senior product specialist, SunGard's capital markets business

Is The World Going MAD?

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This blog post was originally published in ISS magazine.

The European Securities and Markets Authority (ESMA) recently issued a discussion paper (14 November 2013, ESMA/2013/1649) on the possible implementation measures, or interpretation of, the market abuse regulation (MAR) proposed by the EU Commission in October 2011, later amended in July 2012. The regulation is scheduled to take effect in 2015, but this date looks uncertain, as it is tied to MiFID/MiFIR time tables and the associated required political agreements.

So why look at this now? Why should a stressed-out compliance department and legal resources put their heads together and give ESMA feedback on something that is subject to change and will take effect on EU level one – a year from now, with an added delay while ESMA and local regulators drafts technical notes and national laws, before the changes make a real impact on the daily lives of the compliance officer?

The proposed MAR and MAD II is extensive compared to the current market abuse directive (MAD, Directive 2003/6/EU) and although an uncertain “sometime in 2015” deadline probably feels like a distant date in the future for most readers, the magnitude of the changes warrants urgent and close attention and consideration. It is therefore very refreshing to see the consultative and open approach ESMA is taking in its discussion paper well ahead of its implementation; market participants have a real possibility to provide detailed feedback on the implementation of a very important and ambitious regulation that will have a real impact on their business for years after it takes effect.

MAR/MAD II scope changes include:

  1. Significantly extending the scope of the current market abuse regime by bringing within it emission allowances, and OTC-traded financial instruments which might have an effect on the covered underlying market, including complex instruments such as credit default swaps and contracts for difference
  2. Scope extending to include manipulation of indexes, benchmarks and market prices
  3. More closely aligning the way in which the market abuse regime applies to commodities and commodity derivatives trading (including the definition of “insider dealing”) with its application to securities markets
  4. Introducing of a strong emphasis on cross-product, asset-class and market manipulation
  5. Introducing of a new offense of attempted market manipulation, where a person intends to manipulate the market but does not place an order or execute a transaction
  6. Providing competent authorities with specified powers to enhance their ability to tackle and investigate market abuse, including the power to enter private premises, to seize documents and to access telephone records
  7. Establishing a more harmonized regime in respect of criminal and administrative sanctions across the EU member states in order to reduce the possibility of regulatory arbitrage
  8. Introducing of the inclusion of the provider of trading and platform facilities in investigations and potential actions if market abuse is proven

For anyone concerned with the tools, processes and organization required for a compliance function to fully implement and match MAR and MAD II, the above list may be alarming and the 2015 horizon will no longer feel that distant.

In addition, there are a number of items that need to be considered, including from where and how you will bring in all the data needed to effectively ensure traders are not involved in the planning and/or execution of potential manipulation of all the asset classes and markets traded by your firm; flexibility to allow for regulatory changes and updated guidelines; sizable functionality of tools; oversight, overview and reporting of different streams of trading and activity across the organization; and the ability to spot trends over time, which is a key aspect of a surveillance function.

Whatever procurements and changes that currently are planned and budgeted, your organization must keep MAD II and MAR in sight, or any investments done today will fall by the wayside sooner than you think.

Missing Risk Data? All is Not Lost

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This blog post was originally published on the Chartis RiskTech Forum.

Author: Kenneth Yu, manager, SunGard’s risk management advisory practice and the Ambit Risk Institute

Data has rarely been so in-demand by banks, especially for building the required credit models to satisfy regulators and internal compliance requirements. But rigorous risk models, as the backbone of an enterprise-wide risk management framework, require lengthy and well-populated sets of data. And it’s a fact of life that, across banks of all sizes – and for many kinds of reasons – data is sometimes incomplete and difficult to compile.

Difficult, yes, but not impossible. Missing data is rarely an insurmountable problem, and there are several ways in which banks can (and must) fill their information gaps to effectively manage risk.

First, where gaps do exist, it’s important to determine why. Data could be missing for random reasons, such as a loan officer forgetting to record it. In this case, its omission will not affect the risk model either way. But there might be a pattern to the gaps. Do they, for example, occur consistently for borrowers under financial stress, or in a particular region or asset size? If so, the missing data may introduce a systematic bias to risk analysis.

When the omissions in certain borrower cases are random, as in the first example, there is the simple opportunity to drop them from the analysis. In taking this “complete case analysis” approach to missing data, modelers must make sure they have enough remaining data to compensate. If the reasons for missing data are, however, systematic, an alternative, bias-busting approach is “available case analysis.” This uses all borrower cases, however incomplete, and skips over unavailable fields within them.

In practice, banks often adopt a combination of these “complete” and “available” approaches to work around incomplete data. They can also use a “substitution” method: either replacing blank data with an average for the sample as a whole, values predicted by another statistical model, or – most sophisticated of all – the merged results of multiple iterations under a range of models. Other options include developing risk models based on formal surveys of internal experts and finding external sources of detailed, representative data, which can prove difficult and expensive.

Whichever approach a bank takes, dealing with missing risk data should ultimately form a part of its larger data management and improvement strategy. This in turn should promote the importance of complete and clean data, offer incentives to data gatherers to improve data quality, and ensure the continual monitoring of data gaps.

Ultimately, such a strategy can help an organization upgrade its risk modeling capabilities and, as a result, make more informed business decisions, backed by rigorous analysis. In other words, by tackling the problem of missing data, banks can also find new ways to improve their operations – and exceed the expectations of management and regulators alike.

senior vice president, Astec Analytics, SunGard’s capital markets business

A Turning Tide

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This blog post was originally published by Securities Lending Times.

Never one to be short of water or sailing-based metaphors, I preferred a “turning tide” to the oft-cursed phrase of “green shoots” in reference to the changes in the global economy. “A rising tide floats all boats” could have also worked, but is better suited to being used as a mix of compliment and criticism particularly when looking at a company’s performance. During 2013, there was certainly a wave of cheap money washing around the market, and that kept more than a few companies afloat, including those potentially uncharitably labelled “zombie firms.” But what other events left their mark in 2013 and what part did the preponderance of cheap cash play?

2013 saw several high-profile IPOs, with Twitter leading the charge in terms of size and notoriety if nothing else, but new listings were not the only ones coming to the market. Existing firms looking to raise additional capital have also been to the markets for much needed boosts to their flagging balance sheets. In fact, the first three quarters of 2013 saw listed companies (i.e., not including IPOs) raise more than £10.2 billion from investors according to research by Capita. This was more than twice the combined total of 2011 and 2012.

Looking further back, the numbers are even more striking: In 2008 and 2009, a total of £123.6 billion was raised from the markets, 72 percent of that being by financial services companies scrabbling to recapitalise post financial crisis in an environment where ordinary lending had all but dried up. Noting also that this was more than had been raised over the preceding 10 years in total brings this peak into perspective.

While somewhat lower, the 2013 total is still expected to breach £11.5 billion by the end of the year. However, there was one major skewing factor in that statistic – Barclays accounted for more than half this number in one rights issue alone, and at £6 billion it is said to be the fourth-largest secondary issue in British banking history. Even after discounting for Barclays, 2013 still exceeded the prior two years put together. But is this investor appetite for share issues further evidence of the tide turning in the U.K. and perhaps the global economy or just refinancing opportunism attracted by the cheap cash? Opinion is mixed, of course, but some data would suggest a recovery of some sort is well under way. U.K. employment was reported to hit new heights in the middle of December and shares were gaining new highs in major world indices as fears of the effect of the Fed tapering of its asset purchase program receded a little. Along with an investor base ready to fund rights issues, these are likely all good signs.

Perhaps it is the reason to come to market that is key: Barclays did not raise the new capital to expand – it was raised to meet new regulatory requirements. Other capital raising, some argue, was done just because it is a good time to lock in low rates and take advantage of the cheap money available. That may be helpful for the bottom line in the short term, but it is more about lowering expenses that enable a growth strategy.

Compare and contrast two other U.K.-listed firms which both raised new capital in 2013: FirstGroup plc (FGP) and The British Land Company (BLND). FGP issued a rights issue in June last year offering three new shares for every two existing investors held. With the objective of “easing balance sheet constraints” and to part fund asset renewals (replace old buses to you and me) an issue price of 85p was announced on May 20 when the market price for the share was around 155p, implying a discount of 45 percent on that day’s market price and 70 percent off the 2013 high of 223p reached only the previous day (Friday, May 17).

Clearly, a dilution of value is expected when additional shares are issued, and in simple mathematical terms, the additional shares at the lower price would indicate a new price level of around 113p per share, ignoring any value benefits the new capital may bring of course. However, short sellers appeared to be banking on a fall of this magnitude and more when borrowed positions soared from 10 million to more than 50 million shares on May 23. Balances continued to rise to a peak of more than 72 million before dropping away more than 90 percent almost overnight on June 24. Over the same period, FGP shares dropped to 95p which kept them above the issue price, but some way below the theoretical post rights price of around 113p, banking up to 18p per share profit for the short side.

British Land (BLND) by contrast placed shares with the market directly, aiming to raise investment capital to support the purchase of new property – what might be more easily identifiable as a plan to raise capital for growth in a recovering property market. BLND saw its share price oscillate between £5.50 and as high as £6.58 following this and other share placing events across the globe. At the time of writing, BLND shares were worth around £6.00. Short interest in BLND was negligible throughout the year, ignoring dividend peaks, suggesting that it is not raising capital alone that is the warning signal for share price falls. Raising capital for well-defined expansion plans is potentially viewed much more positively than refinancing, even if both such actions are intended to enhance the issuer’s bottom line.

Identifying new trends, especially when they are at the tip of a potential recovery, is notoriously risky, but there does appear to be a distinction that could be drawn from this high level analysis, and that appears to be based on the traditional values of fundamentals. Taking advantage of cheap capital in the short term is not, in itself, a fix for a company trading at the wrong price. Short sellers will seek out such anomalies and the tracks they leave in securities lending data can provide valuable insights for the rest of the market, particularly when trying to steer their ships clear of metaphorical rocks.

The Great Corporate Hedging Opportunity

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This blog post was originally published by Commodities Now.

Author:Matthew Wash, client advisor, SunGard’s commodities trading business

A pipeline of new regulations in over-the-counter derivatives trading is changing how stakeholders will approach business planning. The mandated move of OTC contracts into the realm of standardized, cleared derivatives will present significant challenges for market participants; however, we believe that disruption caused by regulatory reform can also create exciting opportunities. In particular, firms employing corporate hedging strategies are in a unique position to improve organizational processes as they adapt to the impending regulatory environment.

Even now, the corporate community relies heavily on the trading of OTC derivatives, rather than futures or exchange-traded options, to hedge commodity exposures. As regulations such as the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act come into effect – bringing with them a new set of clearing requirements for OTC trading – companies will face a dramatic rise in exposures to clearing banks and brokers.

Additional regulations to watch include the latest Basel Accords, which demand that financial institutions hold larger reserves of capital. The incentives created by this requirement trickle down to the trading world in the form of increased collateral demands by affected firms. In turn, corporate counterparties are beginning to ask banks for a more transparent view of how they determine collateral requirements, in hopes of empowering their decision making processes. As safe havens from increasing collateral charges become ever scarcer, companies trading commodity derivatives will need the right collateral management technology to perform the analytics required in establishing the next generation of hedging best practices – hedging programs that can generate timely and flexible reporting will more easily retain an edge.

In addition to the considerations above, corporations are discovering new value in  the ability to manage risk in real time. This competency will be particularly critical for the management of new initial margin (IM) requirements for OTC derivatives trades. The different calculation methods used for margining add to the value proposition of real-time applications: While current methods are predominantly formulaic, others – such as historical value at risk (HVaR) calculations – can change margin requirements over time for an unchanging position.

As major exchanges like the Intercontinental Exchange adopt VaR-based margining systems, collateral management will move from a reactive, back-office function to an integral component of trading strategy, liquidity management, credit and market risk, and finance activities.  To this end, companies not only need transparency for risk analysis, but also require real-time reporting flexibility. Only with up-to-the-minute insights into positions, margin, prices, and P&L will corporates be able to create the information set needed for optimal decision making. Having the ability to simulate trades and gauge the potential impact on margin will be crucial in leveraging information gathered.

Through advanced technology, real-time risk management, and user driven analytics, corporations can achieve a smooth transition into a more regulated trading environment. Firms that do so will be in a stronger position to not only improve collateral, margin and threshold management, but also identify optimal trading opportunities and ultimately make better decisions.

market analyst, Astec Analytics, SunGard's capital markets business

The Year In Review: Top 10 Most Shorted Stocks of 2013

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This blog post was originally published by Forbes.

It was an interesting and busy year for short sellers in 2013, with climbing stock markets offering opportunities for those making the right bets against the momentum. With growing concerns over the tapering and easing off of quantitative easing and stimulus measures, a number of individual names have been outpacing the broader market, either up or down, and have become synonymous with short selling and have become a regular feature in SunGard’s Astec Analytics’ weekly Top 10.

Looking at borrowed volumes, borrowing cost, utilization, client interest and news driven stories, we have compiled a top 10 list of the most shorted stocks of 2013.

1) Tesla Motors Inc. (TSLA)

Hitting our number one spot this year, perhaps as no great surprise, is the electric vehicle maker Tesla. The company saw a somewhat mixed year on the news front, notably posting its first ever quarterly profit in Q1, as well as fairly buoyant sales data in the early half of the year. This was tempered however, particularly in recent months, as its latest sales figures were taken somewhat less positively, while suffering a PR blow as reports emerged of a number of their Model S vehicles spontaneously catching fire. This image problem was not helped when George Clooney added his two cents, saying his Tesla was always breaking down so he decided to get rid of it.

From a short selling perspective, as analysed by its proxy of securities lending information, the story was no less mixed. Early in the year while the company’s share price stagnated, short sellers built up their bets against the company only to be ‘proven wrong’ with its Q1 results. Following this, these positions were quickly closed and as the company’s share price climbed – peaking at almost three times its May level in October – short positions held fairly muted. That is at least, until November, as this latest batch of concerns surrounding the company has led its stock to pull back, while short sellers are moving back into the market once again; the number of TSLA shares being borrowed having doubled since the start of November to reach its joint highest level for 2013.

2) Blackberry Ltd. (BBRY) / Research in Motion Ltd. (RIM)

One of the hottest and most talked about companies of the year, Blackberry, formally research in Motion, saw hit after hit in 2013 as its share of the ever more competitive smartphone market grew less. Despite hopes that its Blackberry 10 handset would offer a turnaround for its prospects, disappointing sales figures and staff reductions pressured its share price, as it emerged its latest handset would not prove to be a saving grace. In a latest flurry of activity, speculation that the company may be bought out petered to nothing as a bid by a Fairfax-led consortium passed its deadline.

On the short side, it would seem that as the company’s share price benefited from some rare optimism in the early months of the year; short sellers were predicating its downfall as borrowing volumes climbed to a high of over 130 million shares being borrowed. Uncertainty then dominated for a month or so, as a share price treading water was met by the covering of open short positions. As the stock plummeted in the latter half of the year however, short positions have also been on the decline – likely through a deemed lack of potential profits rather than optimism of a renewed price surge. Speculation over the Fairfax bid did see volumes surge in November however, only to fade to previous levels once it proved a moot point.

3) 3D Systems Corp. (DDD)

In many ways DDD’s interest in 2013 was very much linked to the prospects, or at least perceived prospects, of the fledgling 3D printing industry as a whole. While the markets have been wondering if, and exactly, how successful this new technology will become, DDD has seen its share price gain pace since April, able to undergo a $250 million stock offering with its stock price hardly suffering. As new software was developed, and global retailer began to offer 3D printing supplies, DDD’s strength grew.

That said data from Astec seems to show that short sellers have remained pessimistic about this idea. In the first months of the year the number of the company’s shares borrowed climbed rapidly as the share price rose – a share price rise that would later be retraced, but shown to be only muted by comparison to the overall gains made in the stock since April. As this first stock surge receded however, borrowing volumes held there levels, at which they remain to this day, with only minor fluctuations in the level surrounding the stock offering.

4) InterOil Corp. (IOC)

InterOil’s share price has seen fairly volatile trading during 2013 as both company and market based news placed pressures on the stock. Notably in May the share price saw a $20 one-day range as news emerged that it entered into exclusive negotiations with Exxon Mobil’s Papua New Guinea arm, for the development of its Elk and Antelope fields in the Gulf Province of the country. Most recently in December, the stock gapped-down a further $20 when this deal was confirmed.

On the borrowing front, the year has been somewhat in the other direction, where although there have been a few peaks and troughs, the number of IOC shares being borrowed overall were almost 30% lower than when they hit a high in February. In a classic pattern given the stock movements this would seem to suggest the short side are seeing the share declines as offering fair value, or at least little opportunity to profit, rather than a positive bias towards the company.

5) Molycorp Inc. (MCP)

Most of the news flow for Molycorp took place in the early half of the year, although more broadly its prospects have been very much tied in with the rare earth elements market and in turn economic growth in China. With rumours of a takeover bid and a $300 million capital raising, all in the first months of the year, its share price had lost 50% of its value by March. Since which time it held fairly steady, although suffering a large one-day hit in October when it announced a surprising low price for its share issue.

Astec data meanwhile suggests short selling, despite a lack of any major gains in its stock price, has been on the up-and-up all year. Since January, the number of Molycorp shares being borrowed has more than doubled, hinting at the idea short sellers may still be sceptical of where MCP’s share price stands.

6) Opko Health Inc. (OPK)

Opko Health has seen a period of generally gaining stock prices in 2013, having a secondary listing on the Tel Aviv Stock Exchange in August, while a number of insider purchases from the CEO and board members helped support the stock, particularly in the latter half of the year. In December the stock was hit further after a report from Lakewood Capital, published on Seeking Alpha, suggested the company was being traded at between 75% and 100% above its value.

The story from short sellers has been perhaps the exact opposite, where our data suggests positions have been building as the share price climbed. This classic combination of rising borrowing while the stock price climbs, would seem to suggests those on the short side have been, and remain, sceptical of the progress being made in the cash market.

7) Arena Pharmaceuticals Inc. (ARNA)

Much of the news for Arena this year has focused on its anti-obesity drug Belviq. With various stages of development and marketing, as well as US regulations and the proliferation of rival products, the company’s prospects have been seen as very much tied to its now flagship drug has shown to be doing well in its latest batch of earnings numbers. With this, although seeing some reprieve on the latest earnings results, the company’s share price has been on the slide since January; ending the year 40% lower than it started it.

Despite this Astec data suggest the short story has been somewhat more mixed, with the number of ARNA shares being borrowed seeing a number of surges during the year, elevated for most of Q1 and once again in the summer, although ending the year 20% higher and having peaked at being almost 50% higher in July.

8) JC Penney Inc. (JCP)

Starting the year off on the wrong foot with soft earnings data, JC Penney has seen it shares take hit after hit in 2013, notably with the unusual back and forth with Bill Ackman in August, after the hedge fund manager published a five page letter berating the board for not allowing him access to the company accounts despite his large shareholding.

As its share price lost ground consistently during the year, the lending data suggests a game of two halves – the first quarter generally seeing short sellers covering their positions, at this point presumably taking profit as the shares dropped, while since July borrowing volumes have been on the increase; suggesting short sellers have been betting against the stock despite the price continuing to suffer. During the last six months of the year, JCP saw the number of it shares being borrowed, the proxy for short selling, more than double to around 77 million shares.

9) Herbalife Ltd. (HLF)

Another subject of a Bill Ackman media campaign, Herbalife saw most of its headlines and interest take place after the hedge fund manager underwent a public campaign describing the company as a “pyramid scheme” and a house of cards. Despite this however, after a fairly stagnant start to the year, HLF shares continued to gain ground for most of 2013 hitting fresh record highs in December.

This pattern of positivity was effectively mirrored on the short side, with the number of HLF shares being borrowed, although holding at elevated levels in the early half of the year, from May the volume of borrowed stock has now halved.

10) Sears Holdings Corp. (SHLD)

A year of mixed signals for the retailer, weak earnings numbers in the first half year were bookended by stronger numbers towards the end. The good results helped push the share price higher, although this was eventually retraced as concerns about the company sales figures and its need to raise cash, hit the stock hard.

Astec data meanwhile suggests this price rise in the second half of 2013 brought increased short interest, with borrowing volumes almost doubling between May and July. Although perhaps tellingly the latest retracement of the stock has not been met by a significant decline in borrowed volumes, suggesting those on the short side remain pessimistic.

Reducing Risk and Gaining Control of Corporate Actions Processing

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This blog post was originally published by ISS Mag.

How can the industry turn the tables on risk in corporate actions processing? Industry insiders estimate that $1 billion is lost every year through missed or mismanaged corporate actions events. Losses like these result from current industry conditions and longstanding practices that impede optimal processing performance. Doing nothing to address them prolongs problems and ultimately incubates risk.

There are several primary causes with specific implications: the higher volume and complexity of corporate actions is increasing risk; inefficient manual process and workflow add to the burden; and outdated or ill-equipped home-grown systems create an underlying liability.

Relying on manual methods to manage the corporate actions lifecycle makes for a costly, labor-intensive activity. Human error can infiltrate the workflows for both relatively simple announcements such as stock splits and more intricate multi-part events such as cash stock options or rights issues, which require a complex, multi-step process to complete related notifications. At the same time, when processing steps come into question, their resolution may be left open to interpretation.

Facing an improperly handled corporate action can put an unwanted public spotlight on poorly executed processing. For example, under U.S. regulations, companies could be fined a combined maximum of $3 million per incident for unintentionally failing to furnish correct information in a timely manner to both shareholders and nominees. By streamlining and centrally managing the processing of corporate events through automation, organizations can work more productively, efficiently, consistently and securely to process events within required time frames.

In the application of an automated corporate actions process, there are a number of qualities that differ from manual processes. Corporate actions information is automatically compiled from many disparate sources to create a single event using configurable logic, and when new information becomes available, it is automatically captured and applied to the event upon receipt. In addition, all differences in critical information for each source are clearly visible and prioritized for review by staff, which highlights any errors and inconsistencies for correction and therefore increases staff efficiency by reducing manual tasks. Event information, including the deadline for the voluntary choice event, is also automatically distributed to all investors affected by the announcement. When applied through election processing, event settlement and the final reconciliation or closing out of the event, automation helps minimize risk while significantly reducing the time to complete a voluntary corporate action.

When evaluating a corporate actions processing solution, the following criteria should be considered:

  • End-to-end corporate actions processing
  • Comprehensive data management and scrubbing
  • Integration via an array of data interfaces
  • Adherence to XML and SWIFT ISO messaging standards
  • Flexible trade and positions functionality
  • Easy-to-use dashboards and interfaces with support for mobile
  • Cloud-hosted managed services, Software-as-a-Service (SaaS) or local deployment options

Implementing an automated process for all corporate actions can be difficult for a firm to attempt on its own. The implementation requires a combination of technical and domain expertise so that the resulting solution is tailored to address the firm’s specific requirements and risk factors. In addition, the solution needs to be designed to provide the flexibility and security to support new standards, technologies and ways of doing business going forward. Through this approach, companies can run more agile, smarter operations that help readily adapt to whatever comes their way.

Concerns about the improper processing of corporate actions notices are real. Organizations can spend years trying to recover from the effects of a failed corporate actions solution implementation. Firms that act to deploy scalable best-practice solutions for this function can expect to achieve noticeable improvements in productivity, accuracy, STP and customer service. What’s more, vulnerability to risk and reputational damage will be significantly reduced as manual steps are replaced with a streamlined, automated process that contains built-in governance.

As a result, these organizations can accomplish corporate actions processing more confidently and with fewer resources, even as the complexity and volume of events grows. Freed from manual tasks, staff can subsequently refocus their efforts on high-priority assignments that add strategic value to the business. Ultimately, these organizations can make significant strides toward improving and sustaining their competitive position through greater agility, smarter operations and reduced risk.

For more on reducing risk and boosting organizational effectiveness by automating corporate actions, read SunGard’s new insight report, “Turn the Tables on Risk: How to Gain Control of Corporate Actions Processing.”

vice president, SunGard’s capital markets business

Why Market Risk Systems Are Vital to Volcker Rule Compliance

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This blog post originally appeared in Wall Street & Technology.

On December 10, 2013, five U.S. financial regulators approved a game-changing series of new rules that prohibit a broad array of financial risk activities that contributed to the near collapse of the world’s financial system in 2008.

Known as the Volcker rule and codified as part of the Dodd-Frank Act, the rule’s provisions are applicable to all U.S. depository institutions, including those affiliated with or regulated as banks. The final rule prohibits banking entities from engaging in proprietary or own-account trading of certain securities, derivatives and options, among other restrictions. However, there remains significant difficulty in distinguishing market-making activity from proprietary trading.

The final provisions of the Volcker rule are a clear game changer for banks and affiliates that are involved in market-making and related proprietary trading activities. The breadth of coverage is much broader than market participants expected, and, as a result, the race is on to reconfigure or implement ongoing position management capabilities, specifically as it relates to extraneous agency positions. In this context, extraneous positions are those positions that are not an exact duplication of the original transaction.

Specifically, the rule allows for conditional exceptions for certain market-making activities, such as securities underwriting. However, even within the context of underwriting, it is necessary for banks to make an independent and ongoing analysis of whether any reclassification or inadvertent activity pushes a seemingly exempt activity into a prohibited activity, and to what measured level or degree. This will require a reconfigured process for banks, if not an entirely new one.

This is because while securities and derivatives dealers may continue to act as principal when making markets under the exemption, and the final rule does not mandate any substantive shift toward an agency exclusive model, there is a prescribed convergence with elements of the market risk rule. From a practical perspective, the rule requires that the banks qualify risk mitigation measures and in some instances liquidate an interest attached to an identifiable position in a timely manner.

In addition, in the final Volcker rule, the U.S. regulators have jointly adopted a view that broadens the statutory definition of trading account. For instance, under the statutory text, a “trading account” is primarily intent determinative. However, under the final Volcker rule, a “trading account” includes any account holding a position of any financial instrument that is relevant under the market risk capital rules or one that hedges another trading account position.

The breadth of the regulatory definition also extends to any account of a registered securities dealer, swaps dealer or security-based swaps dealer, which is also generally aligned with market risk provisions.

Taken together, this means that internal automation must be capable of identifying all positions that are considered residual to the originating transaction and calibrating them to certain market risk factors.

It is likely that because the regulators have referenced the market risk rule in their guidance, the applicable market risk automation processes will, if properly scaled, accomplish the monitoring of the continually changing risk bank of any residual position.

Covered banks may consider leveraging their market risk framework to comply with or properly leverage the exemptions commensurate with the market-making provisions of the Volcker rule — specifically those residual positions that are “designed to reduce or mitigate identifiable risks.”

To comply with new Volcker rule requirements, the necessary automation should consist of:

  • Accurate and objective profiling of any residual position, including a determination of potential changing characterization of the position
  • Advanced screening capabilities that coexist with the market risk and liquidity factors in accordance with the final market risk rule
  • A multi-level classification structure that provides a real-time identification that concurrently satisfies both the Volcker requirements as well as the market risk rule provisions

What’s Next for Corporate Actions? — #XSPchat Twitter Q&A

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Author: Brendan Farrell, SunGard’s XSP

Today I participated in a live Twitter Chat at #XSPchat with Virginie O’Shea of Aite Group to discuss corporate actions as we head into 2014. We covered topics from risk to technology to message format coexistence.

In case you missed the live chat on Twitter, you can read the entire Q&A below.

If you have your own question about what’s next for corporate actions, please leave a comment, share a tweet, or send a carrier pigeon (although I admit the carrier pigeon method is not my preference), and I would be happy to continue the conversation.



Q1: Let’s start with a scary stat: $1B lost each year from corporate actions errors. Why is this happening? #XSPchat


There has been a definite increase in complexity of corporate actions as a result of an increase in tax rules over recent years… #XSPchat

…this means that firms have to respond to more complex processes and data sets that are non-standard. There is also a continuing… #XSPchat

…lack of adoption of standards such as ISO 20022 and harmonized market practices, which adds further complexity to the mix. #XSPchat


I agree. Not only is the volume of corporate actions continuing to grow, so too is the complexity of these events… #XSPchat

…making firms’ reliance on existing manual processing completely untenable & extremely error prone… #XSPchat

…Coupling this w/ introduction of the new #ISO20022 msg standard & the need for coexistence with the 15022 standard… #XSPchat

…& the result is an extremely exposure-ridden process. As corporate actions pros know, any small error can be very costly. #XSPchat


Q2: How are increasing volume and complexity affecting #corporateactions risk? #XSPchat


In manual processing environments w/ increasing volumes, it’s impractical to adequately staff to manage activity spikes… #XSPchat

…Furthermore, increasing sophistication of corporate actions terms allows for misinterpretation & costly errors. #XSPchat


Traditionally, firms have relied on people to understand and process corporate actions data, hence any significant volume increase… #XSPchat

…will put pressure on manual resources and increase the related operational risk. #XSPchat


Q3: What were top reasons corporate actions professionals were losing sleep in 2013? #XSPchat


Much like the last few years, there has been a lot of ongoing concern about operational cost in 2013 due to tough economic climate… #XSPchat

…Corporate actions pros have therefore had to deal with much more complexity and volume with fewer staff. #XSPchat


Cost cutting, zero risk tolerance, increased globalization & new regulatory burdens are not conducive to a good night’s sleep! #XSPchat


Q4: So how can we turn the tables on risk in 2014? Where should corporate actions pros focus their efforts? #XSPchat


More companies are paying closer attention today to where their real value-add differentiators lie, thus appetites for… #XSPchat

…costly in-house corporate actions dev projects, people-intense “common” processes or managing technology are waning &… #XSPchat

…customers are looking for established vendors to partner with them to ease these costs & risks. #XSPchat


As well as looking at tech improvements, firms should also consider where their expertise lies in the people part of equation… #XSPchat

…Identifying key person risk and ensuring that intellectual capital is retained and people are properly trained is also important. #XSPchat


Q5: How does technology play a role in helping corporate actions pros to change things in 2014? #XSPchat


Provided that it is sensibly deployed, technology can take away from some of heavy lifting in processing corporate actions data… #XSPchat

…Trying to extend this to the complex end of the spectrum, however, can end in disaster. Good people are still needed. #XSPchat


Only technology provides required relief for day-2-day operational pressures & risks associated w/ corporate actions processing… #XSPchat

…& new standards while also providing customers’ clients with the level of modern services they demand like STP & mobile access. #XSPchat


Q6: As 2013 comes to a close, so must our #twitterchat. Any final thoughts on #corporateactions evolving in 2014? #XSPchat


Given continuing widespread headcount cutting across the industry, I expect to see more investigation of technology solutions… #XSPchat

…I anticipate that market infrastructure change like a move to T+2 by 2015 will put further pressure on teams to improve processes. #XSPchat


As firms face pressure to adopt ISO 20022 & prepare for @The_DTCC Transformation amidst cost cuts, new regs & client demands… #XSPchat

…more firms will look for automated, managed service solutions #XSPchat

I also recently published a paper on corporate actions risk, & would welcome any comments/feedback #XSPchat:


BONUS Q7: Time for one more from the audience @BrendanPFarrell @virginieoshea? @JakeCul wants to hear about #ISO20022 adoption. Thoughts? #XSPchat


There’s very little appetite for adoption in Europe of ISO 20022 in the CoAc space – biz case is hard to swallow without regs. #XSPchat


While I agree w/ @JakeCul that implementing @iso 20022 while maintaining the current standard ISO 15022 (Coexistence) is complex… #XSPChat

… @SunGard_XSP is working hard to make 15022/20022 coexistence less of an issue for our customers through… #XSPchat

…. seamless integration of both standards within our offerings. #XSPchat

The Dangers of Copy and Paste – Why Manual Processes Are Putting Hedging Operations at Risk

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Author: Arnaud Terrien, head of business development, Asia-Pacific, SunGard’s Kiodex

While manual processes can help firms perform a myriad of calculations on extensive datasets, undue reliance on them can lead to increased risks, which could result in significant financial losses, particularly for hedging operations.

We see frequent reports of cases where the errors of human intervention have been exposed through a myriad of apparently automated calculations. For example, last year it was reported that a U.S. tier-1 bank suffered a  $6.2 billion trading loss due to copy and paste errors. The business operations in place  was supposed to monitor and limit risk, yet because this was done through a series of spreadsheets, a wrong calculation caused the bank to underestimate the downside of its synthetic credit portfolio.

In Asia, we have not seen such high-profile cases related to spreadsheets and manual processes. But this does not mean none have occurred, nor are firms immune to these. Certainly, with Asia’s complex and unique market factors, companies trading in commodities need better transparency and visibility of their trading books and hedging operations.

In some cases, firms have overlooked the risks of manual processes for a number of reasons. Enterprise-wide data consolidation projects can be a deterrent to tackling the challenges associated with manual processes. In other cases it’s simply a lack of resources.

Those managing spreadsheets appear to be aware of and concerned by the risks. Typically, a company spreadsheet is managed by staff who reconcile paper trade data, record confirmed physical trades from procurement, collect market data and finally produce reports.

Depending on the scale of trading operations, this type of function can generate very large data-rich spreadsheets. In addition to errors being hard or impossible to identify, these unwieldy spreadsheets can overwhelm and crash PCs. Without full backup procedures in place, the data and history of changes can be lost. This makes verifying spreadsheet data impossible, as there is no way of tracking changes. This lack of insight makes data accuracy and business intelligence a significant challenge for auditors and compliance departments.

And what implications does this have for enterprise-wide data access? In short, it prevents effective contingency. If there is one person managing a spreadsheet and they are unexpectedly out of the office, who can properly undertake his role at short notice? Direct financial losses are by no means the only problems arising from spreadsheet errors. Reputational risk is also a factor if there’s a need to re-issue a financial statement, or if embarrassing errors are made public.

Hedging operations today can no longer be efficiently and profitabily run on a spreadsheet. Increasingly, we see firms across the region adopting an integrated approach to their trading system infrastructures which help improve cost efficiencies and enhance operational effectiveness by automating reports and streamlining processes. In turn, this frees up resource so staff can focus on core business activities that drive growth.

Solution providers can offer aggregated data from the public domain or help companies input data more quickly and safely. There are checks in place so it’s possible to see who made specific changes – eliminating the opacity of spreadsheets. Via web browsers, users can quickly check trades, perform calculations and generate reports. With an automated solution, in addition to enjoying peace of mind, users can get more time for testing and validating hedging strategies to help grow their business.

senior vice president, Astec Analytics, SunGard’s capital markets business

Lewis on Lending: Regulatory Changes in Securities Lending

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This blog post first appeared in the December Securities Lending Focus produced by SunGard’s Astec Analytics.

Attending a recent beneficial owner summit hosted by a large agent lender, it was pleasing to see the level of engagement and optimism in the room. The cynical might believe the high attendance was due to a combination of the excellent bacon sandwiches on offer and the fact that the market is quiet enough to allow a whole morning to be invested in such matters. However, those with a more positive outlook might see something different: a much more engaged and better informed set of organizations that are investing much more time and effort in the business of securities lending.

As might be expected, a great deal of the panel discussion time was spent on regulation – the last couple of years have seen an unprecedented breadth and depth of regulatory uncertainty and change, with securities lending being affected directly and indirectly by Basel III, Dodd-Frank and the various machinations of the Financial Stability Board (FSB). However, a strong message being broadcast by Kevin McNulty, ISLA Chief Executive, was that the regulations were clearer than ever before and the uncertainty of just how the industry is going to be affected continues to diminish.

That is not to say that there are not bogeymen lurking in the small print of the regulations; the Financial Transaction Tax (FTT) is one such risk. The FTT is to the securities lending industry is what Kryptonite is to Superman, at least in its pure form. Many observers suggest that the FTT will never come into force in the guise it was first expected and feared, and some believe it may simply be quietly brushed under a carpet in Brussels as political will loses to economic reality.

The FSB’s guidelines on repo and securities lending contains their own traps – numerical floors, or minimum haircuts, are mooted for a limited type of financing trades. The fact that these floors are below what can be seen in the normal market place currently has indicated that these may not be an issue. However, two possible effects should not be ignored. Firstly, numerical floors could spark a competitive rush to the bottom, actually reducing margin levels from current market norms. The second possible outcome is more risky and difficult to predict – having set a floor, the FSB have effectively installed a lever that they can pull to raise the floors and potentially squeeze off liquidity whenever they wish. This, together with many of the other regulatory issues discussed at the summit, support multiple objectives – shining a light into the world of shadow banking, increasing regulatory control over the financing market, and potentially reducing it in size.

Overall, there is a much more positive mood in the industry going into 2014 with some positive expectations regarding revenues, new markets expected to open up and increasing regulatory clarity. What may result from all this change is a more regulated, potentially smaller and more efficient financing industry with fewer, better capitalized participants. The industry needs to adapt to the new landscape and make the best out of it, and I have little doubt it will.