the router. And you don’t necessarily need antivirus software if you know what you’re doing but, even if you don’t, there’s plenty of free ones out there.”

So he uninstalls my beloved protection software and reboots the PC.

Instead of half an hour, it reboots in a few minutes.

Then it becomes lightning responsive.

“Wow!” I say. “this is great. But what happens to my firewall and antivirus protections?”

“Don’t worry”, he reassures. “As long as you have the router and, let’s say, Windows Firewall and, if you want, some basic antivirus software, you’re fine.”

“OK”, I say, “but I work with banks. What happens if my accounts are compromised?”

“No problem”, he responds. “Think of your PC like your house. You can protect with a basic burglar alarm – firewall and antivirus at a basic level – or with Alsatians, guns, laser beams and security guards – your protection package you were using. Take your choice.”

So I chose to get rid of my protections and get a usable PC.

Weird but true ...

 

Images from:

iPad - engadget.com
Terminator - walyou.com
Computer Crash - podfeet.com
Geek - womoz.org
Dilbert - 90percentofeverything.com

Things worth reading: 29th January 2010

Things we're reading today include ...

Today's must read:

Chinese Leader Offers a Glimpse of the Future  - New York Times

China gave the world a glimpse of the next generation of Chinese leaders on Thursday when Li Keqiang, widely expected to be the next prime minister, vowed that his country would act swiftly to shift from an over-reliance on exports toward greater domestic consumption. But, in a half-hour speech at the World Economic Forum here, he carefully avoided any mention of the issue that was foremost on the mind of many in the audience: the undervalued Chinese currency.

Alistair Darling dismisses Obama plan to break up banks as ineffective - The Telegraph
Fed chief Bernanke gets second term - BBC
Deutsche Börse to axe jobs - Financial Times
JPMorgan to launch global corporate bank unit - Financial Times
In Sweden, Banks Differ on Paying Bonuses - New York Times
India banking reforms focus on Islamic finance - Financial Times
Global Leaders Struggle With Bank Regulation - New York Times
Global banks still refusing to lend - The Telegraph
$1bn task: how global leaders would spend $1bn - BBC
Robert Peston: the private thoughts of bankers - BBC

 

Quote of the Day:

"Women are saying the name evokes awkward associations with feminine hygiene products."
For Apple, iPad Said More Than Intended - New York Times

 

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SCTs second birthday

Today is the second birthday of SEPA Credit Transfers (SCTs), which launched on January 28th 2008 and has now achieved a 5.3% volume of total European credit transfer ... I had completely forgotten about this major milestone until Jonathan Williams, of Experian Payments, sent me this note:

in the last year, we have reached several payments milestones, including the launch of SEPA Direct Debit (SDD), and the transposition of the Payment Services Directive (PSD) into national law in most of the EU. So the time is right to reflect on SEPA migration to date and the challenges the banking industry still has to overcome.

While both SEPA Credit Transfers and SEPA Direct Debits are now available, implementation and adoption has not necessarily followed. In fact, most banks, for example, still do not comply with SEPA Direct Debit regulations and the latest figures from the European Commission show that only around 2,600 of Europe's 8,000 banks were ready for the launch of SEPA's Direct Debit scheme on 2nd November 2009. However, there are six key steps that corporates can take in order to harness the benefits of SEPA whilst maintaining current levels of efficiency and avoiding costly bank charges.

First of all, corporates now need to ensure that they have a good understanding of SEPA to fully assess existing operations against the new regulatory requirements

Secondly, corporates in particular need to investigate in which countries they plan to operate and consequently consider which countries they will want to make payments into and within to create the scope of their planning since the use of IBAN (International Bank Account Number) and BIC (Bank Identifier Code) is mandatory for all SEPA Credit Transfers and SEPA Direct Debits both domestic and cross-border

Then, organisations should contact their bank to find out about the changes that the PSD makes to the agreement between them and their payment services provider

Furthermore, corporates need to be clear about what the charges are likely to be for invalid payment details or instructions in the wrong format

In addition, to minimise the costs, organisations will need to complete migration to SEPA in a timely and efficient manner by assessing how much data needs to be converted to the IBAN and BIC format and the resources required to avoid errors in converting the data

Finally, corporates need to investigate whether their current payments systems can capture and handle the IBAN and BIC formats required for Eurozone payments to help quantify the amount of system change required to be SEPA-compliant.

Despite the associated challenges, we must not forget that the move to SEPA does create opportunities that corporates as well as the banks have been slow to take advantage of. It might be that by following these steps, organisations are able to smoothly migrate to the SEPA payment systems and avoid costly errors as a result of failed cross-border payments.

Thanks Jon ... nice to know someone's thinking about this!

You might miss this regulation, but don't

With so much hullabaloo about banker's bonus taxes, taxes on liabilities, a return to narrow banking, the closure of leveraged prop trading, bankers versus Obama, Sarkozy and Davos, you might miss a few key changes in emphasis.

For example, the bankers view as demonstrated by Bob Diamond's comments yesterday:

'World leaders may find it increasingly difficult to source finance in the capital markets if they insist on splitting up banks that are "too big to fail", Barclays president Bob Diamond has warned.'

Or Lord Adair Turner's, Chairman of the FSA:

'Regulators needed more than the ability to set interest rates to stop asset price boom-bust cycles. He urged the creation of a "macro-prudential body" to cut down on lending or borrowing at times when it thought a bubble was being created.'

But the one I bet you miss completely, unless you're looking, is the speech of the Executive Director for Financial Stability of the Bank of England.

This speech took place in Liverpool last night (20 page pdf).  It's not Davos and he's not Obama, Sarkozy, Brown or even a King or a Darling.  No, he's Haldane.  Andrew Haldane.  And when you've got all attention diverted elsewhere, it's a good time to release news to test the waters of the industry, but not the media who might not appreciate the intent.  So he did, in my humble opinion.

Why is his speech important?

Because he makes it quite clear that the economy has stabilised but the root cause - debt - is still there.  Like the McKinsey report of the other day about deleveraging, he makes it quite clear that we have to deleverage.

What does that mean in reality?

First, that banks should reserve in the good times to over the bad - the procyclicality reserving of profits in other words.  That's nothing new.

Second, the conversion of debt to equity that is state contingent.  Now that one is new.  And by 'state', we don't mean the country as state, but the borrower - whether that borrower be an individual, company or sovereign state.

Here's the section of Andrew's speech that puts this into context:

"Take a typical mortgage contract. A rise in the value of a property relative to the loan gives the borrower equity against which they can borrow. This provides an incentive to tradeup, raising house prices and generating further equity. This amplifier operates symmetrically, as falling collateral values reduce refinancing options and drive down prices. Economists call this effect the financial accelerator. It adds to cyclicality in credit provision and asset prices.

"US economist Robert Shiller has suggested it might be possible to devise mortgage contracts that slow, or even reverse, this financial accelerator. Instead of being fixed in money terms, imagine a mortgage whose value rose with house prices. So the repayment burden would rise automatically with asset prices to slow a credit boom and fall in a recession to reduce the chances of mortgage default. Mortgages would operate like a contractually pre-committed debt-equity swap between households and banks. They would automatically stabilise household loan-to-value ratios. By reducing the amplitude of the credit cycle, they ought to benefit both borrower and lender."

In other words, the idea is that your debt is an 'equity' in the things you borrow against.  Therefore, if you take a mortgage, you are not borrowing £100,000 on a £200,000 house, but you are offering a 50% investment in the house for the bank.  If the house is worth £400,000 five years later, you owe the bank £200,000 or, if it's now £100,000, you only owe £50,000.

Of course, you still have interest payments, but now the asset is shared rather than owned by you once interest and the initial amount borrowed is paid down.

That's quite a big change in how we all think about debt.  It's also a big investment by banks in our assets, that will now be bank owned rather than borrowings, especially if this extends to sovereign debt and corporate capital.

In fact, it could fundamentally restructure the way we think about finance.

Bearing in mind how rapidly ideas like procyclicaility reserving and narrow banking have taken off with the regulators in the last year, it wouldn't suprise me if this idea became mainstream in a matter of days or months.

Hmmm ... a good day to slip that one under the radar wasn't it?

More on remittances

I mentioned a dinner which I chaired about remittances the other day, and the firm that organised the dinner sent me a white paper as a follow-up.

As a taster, read the previous blog entry or this paragraph gives a good indication of the content:

"Remittances are no longer solely about supporting people in the developing world. in many cases today, remittances are also made for charitable and trade reasons and can therefore have a very powerful impact, especially if directed for maximum benefit. findings of a recent World Bank report indicate that the rate of return to each dollar of aid directed toward promoting trade is nearly $700 in additional trade.

"This discussion covered pertinent industry issues including how the global uptake of mobile, internet and social network communications is dramatically changing the landscape.

"Interestingly, participants’ perspectives also suggested that, in spite of technology being more affordable and accessible, the old world of payments – face-to-face contact and cash-based transaction – continues to command a foothold, albeit a weaker one.

"The debate turned to the roles that financial institutions and regulatory bodies are currently playing, as well as their future potential impact. this led to dialogue about the ongoing problem of the unbanked and financial exclusion in the latter part of the discussion.

"Participants offered some sound suggestions of how this can be tackled, including how transferred monies can be used for trade reform."

There's quite a nice 12-page summary, a bit more comprehensive than my few paragraphs, and this can be downloaded here if you're interested: Download Remittances White Paper

 

Things worth reading: 28th January 2010

Things we're reading today include ...

 

Davos

Davos 2010: More Bankers This Year at Davos, but Mood Remains Glum - New York Times
Davos: Lord Turner calls for controls on bank lending - The Times
Sarkozy calls for global revamp - BBC
Regulation clash as Davos begins - BBC
Regulation of banks a question of credibility - The Times

Bankers fight back against Obama - The Independent
Soros in Davos Endorses Obama’s Bank Plan - New York Times
Mervyn King rubbishes Gordon Brown's Tobin plan, allies himself with Barack Obama - The Telegraph
Davos Soros: Obama reform plan not tough enough - The Times
Davos 2010: Barclay's Diamond warns of dangers of splitting up 'banks too big to fail' - The Telegraph

Capital

Problem Loans Plague Banks in Austria - New York Times
UK bank dividends at risk as rules erase £62bn of capital - The Telegraph
Banks must raise billions to fend off crisis, says IMF - The Telegraph
Finance: The hindered haircut - Financial Times

Companies

Sir Brian Pitman courted to chair Virgin Money - The Times
Regulation threat to CME dominance - Financial Times

AIG

Bailout watchdog attacks Goldman in AIG hearing - The Times
Geithner Says A.I.G. Rescue Prevented a Depression - New York Times

Privacy

Swiss Seek to Reopen Negotiations With U.S. Over Bank Client Data - New York Times

 

Does PR matter for financial firms?

Just found a survey in my inbox today from Broadgate Mainland and the Financial Services Forum. The survey asked 89 folks in mainly UK financial services firms – 52 in PR and 31 marketers - about their views on the measures for evaluating public relations.

What interested me is that in measuring broadcast coverage, 51% of survey respondents said that they did not measure it. What a cushy job they’ve got!

Those that do care most about audience size and half of survey respondents measured or evaluated coverage across social media through free alerts or RSS feed such as Google or Social Mention. Interestingly, half of the survey respondents are not satisfied with the tools they are using to measure social media.

Surprisingly, increasing web traffic enjoys mixed importance across the financial services sector. It has become a key priority for PR campaigns over the last year in one third of respondents’ eyes and for half of all respondents it has also become more important to appear on key web sites. In contrast ensuring high search engine visibility was classed as one of many priorities by around 35% of respondents and 33% said it was a growing priority. Almost three in ten respondents said it was either a low priority or not a priority.

You can download a full copy of the survey here if interested: Download Broadgate_Mainland_and_Financial_Services_Forum_Evaluating_PR_Survey_2010

Davos trials, investigations and procrastinations

Like everyone, I’m amazed by how much pure madness there is in the markets right now. Not the madness of crowds, the madness of bankers or the madness of investors. No, it’s the madness of politicians and regulators.

First we had Alastair Darling’s tax on bonuses. Then Sarkozy followed suit. Finally Barack Obama announces not only a tax on bank liabilities, but measures to reign in the banking system by restricting trading on one’s own account - prop trading - using language and rhetoric rather different to the language we expect from him.

Obviously, Obama did this as a pre-emptive strike before Davos, where a whole raft of other regulatory reforms are being discussed and proposed via the G20 and individual world leaders.

After two years, you would imagine that these guys could get their act together wouldn’t you? Instead, we appear to have a muddle of confusion. Robert Peston, who is enjoying his Davos experience obviously, writes his blog over on the BBC today with the title that bankers are ‘dazed and confused’, saying that bankers are commenting that Barack Obama’s scheme is:

1) “vague, confused and we don't know what he's on about;

2) “it won't achieve its stated aim of reducing the risks of another meltdown in the banking system (although quite how they know that if they don't understand what he's saying is beyond me);

3) “if President Obama's aim is to savagely reduce banks' direct holdings of tradeable securities, it will lead to a second devastating wave of banks dumping assets - and will risk a return of the credit crunch;

4) “the confidence of bankers - which the bankers themselves say is so important to any serious revival of lending (so aim off) - has been knocked by the perception that the US and Europe are divided on the future structure of their industry;

5) “bankers' confidence has been knocked further by confusion over who in the US administration has the ear of the president on financial policy-making (the scheme to shrink the banks was the brainchild of Paul Volcker rather than the supposedly banker-friendly Treasury Secretary, Tim Geithner).”

George Soros says that “this development came too soon because the banks are not out of the woods”, although he continues by stating that he is “very supportive of it, but I don't think it goes far enough.”

Hmmm ... accusing bankers of being “tone deaf”, Mr. Soros obviously hasn’t been listening to them, as Bob Diamond, the golf-mad President of Barclays, who says that “there is no evidence that shrinking banks is the answer” and that this will have a devastating effect. The impact “on jobs and the economy will be very negative.”

What is obvious is that the Paul Volcker inspired Obama plan is a core focus of discussion and attention. Probably because most of the politico’s, bankers and corporate leaders are rather worried about their investment portfolios as the stock markets take a further battering for the seventh day in a row.

Shocker.

Things worth reading: 27th January 2010

Things we're reading today include:

Special Report: Global Financial Outlook: The London Banking Center Is Beginning to Feel Like Itself Again. - New York Times
"As bankers and traders in London wait nervously for regulators to lay out a set of post-crisis rules for the industry, the real threat to their global pre-eminence is likely to come from elsewhere. Skip to next paragraph Jason Alden/Bloomberg Adair Turner, chairman of the Financial Services Authority. The rapid growth of emerging economies in Asia means neither London nor New York may be able to hold on for long to the unofficial status of the world’s most important financial center, a title they spent much of the past decade tussling over, analysts say."

The outspoken Mr. King

British Central Banker Favors Splitting Big Banks - New York Times
King renews call for banking overhaul - Financial Times
Mervyn King calls for pay cuts and a carve-up of international banks - The Times
Bank of England bosses back Obama plan for reforms - The Independent
Mervyn King says banks need to understand radical reform is 'on the table' - The Telegraph

Bonuses

Bank chief raps 'inflated' bonus culture - The Independent
Ailing Banks Favor Salaries Over Shareholders - New York Times

America

Bernanke vote expected by end of week - The Times
Bernanke's role 'is being politicised' - The Independent
Volcker Rule is necessary to prevent bank failures turning into a crisis - The Telegraph

World

China Raises Bank Reserve Rules, Starting Stock Sell-Off - New York Times
Davos Summit 2010: Banks must get real on profits, says WEF report - The Independent

Quote of the Day:

"Airport security is about as effective as a condom with a hole."
Anon

Don't tell mum I work for a bank

Just got the proofs for my new book ...

... unfortunately I can't use this as it's been used before, but could have been a good one.

Is MiFID working?

Just had an enjoyable morning floating around the City and talking with folks about MiFID 2. Now you may think that’s not so enjoyable, but it has been interesting.

For a while now, MiFID has been of concern as it has not achieved what it set out to do, namely to improve trade execution by providing guarantees of processing in terms of the best price, cost, speed of processing. The fact that the Directive celebrates its third year of operation without a single major best execution case or fine shows how effective that has been, particularly as best execution is known to be way off. For example, Equiduct showed a year ago that of the €97 billion trades completed in January 2009 across the most liquid 500 stocks, a third (33.4%) could have achieved a better price on a different venue.

But other things have taken priority over best execution, such as survival and bonuses.

So MiFID has failed in one of its core tenets. It has also failed in another: the transparency of trading.

According to a CFA Institute survey published last month, 68% of respondents felt that market fragmentation has created difficulties in trade reporting obligations.

Although the survey finds no empirical evidence that the fragmentation of trading and pricing has been detrimental to price formation, it does highlight the number one issue for most market constituents, which is the need for a consolidated tape for quote and trade data for European equity markets. You see there are so many trading venues now, each reporting their trades to their own chosen public reporting sites, that users have to increase their connectivity to a much wider range of venues than ever before. With each connection costing around £10,000 per month, that’s a high cost.

This concern has been picked up by Thomson Reuters who have produced an interesting white paper on European data consolidation this month. Their paper provides three key conclusions:

• “The buy side considers the cumulative cost of fees charged by exchanges, and trade reporting services is a significant barrier to adoption of a consolidated tape, and a detriment to overall transparency. We suggest there should be a more modular approach to data pricing that is underpinned by regulatory intervention.

• “The coverage and quality controls around MiFID trade publication need to be formalized and enforced to instil market confidence and trust. We make several suggestions to improve trade publication. To be successful, the institutional buy-side, brokers and trade reporting services will need to reach agreement on standards, and these rules will need to be codified through MiFID 2 regulation.

• “Best execution monitoring has been hampered by shortcomings in the provision of the source data contributing to a consolidated tape and by inconsistencies of approach to benchmark calculation between information vendors. In this document, we openly share our TCA (Transaction Cost Analysis) formulas and methodology. We now call upon other vendors to join in defining industry standards for data consolidation and TCA measurement.”

The consolidated tape is the priority for MiFID 2 therefore, along with sorting out the issues of best execution and pricing.

What else might be in there?

Dark pools?

Sure, they are a big issue aren’t they? The CFA survey found that 70% believe dark pools are problematic for price discovery, and the Federation of European Stock Exchanges (FESE) estimates that as much as 40% of trading takes place in the dark.  That means the general investor does not get to see these prices and orders until they are filled in a ‘hidden’ dark world.

FESE says that is wrong.

The banks say it’s just the Exchanges trying to create a smokescreen and that there’s no way the trading in dark pools is at that sort of level. In fact, the FSA has found that it is only about 2.5% of OTC (Over-the-Counter) trades that take place through dark pools whilst, across Europe, CESR estimates it to be more like 1.25%.

Interesting times and I could write a lot more, and will in the future.

Right now though, between the MTF impacts, the increasing use of dark pools, the lack of consistent trade reporting, the increasing use of flash orders and high frequency trading, the need for best execution and price transparency, and more, the regulators have still got a lot on their plate for this MiFID review.

Crisis or no crisis.

Things worth reading: 26th January 2010

Things we're reading today include:

Today's must read:

Davos 2010: Bank chiefs break cover to bend government's ear - The Telegraph
Battle lines have been drawn, with regulators, politicians and academics declaring big banks to be bad news. President Barack Obama knocked the wind out of the industry last week by calling for a ban on the banks getting involved in proprietary trading, private equity and hedge funds. On the ropes, the banks are throwing everything they have back.

 

Politicians

‘Six-figure’ hedge fund deal for Tony Blair - The Times
Brown claims transaction tax is gaining traction - The Times
Banks considered too big to fail are too important to ignore, says John McFall - The Telegraph
Myners and G7 to home in on bankers' bonuses - The Times
City minister Myners seeks review of how investment banking has 'permeated' society - The Telegraph
Barack Obama rips up the banking rule book - The Telegraph

Investigations

Probe into NY Fed over AIG disclosure - Financial Times
Bank bail-out alternatives sought - BBC

Other news

An Exclusive Peek Inside Citi's Banks of the Future - Fast Company
HSBC chief Green attacks big bank bonuses - The Telegraph
Computer-driven trading raises meltdown fears - Financial Times
Quick View: You’re kidding, more US exchanges? - Financial Times
The looming deleveraging challenge - McKinsey

 

Quote of the Day:

“It is particularly shocking that people do what is called stress tests by taking the worst possible past deviation as an anchor event to project the worst possible future deviation, not thinking that they would have failed to account for such deviation had they used the same method on the day before that past anchor event.”
Nassim Taleb, Author of the Black Swan

Are you taking the PSD?

Interesting article on the guide to all things Europe today, Euractiv, about the Payment Services Directive.

The Directive “has been transposed in all but 11 of the 31 EU/EEA countries”.

Hmmm ... that would be Cyprus, Estonia, Italy and Latvia (Jan); Norway (Feb); Belgium, Greece, Spain, Finland, Malta and Poland (Mar); whilst Sweden is last (Apr).

December 2009:                                          January 2010:

Note: the above are the official charts of the European Commission.  Is someone pulling the wool?

“Observers agree that it favours banks and card companies over the merchants, retailers and consumers who will be using the scheme.”

Hmmm ... would the banks agree? The banks that have spent eight years pulling SEPA together? The banks that have spent billions on change and lost billions of margin? The banks that have been arguing that there is no benefit to merchants, retailers and consumers being communicated by the Commission or public authorities?

“The directive may lead to more fragmentation.”

That’s the point isn’t it?

By introducing new payments institutions, it creates more competition which leads to lower prices which leads to better markets, is the contention of the legislators. This was the same view with the other Directive, the Markets in Financial Instruments Directive, that led to market fragmentation for investing with the rise of Chi-X, BATS and many dark pool investment vehicles, where things are traded outside the line of sight of the public market.

Markets do fragment thanks to these Directives.  Over time, they then consolidate. That is why Chi-X stands out as a clear leader in the post-MiFID trading world and, over time, the same will happen in the post-PSD payments world.

So fragmentation isn’t necessarily a long-term issue, but a short-term concern.

“The PSD's weaknesses lie in its opt-outs”.

Absolutely. Checkout our research if you want to know what they mean as derogations and opt-outs have created a truly uneven playing field for payments.

“Card companies argue that the EU's new rules do not address the issue of catching fraudulent transactions.”

In the words of an old Tina Turner song: “what’s fraud got to do with it?”

The card companies are right by the way. The PSD is purely concerned about moving towards a level playing field for payments in terms of the legal structures of cross-border transactions. The focus was primarily around direct debit and credit transfer operations, as this is where SEPA had focused and needed support. Cards were not centre of the radar for the legislation, nor was fraud. Watch out for the PSD II in 2012 however, when these things do move to centre stage.

Postnote:

At the end of the article is the line: “SEPA is being treated as a low-priority project in Sweden and Finland because their respective ministries of finance have limited resources to roll out the scheme, according to Elemar Tertak from the European Commission.”

I think the person who wrote this mistook PSD for SEPA.

If they want to know more about SEPA then come along to our meeting tomorrow night at the Club:

"Is SEPA happening and does it matter?" a panel discussion with:

• Gilbert Lichter, CEO, EBA
• Fred Bär, Managing Director Euro Services, VocaLink
• Paul Smee, CEO, the Payments Administration
• Simon Bailey, Director, Logica

Chaired by Bob Lyddon, Managing Director, IBOS Association.

Started in 2002, in response to the Lisbon Agenda and Regulations on fees for cross-border cash withdrawals, the Single Euro Payment Area (SEPA) has been in the planning for a long time. In fact, it has been discussed for so long by so many that, for a lot of people, it’s become as dull as dishwater.

This view may be wrong though as, after seven years of gestation, SEPA Direct Debits (SDDs) were finally born in November 2009 and the Payment Services Directive (PSD), which legally supports SDDs, was transposed and implemented in most European countries. So all is good is it not?

Or maybe it is not as, according to the survey the Financial Services Club performed during the Autumn, most nations and most banks are not supportive or implementing SEPA and the PSD correctly. What is the truth? Is SEPA here? Even if it is, does it actually matter?

If you would like to attend, click here.

 
The Financial Services Club is sponsored by

  
For details of sponsorship email us.

Things worth reading: 25th January 2010

Things we're reading today include ...

 

Today's must read:

Joseph Stiglitz: Why we have to change capitalism - The Telegraph

"In the current crisis, bankers lost our trust, and lost trust in each other. Economic historians have emphasized the role that trust played in the development of trade and banking. The reason why certain communities developed as global merchants and financiers was that the members of the community trusted each other. The big lesson of this crisis is that despite all the changes in the last few centuries, our complex financial sector was still dependent on trust. When trust broke down, our financial system froze."

The Obama Plan

Obama's new rules stir up Wall Street - The Independent
Prop trading in spotlight as Obama plan reverberates - The Telegraph
War on banks unsettles hedge funds - Financial Times
Banks urge Britain not to join US crackdown - The Independent
Alistair Darling warns Barack Obama over banking reforms - The Times
Darling reveals frustration over Obama bank plan - The Independent

Other Plans

Obama urges Senate to stand by Ben Bernanke - The Times
Masters of the universe redesign the world at Davos - The Independent
Our financial rulers are on another planet - The Times
Ethics and values are vital to financial rethink, report says - The Times
Celebrities call for extra bank tax to pay for charity - BBC

Regulatory Plans

FSA warns firms on protection of client assets - Financial Times
City brokers angry at new capital reserve regulations - The Independent

Companies

Blackstone boss confirms UK bank plan - Financial Times
Barclays bank to 'defer bonuses' - BBC
B&B and Rock poised to merge ‘bad banks’ - The Times
Rivals continue to bite into LSE's market share - Financial Times
Goldman Sachs slashes London superstars’ pay to £1m - The Times
Goldman winds down flagship hedge fund - Financial Times

Markets

'Fewer people' default on credit - BBC
Pensions pour into emerging market debt - Financial Times
Fears of public outcry as UK banks prepare to announce £25bn profits - The Telegraph

 

Quote of the Day:

"While one person is talking about how difficult something is; another person is doing it."
LL Cool J, via Twitter

The Finanser's Week: 18th January - 24th January 2010

The biggest news stories of the week include ...

Fraud fear blocks Haiti donations - BBC
After £800bn loans, China tells banks to focus on the real economy - The Times
Barack Obama's speech on banking reform: in full - The Telegraph
Michael Geoghegan speaks to Sky News' Jeff Randall: Full Transcript - The Telegraph
Ben Bernanke requests audit of Fed's AIG bail-out - The Telegraph

 

And our biggest stories of the week are ...

Why would a bank change their core system?

I was asked a question about why a bank would change their core system the other day.  There are lots of reasons why a bank would change their core system.  Here’s my top five: legacy constraints, competitive forces, regulatory mandate, merger and acquisition and new management requirements.

The last pit ... the end of open outcry trading

For years, men have shouted at each other in open warfare outcry pits.  These blood curdling scenes are reminscent of cock fighting or pitbull terrier pits, where teams of angry testosterone fuelled alpha males go at each other with their gesticulations and cries.  What am I talking about?  The traditional trading floor.

David vs Brick Wall: How Banks are Sticking to Customers

Mint’s blog sent a post out yesterday titled: “David & Goliath: How Customers are Sticking it to the Big Banks”.  It immediately caught my attention because the Huffington Post in the USA has been promoting the idea of switching banks, as have others such as the Guardian and more.  But their campaigns are misguided.

Reinventing card payments using the iPhone

Everyone's getting real excited about Jack Dorsey, the co-founder of Twitter, and his new payments application for the iPhone called Square.  This simple plastic add-on and its app allows any iPhone user to take credit and debit card payments.  But is this a radical innovation or just a work around for a twentieth century issue? 

How far can investment firms innovate?

I’m continually impressed and amazed by the speed of change in the technology of the investment markets.  For example, last year was all talk about low latency and lit versus dark pools. This year, it’s all about private cloud-based services based upon colocation and proximity services. Next year, it will be all about real-time liquidity and settlement.  What's next?

The do's and don'ts of bank marketing

UK bank Halifax, part of the Lloyds Banking Group rescued during the crisis, has been heavily advertising a £5 gift to customers who deposit £1,000 per month into their account.  The trouble is that customers hate the adverts.  Is this good or bad?  See the advert and customer feedback by clicking here , and find out what Halifax should have done by clicking here .

Malta, sponsored by HSBC

Just back from Malta for a brief trip, and was particularly taken with the fact that the country appears to be sponsored by HSBC.  Not just the airport, a hotel or a football stadium, but the whole country.  Where did this impression come from?

When will they ban travellers cheques?

Following the decision in the UK to phase out the paper cheque by 2018, here's a graph of travellers cheques usage as published by the Federal Reserve (double click to enlarge):

I wonder when these will be outlawed?

And, in other news:

Social media and financial services
Further to previous surveys conducted by the Financial Services Club, we are pleased to announce our first research for 2010 focused upon Social Media in Finance.  Click here to take the survey.

The Financial Services Club's First Quarter Agenda

The first quarter season of the London-based Financial Services Club has just been announced and includes discussions on SEPA, EU regulations, Innovation and the Media, and includes leading luminaries from the BBC, Payments Council, EBA, Wonga and more.

 

The Financial Services Club is sponsored by:

 

For details of sponsorship email us.

Dilbert's business case for mobile

Just saw this Dilbert from last month:

If you ever needed a business case for mobile banking, this is it.

Why would a bank change their core system?

I was asked a question about why a bank would change their core system the other day.

There are lots of reasons why a bank would change their core system.

Here’s my top five:

• Legacy constraints: this is the most obvious one, but it does not create a reason for changing a core system in or of itself. After all, I know of plenty of banks that continue to operate processors and applications developed in the 1960s and 1970s because the view is: ‘if it ain’t’ broke, leave it’. That’s why many City institutions still have a need for FORTRAN and ASSEMBLER programmers, and why some banks process transactions converted to pounds, shillings and pence (pre-decimal systems should have been dropped in 1971!). It is because these systems worked and were too expensive to change back in the 1970s and 1980s. Now, fifty years later, they have the problem that they are too incomprehensible to change. After all, many of the folks who developed these systems didn’t document them and the developers are now retired, suffering from dementia or dead. So the bank keeps them running as they can’t dump them. However, if the legacy is causing them to be uncompetitive and to lose business, then that may finally prompt the change of core system that has been so strategically required for decades but ignored. This leads us to the next major reason for change: competitors.

• Competition: a bank will often change systems if competitive pressures force them to. For example, no bank wanted to launch call centre or online banking services until someone launched it first and started taking accounts away from them. This is why banks are variously described as sheep or lemmings, because they all follow each other around and copy what each other is doing. The result is that if a new core system capability delivers significant competitive differentiation for a financial institution, then all the other institutions will either buy the same system, buy a similar one from the provider’s competitors or will copy it.

• Regulations: all of the regulations that have been introduced over the past few years such as MiFID, the PSD, Faster Payments, the Capital Requirements Directive, RegNMS, MT202 Cover Payments and more, have required significant change to systems, structure and processes for the banks and operators in those market sectors impacted. Therefore, every time there’s a legislative change, it will more than likely prompt an assessment as to the fitness for purpose of the existing system to meet and comply with the new obligation and, if they don’t comply or if it is too difficult to adapt, then the bank will change core system.

• Merger and acquisition: every time a bank merger occurs, there has to be a rationalisation of systems as that is a core rationale for justification of a merger. In other words, cost savings... there is absolutely no rhyme or reason as to why a bank would run two parallel core systems as that would mean twice the cost. Therefore, one of the core systems will change. Unfortunately, it usually means that the core system changes by throwing out the system of the acquired bank and converting it across to the acquirer’s platforms. This has little to do with effectiveness or efficiency and is more to do with ego and power. For example, NatWest’s systems were forced onto Royal Bank of Scotland’s when RBS took over NatWest a decade ago and, more recently, Abbey’s were dumped and converted to Santander’s. In retrospect, it would make more sense for a fuller review to take place before such decisions are made to ask: (a) which is the best system and (b) is there a better one outside the bank overall? Having said that, I cannot imagine any bank converting both their own and their acquired banks systems across to a new platform at the same time but, when acquiring a bank, it would be a good time to consider converting the acquired bank’s core system to the best in the market and, if that means buying externally, then convert your own core systems across to the same platform thereafter.

• New management: again, it is often just a case of ego and power, but when a new management takeover a bank, the first thing they want to do is to stamp their authority on it. This can be done in two ways: first, sack all of the sycophants who worked for the previous management team; second, replace all of their decisions with new ones that show how ineffective their decisions were. The latter means finding things they did or did not do, and then showing how stupid they were. For example, not replacing an old legacy system may be a good way to highlight this; or the fact that they replaced core systems but didn’t choose a good one is another. Either way, a new management team, given the right prodding, could easily be convinced to change core systems if they thought the previous management had been shirking their responsibilities by not changing it or changing it for a poorer one.

So there you have five good reasons to change core systems: legacy constraints, competitive forces, regulatory mandate, merger and acquisition and new management requirements.

Thinking about these things, the post-crisis fallout means that all of the above are rife. Many banks have new management teams, are going through a tumultuous acquisition, have been forced to change due to regulation, and have new competitors and new customer needs that put a strain on their legacy operations.

This means that 2010 onwards is a great time to see core systems change in many European and American banks.

However, there’s one point that is not made above that is just as critical.

No bank will change a core system because of new technology.

New technologies are great. They may be sexy, interesting, create differential and be very compelling, but new technologies in and of themselves will never justify a core systems change.

It is only when the new technology can demonstrate that it will support the needs to be compliant with new legislation; or to eradicate legacy overhead for operational efficiency; or to improve management and business processes that the bank can maintain competitive parity now and into the future; that the systems are purchased.

In other words, the debate about core systems has nothing to do with the features and functionality of the technology itself, but is triggered by a burning platform that means that if the bank does not change the core system they will flounder.

That is the key to why banks change core systems and the sooner providers get off the feature, functionality and technology platform and get on to the business need, management drivers and strategic platforms, the better.

*

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Things worth reading: 22nd January 2010

Things we're reading today include ...

Today's must read:

Barack Obama's speech on banking reform: in full - The Telegraph

"While the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system.  That's why we are seeking reforms to protect consumers."

Shares fall on Obama bank plans - BBC
Barack Obama declares war on Wall Street - The Times
Proprietary traders are an obvious target for Obama's reforms - The Telegraph
Obama talks tough on day Goldman reveals bonus pot - The Independent
Goldman Sachs pays more than £300,000 to workers for 2009 - The Times
Bankers complain, but their party goes on by Rory Bremner in The Telegraph
Accounting plan could exacerbate cyclicality - Financial Times
Fraud losses 'cost £30bn a year' - BBC

 

Quote of the Day:

"The financial services sector in general and banking in particular is facing a tsunami of regulatory pressure, public pressure, opinion pressure and political pressure ... what keeps me awake at night is coping with all of that and how it's going to play out."
Marcus Agius, Chairman, Barclays Bank
Barclays chairman Marcus Agius tells bankers not to complain - The Telegraph

 

Malta, sponsored by HSBC

Just back from Malta for a brief trip, and was particularly taken with the fact that the country appears to be sponsored by HSBC.

Not just the airport, a hotel or a football stadium, but the whole country.

Where did this impression come from?

Well, from the moment of arrival when you are welcomed by a massive “HSBC welcomes you to Malta” sign and self-service lobby.

Upon arrival at the hotel, the HSBC sponsored guide to Malta’s Heritage is the first thing left out visibly on the desk of my room.

Opposite the hotel is an HSBC ATM and branch ...

 

... and every other ad in the newspapers is for HSBC and every time I use my Chip & PIN Card I get a thank you from ... HSBC.

Returning to the airport, I find yet more HSBC signage upon check-in as well as the usual gates, sponsored by ... HSBC.

So OK, Malta’s a small place – total population of only 400,000 – and so the bank’s beneficence in sponsoring the place is laudable ... it just worried me a little when the latest Malta headlines are about newborn babies sponsored by, yes, you guessed it, HSBC.

Note: in the interests of full disclosure, not all of the images and material used is from Malta