The Financial Services Club's Blog

Revising MiFID and RegNMS for HFT

Gawd, I hate acronymns and look at that!  Three in one blog entry title!!!

Anyways, for the nerdy-nerd equities guys, this will grab their attention.

It's all to do with trading in European and American stocks and shares using High Frequency Trading (HFT) systems, and the regulations therein with EU MiFID rules applying over here and USA RegNMS rules applying over there.

These rules are going to be overhauled soon thanks to the Flash Crash, that dreaded thing that caused US stock markets to go haywire on May 6th.  There has been lots and lots written about the Flash Crash of May 6th, but there’s not been a great deal saying it was a good thing ... until you meet JPMorgan.

In this week’s Eye on the Market, they identify five things they like about the Flash Crash, namely:

[1] Stock-specific circuit breakers.

The U.S. has been slow to install circuit breakers on major exchanges, relying instead on “clearly erroneous trade rules” that cancel trades after the fact. In Asia and Europe, circuit-breakers have been around for a while. In Asia, trading is restricted outside of pre-specified daily bands of 5%, 10% and 15% (different by market). In Europe (e.g., Deutsche Bourse), trading is halted for 5 minutes after a 3%-10% move, and then reopened. In the wake of the Flash Crash, 10% circuit breakers are now applied to a few stocks as part of a pilot program (they have already been triggered on Citigroup, Anadarko and the Washington Post Company). If we are going to exist in a world with automated robots doing the lion’s share of daily trading, circuit breakers may be needed to prevent unintended and unmanageable meltdowns.

Another topic under discussion by the SEC: prevent HFTs from having “unfiltered, naked access” to the exchanges by requiring them to live by the same pre-trade risk management controls that clearing members do. Why? As noted by the Chicago Fed, “high-frequency trading has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment”.

[2] More balance to the HFT discussion.

HFT supporters claim they are providers of liquidity to the market, and that HFT makes U.S. markets more efficient than ever. Suggestions to the contrary have been deemed “utterly laughable” by firms defending them. However, the Flash Crash highlights the uncertainties around these assertions.

While volumes have tripled in the last few years, there’s a big difference between volume and liquidity (the ability to transact without moving the price). In an industry barometer survey1 conducted by the Tabb Group in May of this year, barely half the participants had a high degree of confidence in the US equity market structure; 73% did not believe the market structure is “orderly”.

One of the survey recommendations: HFTs should be required to register as broker-dealers.

To be sure, there were weaknesses in the old specialist system as well2. But specialists were required to maintain a fair and orderly market, and post quotes that were part of the National Best Bid and Offer system; their reputations mattered. HFTs have no such requirements (no minimum shares or minimum quote times); one proposal would require quotes to be valid for at least one second. The SEC has broadened the trader reporting system in order to analyze HFT activity more closely.

[3] Proposals requiring HFTs to act more like the floor specialists they’re replacing.

With the advent of HFTs, cancelled orders have soared. Today’s ratio of 30 cancelled orders for each one executed means that 97% are cancelled.

To curb abusive practices, some market participants recommend applying a fee to HFTs for an excessive number of cancelled orders. The increase in cancelled orders is one reason we do not agree that increased order depth on S&P 500 stocks at the NBBO is a clear indication of greater liquidity, as some market research alleges. Quotes pulled within a nano-second of being posted, and which are part of an algorithmic order detection exercise, don’t seem like liquidity in the traditional sense. Ameritrade’s representative on the recent SEC Roundtable referred to this as “opportunistic liquidity”.

[4] More discussion around HFT “co-location”.

Some HFTs co-locate computer servers inside stock exchanges3 to minimize the milliseconds (or nanoseconds) required to scan existing orders, and have algorithms act on this information. As trading execution and IPO listing fees declined, exchanges have tried to make up the difference by selling access to market data. Some exchanges have products which give clients a faster look at quotes, in exchange for a fee. As a result, some HFTs end up with access to information sooner than institutional or retail investors who rely on more standard venues (such as SIP Quotes).

The search for co-location benefits has existed forever (in polite company, “order anticipation strategies”). Broker-dealers in past decades argued that being closer to floor traders on the CBOT was an advantage to their clients. But historical parallels can lose their meaning when the instruments of battle change: one HFT computer can reportedly decode more than 5 million messages per second. The Flash Crash has increased the debate around whether co-location confers advantages to HFTs, and whether there should be obligations and responsibilities that accompany them.

[5] Asset managers learn that “cheapest <> best”.

After the NYSE moved to decimalization in 2001, bid-offer spreads fell almost in half on S&P 500 stocks (less so for the Russell 2000 stocks, where HFTs are less active). Schwab retail commissions fell from $35 in 2003 to less than $10 in 2009. This trend is confirmed by broader research from the American Association of Individual Investors. So if the prism of success is bid-offer costs and commissions on individual trades, the battle has been won.

But is that the right prism to define what makes an optimal marketplace? Part of the HFT industry tracks the order flow of larger investors who leave electronic footprints4. Using algorithms which include spraying the tape with thousands of quotes, the intentions of large investors is ferreted out. This can result in higher trading costs for such investors, and by extension, their clients, who include 401k investors, and pensioners participating in state and corporate plans. Quantitative Services Group computes analyses of HFT impacts on execution costs. They estimate that HFT tracking algorithms can drive execution costs up 1.5 to 3 times, even when institutional investors parcel trades into smaller orders to avoid detection.

There’s lots more of interest in their report, which you can read in full and download if you want:

JPMorgan's Eye on the Market

Meanwhile, you may note that a lot of it is about High Frequency Trading (HFT), which I’ve written quite a bit about recently:

• Who's afraid of HFT, HFT, HFT?
• High frequency trading in jeopardy thanks to flash crash
• More Banking Statistics: Algo and High Frequency Trading

as have many others.

This means that this area is going to get regulated, and it will mean significant restructuring.  For example, back in January, the SEC started a consultation through the Concept Release - a request for public comment on securities issues - on HFT and more.

Key areas under review include:

Market Quality Metrics

What are the best metrics for assessing market quality for long-term investors and have these metrics improved or worsened in recent years?

Fairness of Market Structure

Is the current highly automated, high-speed market structure fundamentally fair for investors?

High Frequency Trading

What types of strategies are used by the proprietary trading firms loosely referred to as high frequency traders, and are these strategies beneficial or harmful for other investors?

Is the overall use of any harmful strategies by proprietary firms sufficiently widespread that the Commission should consider a regulatory initiative in this area?

Co-Location

Do co-location services (which enable exchange customers to potentially route trades faster by placing their computer servers in close proximity to an exchange's computer system) give proprietary trading firms an unfair advantage?

If so, should the proprietary firms that use these services be subject to any specific trading obligations?

Dark Liquidity

Has the trading volume of undisplayed trading centres (such as dark pools) reached a sufficiently significant level that it has detracted from the quality of public price discovery?

If more individual investor orders were routed to public markets, would it promote quote competition in the public markets, lead to narrower spreads, and ultimately improve order execution quality for individual investors beyond current levels?

Are a significant number of individual investor orders executed in dark pools and, if so, what is the execution quality for these orders?

Lots of comments have been received on the Concept Release, and its conclusion cannot be far away.

Now we have a European response to this area with Kay Swinburne, rapporteur to the Economic and Monetary Affairs committee of the Parliament, producing a draft report last week. This report provides indication of much of what might be in the revised MiFID and very little is left untouched.

Jeremy Grant over at the Financial Times, has picked out some of the more interesting nuggets from Kay’s report:

• She suggests it may be necessary for “informal market makers” – read: HFTs – to be subject to mandatory liquidity provisions;
• Calls for an “ongoing regulatory review” of the algorithms used by HFTs;
• Seeks an examination of HFT to determine whether market flow generated automatically is providing “real liquidity” to the market and what the effect of this is on overall price discovery;
• Suggests that, “in the interests of equitable treatment”, rules need to be introduced so that MTFs (multilateral trading facilities”, like Chi-X Europe) are subject to the same level of supervision as exchanges, under certain circumstances;
• Calls for new provisions under Mifid for “broker crossing networks”, including requirements that they submit to authorities “orders matched in the system”, and “details on access to the system”; and
• Suggests a minimum order size for dark pools.

This is pretty dramatic stuff and Jeremy finishes his column by referencing David Doyle, a regular speaker at the FSClub, returning to the London meeting on 12th January 2011 for our annual EU regulatory update.

David presented on the key changes in MiFID at a conference at the London Stock Exchange last week, stressing that “the whole review of MiFID will have as its driving principle investor protection – that is, the interest of the retail investor, not the operators of exchanges, dark pools and HFTs.”

Too true David, too true.

If you’re interested in more of what David had to say, here are his slides:

Mi fid, david doyle, july2010

View more presentations from Chris Skinner.

The Financial Services Club's Program, Autumn/Winter 2010 (draft)

For those who are interested, we have just put together our draft program for the London Financial Services Club Autumn/Winter Season.  The dates and details are as follows:

23rd September 2010: “Technology Trends: Mobile Developments” with Samee Zafar, Director, Edgar Dunn, London & David Birch, Director, Consult Hyperion

27th September 2010: Quarterly Dinner with Matt Colebrook, Chief Executive of First Direct

5th October 2010: Capital Markets Chamber

12th October 2010: “Doubling volumes every year, Zopa rocks!” with Giles Andrews, Chief Executive, Zopa

27th October 2010: “The City of London’s Future” with Sir Stephen Wright, former CEO of IFSL and Senior Advisor to TheCityUK

4th November 2010: “How banks should think about technology and innovation” with JP Rangaswami, Chief Scientist, BT Group

9th November 2010: Capital Markets Chamber

18th November 2010: “How does a credit rating agency work?” with Roberto Rivero, Head of Market Development Rating Services, Standard & Poor’s

23rd November 2010: “Technology Trends: High Frequency Trading”

7th December 2010: Capital Markets Chamber

14th December 2010: Quarterly Dinner discussing “A Parliamentary View on the Future of Banking” with members of the UK Treasury and Government in partnership with the Industry & Parliamentary Trust

12th January 2011:“An update on EU financial services legislation and associated initiatives” with Dr. David Doyle, EU Policy Advisor on Financial Markets

If you would like further details on these meetings, our other Clubs in Scotland, Ireland and Central & Eastern Europe, or just information about how to join the Club, let us know by clicking here.

Meantime, if you want to connect sooner than that, then come along to the London Launch of the Brett King's groundbreaking book BANK 2.0.  There's free drinks and I'll be there too!

It's this Thursday 22nd July, from 18:30 at Blackwells, 243-244 High Holborn.

Sir Win Bischoff on Banking Reform

So, another fun evening at the Financial Services Club the other day, with Sir Win Bischoff kindly agreeing to be our keynote speaker. The result was a record turnout of 120 people for a dinner discussion about the future of banking from someone who is an expert.

Sir Win Bischoff was appointed Chairman of Lloyds Banking Group on 15th September 2009, after being formerly chairman of Citigroup Inc. (2007-2009) and interim CEO in 2007.

Sir Win was knighted in January 2000 for services to the banking industry. He started his career with Chase Manhattan Bank in New York in the 1960s. Subsequently he joined J. Henry Schroder & Co. and became Group Chief Executive of Schroders plc in December 1984. Schroders was worth £170 million then. When the investment banking division of the company was acquired by Citigroup in January 2000, the Group was valued at just under £5 billion, generated wholly by organic growth.

Alongside his responsibilities at Lloyds Banking Group, Sir Win is a non-executive director at McGraw-Hill, and Eli Lilly and Company in the U.S. and Chairman of the British educational charity Career Academies UK. He co-chaired with the Chancellor, Alistair Darling, a review of the competitiveness of UK financial services and is Chairman of the Advisory Council of the newly formed TheCityUK, the promotional organisation recommended by that review.

Sir Win Bischoff, Chairman, Lloyds Banking Group from Chris Skinner on Vimeo.

We all wanted to know what was happening with Lloyds Banking Group, I’m sure, but the evening was under Chatham House rules and so none of that is bloggable. What I will say is that he gave a very good insight into where the industry has come from and is going, so here are a few of my own notes.

We talked about bank capital positions, which are all much improved today, but that has not solved the issues in the industry as liquidity is still a challenge. In fact, the lack of trust across the system is still not what it was or should be, and so liquidity risk will remain a high priority for the near-term.

The public and media debate about banks being bailed out will also remain for a while to come, but is mis-directed as the gross direct support from governments has not been as high as initially reported and is reducing all of the time. In fact, it is reducing at a rapid rate and the feeling is that all of the capital injections into banks will be repaid with interest sooner rather than later, unlike some of the more risky industries like auto.

Meanwhile, the tax regime being discussed for the banking industry is slightly concerning, and it implies that banks can be taxed in isolation and in different forms in different countries. That won’t work. Similarly, the IMF proposals won’t work if there is opportunity for regulatory arbitrage.

In other words, unilateral action by any government is not going to work ... even though the City of London says that global action won’t work either.

What is interesting here is the quandary it leaves for the UK Coalition government who came out with a stack of regulatory reforms and tax proposals for the banking sector, just as European markets meltdown and the USA introduce their own regulatory reforms.

Nothing like co-ordinated action is there?

Anyways, full proceedings of this and future Club meetings can be found at www.fsclub.net and on the blog.

Come along if you haven’t been before as my guest ... just drop me a note to request attendance.

Do building societies have a future?

Great write-up by David Calder for the Caledonian Mercury of Monday night's meeting in Edinburgh:

Do building societies have a future?

That will be at the heart of discussions at the Building Societies Association annual conference in Manchester next week and it was the topic for debate at a meeting of the Financial Services Club in Edinburgh last night.

The Director General of the Building Societies Association, Adrian Coles, acknowledged that parts of the sector have been under stress. He showed slide after slide detailing its woes: the shrinking size of the market; repossessions up and savings down; the number of owner occupiers dropping for the first time since the 50s; the fall in new lending – down 88% – and the 60% fall in transactions.

He claimed that one of the reasons why building societies had “got into a mess” in the final years of the 20th century was that “…the FSA didn’t set up a dedicated building society team until 2008. And our problems came at the same time as the major banks were collapsing. They felt they had to focus on those financial institutions that could bring the economy down.”

But curiously, he was not pessimistic about the sector’s future ...

Read the rest on their website and you can find many of Adrian's slides here.

  

What’s on a treasurer’s mind?

We had a great session at the FSClub the other day, discussing the views of the corporate client and their relationship with the bank. The panel consisted of a representative for corporate treasurers; a former head of treasury ops for a major technology vendor; and the head of epayments for a large, global bank.

The corporate treasury representative kicked off the evening by discussing the key challenges for a treasurer. These are roughly summarised by:

• Access to credit: the relationship between the corporate borrower and their bank has fundamentally changed as the bank now looks very carefully at who is asking for how much and what they are going to use it for;

• Regulations: as the uncertainty over Basel III and OTC derivatives regulations are in flux and this could clearly change a treasurer’s portfolio of investments;

• Pensions: where the resources, management and overall structure of the portfolio is being challenged, and the trustees are nervous of reactions of the fund;

• Value-add: both of the treasurer and the treasurer’s bank – the corporation is looking for value-add from treasury functions and this means a clear focus upon processes, technology, employees and customer relationships

He summed up all of the above by making it clear that treasury and treasurers have a real issue right now, which is that they cannot see the lay of the land for the future.

I asked him if the issue of access to credit was down to the banks tightening up so much that they wouldn’t lend, or if businesses just don’t want loans, which is what quite a few banks claim.

His view was that it’s ok if you’re a FTSE100 firm and need to borrow, as the banks don’t want to upset those relationships, but that it’s far harder if you’re outside the FTSE100. Sounded like the old adage of those who owe the bank £1,000 have a problem but those who owe the bank £1 million mean the bank has the problem.

The banker followed by stating that this is the ‘year of disruption’ as focus moves from Western economies to Eastern economies, and that the corporate supply chain would be radically altered as firms re-engineer for dealings with Asian economies, and China in particular.

For these reasons, risk is becoming increasingly important as a factor and this is why firms are moving away from the open account style of trading popularised in the early 2000s to refocus around bank licensed relationships and letters of credit.

He also felt that regulators have a real challenge here as “generals fight the war they fought before”. In other words, regulators have zero foresight, only hindsight, and that is their dilemma.

The banker went on to talk about SWIFT and the fact that the level playing field has also been disrupted.

In this context, it related to SWIFT’s post-9/11 subpoena by the US authorities to disclose any messages that might relate to terrorism. How is SWIFT meant to delineate between those that might relate to terrorism and those that do not? It’s impossible. But this means that the EU cannot agree with the USA on the information sharing rights and access to SWIFT messaging. As a result, SWIFT has to take an increasingly regionally focused approach to financial markets, rather than a global approach.

It made me wonder whether this meant that SWIFT’s role is diminished.

Strangely enough, maybe not, as the banker went on to discuss the increasingly internationalised way of doing business and the fact that the internet and, more importantly, mobile internet is making this even more the case.

Mobile internet banking is enabling many new international organisations to launch so that the old days may have been one of an Asian cash business, a European cash business and an American cash business, but it’s now a Global cash business.

Corporates are expanding globally but, in many cases, they are not big enough to split the world up into the regional structures required and expect the bank to do that for them. This means that there is an increasing focus upon the quality of bank’s service and client engagement.

The former treasury head then had their chance to respond, and said that the top of mind matters for treasury varied by company size and region; whether they were cash rich or exposed to net debt; how they fitted into the supply chain; and whether they were a retailer, manufacturer or producer.

The core question for all of them however is: can I access credit, liquidity, capital, etc. For these reasons, all of them need a good sight of their cash positions and a good feeling about the strength of their banking partner(s).

Her view is that it is still very difficult for a global corporate to find a single global bank relationship for these reasons, as no single bank has a global position or platform that is adequate in every geography. The question however is how many relationships do you therefore have to have: ten, twenty, thirty...

She believes that treasurers will have as many relationships as required to be effective but will then use technology for virtual consolidation to provide that cash positioning dashboard on a globalised basis. In this context, being bank agnostic is the key.

She also believes that the move towards open account trading is inevitable, unlike the banker, and that the procure2pay process will be reengineered to reflect this.

The question then is what are the right timings for netting, pooling and positioning: end-of-day, intraday or real time?

Of course, I would say real-time.

The evening then went into an open Q&A, with a wide range of topics covered from the role of technology to the future of SWIFT; supply chain processes to working capital reengineered; the role of social media to the role of the EACT and EU; the bank relationship and standards to the corporate relationships and TWIST; and more.

All great stuff that could form a blog entry of several thousand words but, at just over a thousand, this will doodle-do.

All in all, an event that looks like it will become a stable Club meeting for years to come.

Oh yes, and what’s on a treasurer’s mind?

UK banks: over £1 trillion of maturing debt

Earlier this week Adrian Coles, Director-General of the Building Societies Association, gave a fascinating presentation to the Financial Services Club Scotland on the state of the UK's Building Societies sector.  

The presentation didn't actually say too much about Building Societies but was more of a reflection of where we are with the mortgage and savings markets in the UK, and a sad story he told.

Rather than writing down Adrian's presentation in full, it's probably easier to share a few hand-picked slides which tell the tale.

First, here's the gross and net UK lending figures for the past decade:

 

 

EEK!!  Net Lending is the lowest it's ever been.

No wonder house sales are so tepid ...

 

But what was really worrying is that Adrian had picked on two of the Bank of England's Financial Stability Report Charts to illustrate that the situation isn't going to get any better.

The first is the maturing funds of UK banks' wholesale liabilities, by instrument and year of maturation:

This was in the June 2009 chart section of the Bank of England's report, and shows the ballooning debt maturity mountain peaking in 2011.  In other words, banks' stringent lending conditions will probably remain in place until that debt bubble bursts.

Interestingly, this chart was dropped in the December 2009 Financial Stability Report, but is just as well illustrated by Chart 2.19:

[CGS and SLS are the Credit Guarantee Scheme and Special Liquidity Scheme introduced by the current government as our equivalent of TARP]

The figures speak for themselves.

UK banks need to cover £1 trillion of maturing debt over the next four years, including the re-securitisation of £250 billion worth of Residential Mortgage-Backed Securities ... don't expect another house price boom in Britain for a while.

 

Note: Adrian's presentation is available in full to all Financial Services Club members

 

What's on a Treasurer's mind?

No it's not the obvious answer, but it does make a good focal point for our next meeting of the Financial Services Club in London.

On 22nd April, we have a great debate about: "What's on a Treasurer's Mind?" with four significant practitioners in this space:

• Marcus Treacher, Head of e-Commerce, Global Transaction Banking, HSBC;
• Magnus Lind, Chair of the European Treasurers' Peer Group;
• Peter Matza, Head of Publishing, Association of Corporate Treasurers; and
• Sarah Jones, Business Leader at Bottomline Technologies and former Head of Treasury for Hewlett-Packard Europe.

The panel will discuss key questions including whether financing has changed for good, thanks to the financial crisis, and whether treasury operations can become bank agnostic thanks to alternative financial markets and new Payments Institutions?

The evening will discuss everything that is top on the treasurer’s agenda, from external funding issues to internal unlocking of cash and the technologies corporates are using to become bank independent. 

If you want to come along, click here and then register as a member or non-member.

A new PSD-approved Payments Institution starts business

Nick Ogden, CEO and founder of Voice Commerce (he previously created WorldPay, the RBS payments unit, back in 1993 and sold it to them in 2002*), recently spoke at the FSClub about using voice biometrics as part of authentication in mobile financial transactions.

Who are Voice Commerce Group?  Best to read what they say about themselves:

“The Voice Commerce Group was founded upon a simple principle ‘whenever we speak we establish a position of trust’. Consumers use their voices to communicate decisions; perhaps to instruct, to agree or to buy something. This natural process already happens automatically billions of times every day and the Voice Commerce Group has taken this natural capability and automated the process through its innovation in voice signatures.

“Voice signatures allow consumers to use their own unique voice to sign and authorise transactions, and their patented technology now lies behind worldwide standards for mobile trust. Using voice signatures guarantees transactional security when making a payment and protects users against personal data compromise. Voice signatures are complex devices that combine the use of voice biometrics with transactional history, trends and patterns to create a highly secure, unique authorisation environment. The system can deliver two factor identity authentications virtually anywhere. Authorisation failures, suspected imposters or potential fraudsters can be controlled and managed and transactions re-qualified using automated outbound IVR. This not only improves customer service but reduces the risk of fraud and identity theft.”

Why am I giving them a plug here?

Because, during the evening at the FSClub, Nick mentioned that Voice Commerce were one of the first Payments Institutions (PI) to register with the FSA, after the PSD was transposed last November and were about to announce that they are also one of the first PIs to be accepted as a Principal Member of Visa Europe.

The announcement was released this morning, so now is the time to talk about it.

What does being a Principal Member of Visa Europe mean?

The membership means Voice Commerce can start providing its own payment services to businesses including acquiring payment transactions.

Following the launch of the PSD in November 2009, Visa Europe confirmed that Payment Service Providers such as Voice Commerce, as defined in the PSD, would be eligible to apply to become members of Visa Europe. Subject to stringent risk management requirements and being capable of complying with Visa Europe’s operating regulations, the Voice Commerce application was approved by Visa Europe at the Board of Directors Meeting in February 2010.

Nick comments that: “as a Payment Institution, Voice Commerce is regulated in exactly the same way as banks in relation to capital adequacy and regulatory responsibilities for payment services. Being granted Visa membership means we can further compete on an equal footing across Europe with our banking peers. Our next move will be to grow the business and bring fresh creativity to the industry using innovative payment services, including voice biometrics to authorise payments.”

Voice Commerce also describe themselves as being “authorised by (the) UK Financial services Authority under the European Commission Payment Service Directive, and regulated in the provision of e-money services”. This means that they have to “maintain appropriate financial capital adequacy”.

Interesting.

Very interesting.

Particularly interesting as the firm that Nick created, WorldPay, is now up for sale with a price tag of £3 billion ($4.5 billion).

Bidders include private equity firms Advent International Corp; TPG Inc.; Warburg Pincus LLC; Kohlberg, Kravis Roberts & Co; Permira; CVC Capital Partners, Blackstone Group LLP and The Carlyle Group LLP.   Tsys, Atos, ChasePaymentTech and First Data are rumoured to be in there .. and IT firm Voice Commerce Group, whose chairman and chief executive officer is Nick Ogden, the founder of Worldpay, is making a bid to get them back too!

From Lafferty Card News:

“A skilled management team has already been assembled as part of the acquisition offer that will include the existing team at Voice Commerce. The team has appointed Montrose Partners, specialist financial advisors, to assist in their bid ... the value of Ogden’s bid for RBS WorldPay has still to decided, but he said Voice Commerce has substantial support from a number of private equity firms. When asked when a deal might be completed, he said: The expectation from UBS, who are handling the deal, is hopefully by August 2010. The process of due diligence is now taking place while they attain the position and value of the company. Following this period, UBS are expected to produce a sales memorandum in January 2010. Voice Commerce then predicts an 18-month separation process of the business, at which point the full extent of the deal will become clear.”

A new season of events, April through July 2010

We are delighted to announce our forward season of the London events for the Financial Services Club’s meetings for the second quarter of 2010. For more details or to register for any of these meetings, go to: http://www.fsclub.co.uk/public-club-events.cfm

20th April

“This house believes that new regulations, such as Solvency II and the new Liquidity Risk requirements, have reinvented the wheel”

A panel discussion with:

• Clare Swirski, Partner Clifford Chance
• James Orr, Chief Actuary, General Insurance Actuaries Team, Wholesale Insurance, The Financial Services Authority
• Scott Eaton, Executive Managing Director, BroadStreet London
• Gez Llanaj, Solvency II subject matter expert, SAS

22nd April

“What's on a Treasurer's Mind?”

A panel discussion with:

• Marcus Treacher, Head of e-Commerce, Global Transaction Banking, HSBC
• Magnus Lind, Chair of the European Treasurers' Peer Group
• Peter Matza, Head of Publishing, ACT
• Sarah Jones, Business Leader at Bottomline Technologies and former Head of Treasury for Hewlett-Packard Europe

4th May

What’s in MiFID Wave 2?

A panel discussion with:

• Andrew Allwright, Business Manager, MiFID Solutions, Thomson Reuters
• Andrew Bowley, Head of Electronic Trading Product Management, Nomura
• Hirander Misra, CEO of Algo Technologies Ltd and former COO, Chi-X
• Peter Randall, CEO, Equiduct
• Philippe Guillot, Global Head of Trading and Execution, CA Chevreux

11th May

“This house believes that payments infrastructure risk has been largely forgotten. A debate about whether the payments infrastructure is up for the new risk management standards”

17th May

The road ahead for Lloyds Banking Group and UK Financial Markets
A Dinner with Sir Win Bischoff, Chairman, Lloyds Banking Group

7th June

Long Finance
A panel discussion with Professor Michael Mainelli and guests

14th June

“The Future of Banking”

An evening with the Economic and Social Research Council (ESRC) and three very distinguished scholars: Professor Charles Goodhart, Professor David De-Meza and Professor Donald MacKenzie

6th July

What’s new with SEPA and the PSD?

A panel discussion with:

• Ruth Wandhofer, Head of Payments Strategy, Citi Global Transaction Services
• Simon Newstead, Head of Financial Institutions Advisory Group, Royal Bank of Scotland

For more details or to register for any of these meetings, go to: http://www.fsclub.co.uk/public-club-events.cfm

Chinese Bank buys majority stake in Citi

OK, I made that up.  Mind you, I made it up in 2006 when I presented at the BAI Retail Delivery Show.  My logic was based upon the inevitable march of Asia's tigers, and the fact that ICBC had just listed and suddenly became one of the top 10 banks in the world.

October 26th 2006: The largest IPO the world has ever seen took place when Industrial & Commercial Bank of China (ICBC) sold shares. The $19 billion sale dwarfed the $12 billion raised from 53 IPOs in the second half of 2006 on Wall Street. After the first day of trading, the Chinese lender had a market value of about $157 billion which made it worth more than Goldman Sachs Group and Lehman Brothers Holdings put together, and within striking distance of JPMorgan Chase.

Based upon such trends, my prediction was that four of the top ten banks of the world would be Chinese before the end of the decade and that, at some point soon, they would expand beyond Asia into global banks with global presence, for example by buying a big US Bank.

All of this went down real bad with the US audience, who haven't invited me back since.

Shame, particularly as many of those wild ideas have come or are coming true. 

So now I ask: “Will there come a day when the largest, strongest banks are all Asian?”

To answer that question, my good fried Emmanuel Daniel, founder of the Asian Banker, will speak at the FSClub on 23rd March on this very subject.

Emmanuel will profile the following:

• trends in the internationalisation of Asian banks today;
• where Asian banks are today in terms of operations, business, technology and risk configurations;
• Asian responses to global initiatives such as Basel II and the Financial Stability Board;
• the ability of Asian businesses in general to build regional and global models; and
• the place for Asian financial institutions in a global scenario of banking players in the next 10 years.

Emmanuel Daniel is the founder of The Asian Banker.

The Asian Banker is the foremost provider of strategic business intelligence on the financial services industry in the Asia Pacific and Middle East region with offices in Singapore, Kuala Lumpur, Beijing and Dubai, as well as representatives in Shanghai, London and New York.

This meeting will take place at 6.30pm on 23 March 2010, Institute of Directors, 35 New Broad Street, EC2.  If you would like to attend, just register.

We think Basel's liquidity standards are rubbish

We have an FSClub Meeting on 16th March 2010 in London with the theme:

This house believes that the Basel Committee on Banking Supervision's new liquidity risk monitoring standards are built on sand ... a debate on the BCBS liquidity risk monitoring consultation due 16 April 2010.

Just before Christmas, the BCBS opened a consultation on radical new risk management measures for financial institutions. JP Morgan's research has shown the demands on banks to hold more capital could cost the industry $220 billion – of which $91 billion would be incurred by British banks.

New liquidity cover ratios, net stable funding ratios and market monitoring tools will certainly reshape today's business practices. However, we ask "will they be 'good enough'?" There is no common reference data set for much of what is required. This means that each firm is flying solo and the regulator left to wonder what good ratio systems and controls should look like.

Will one firm's calculations, based on market, counterparty, and instrument data, allow their ratios to be compared to another's? Judgements based on years of disparate legacy systems could have significant financial consequences if not appropriate:

• Will the industry be forced into a massive infrastructure upgrade? 
• Can new standards create new business opportunities?
• How will the regulators benchmark the banks' implementations?
• What standards are required to stand these pillars in solid ground?

Come and join the discussion, with an expert panel comprising of:

• Christopher Clack, ScD, Director, Financial Computing, UCL
• Bill Rickard, Head of Strategy and Policy, RBS Group Treasury
• Julia Sutton, Director - Global Reference Data, Royal Bank of Canada Capital Markets
• Alexander Dorfmann, Head of Product Management, Thomson Reuters 

The panel will be chaired by Capital Markets Chamber leader, PJ Di Giammarino. 

Click here to register.

What comes next in Mobile Banking?

Our next meeting of the Financial Services Club (England) will focus upon a debate around the question: "What comes next in Mobile Banking?"

For the past year, the hottest space in banking has been around mobile thanks to iPhone apps, M-PESA and other developments in mobile payments and banking.  The Club has debated this area often, and now looks further out towards the next and future waves of innovations.  Are there just further evolutions of change, or is there a revolution here?
 
Leading the discussion are significant practitioners in this space:

• Tim Murdoch, Founder & CEO of iCeni Mobile and co-creator of M-PESA
• Michael Salmony, Board Member of Equens and the EPC 
• Nick Ogden – Chairman and Chief Executive of Voice Commerce Group
• Michael Davison, Senior Managing Consultant, IBM Global Business Services

Tim Murdoch, Founder & CEO of iCeni Mobile
The story of M-PESA, the revolutionary service in Africa for mobile payments is now well-known.  What is lesser known is how M-PESA was really created.  A smaller team from a firm based in Cambridge, the UK, had a vitally important role in the conceptualisation and development of the application.  The firm not only wrote the software for M-PESA, they also designed the business processes, and provided operational and technical support during the pilot and after launch.  That firm and their team was led by Tim Murdoch.  Tim has now launched a brand new venture: iCeni mobile, "a telecommunications company delivering solutions to extend mobile networks and data services into rural areas, connecting the world’s most remote and low income communities". 

Michael Salmony, Board Member of Equens and the EPC

Michael Salmony recently managed the post merger integration between previously Interpay and the German processor Transaktionsinstitutnational, achieving synergies and efficiency gains equivalent to a saving of over 400 staff, to create the pan-European payment service provider Equens. He is also a member of the European Payment Council, the decision making body of the 8000 banks in the 31 countries of Europe, as Head of Internet Payments and e-  and m- payments expert group since its inception.

Nick Ogden – Chairman and Chief Executive of Voice Commerce Group
As founder and CEO of The Voice Commerce Group, Nick is primarily responsible for the company’s overall corporate strategy and business development. A serial entrepreneur Nick has consistently been at the forefront of innovation in technology since 1985. In 2003 Nick, together with several former colleagues from WorldPay, formed the Voice Commerce Group to develop systems which allow individuals to identify themselves using a voice signature. Previously, he founded Multi Media Investments Limited, a technology research and development company that led to the development of one of the first bank-endorsed e-commerce initiatives in the form of the UK’s first electronic shopping mall, ‘BarclaySquare’. In 1997 Nick founded WorldPay, which was acquired by the Royal Bank of Scotland in 2002.  He has been recognised by a number of industry awards including the UK Ernst and Young Entrepreneur of the Year Award, the Computer World Global IT Leaders award and more recently the ID People Awards 2009.

Michael Davison, Senior Managing Consultant, IBM Global Business Services
Michael recently produced a 10,000 word study of mobile banking and payment offerings, including a review of the ways in which these new services are reconfiguring value chains in very interesting ways.  He has recently appeared on CNBC and other media in this capacity and regularly commentates on innovation in banking structures.

The meeting will be held on Thursday 11th March 2010 from 18:00 until 20:30 at The City IOD, New Broad Street House, 35 New Broad Street, London, EC2M 1NH, and will be followed by drinks, canapés and networking.

If you wish to attend please register as a member or non-member (the cost for non members is £95 plus vat and is reimbursed in the event of the attendee subsequently becoming a member.)

We look forward to seeing you.

 

A Single Customer View? Codswallop!

The UK Government recently ordered changes to the Financial Services Compensation Scheme (FSCS), as announced in the Banking Bill of 2009. The Bill resulted in a new regulation from the Financial Services Authority (FSA), Policy Statement 09/11 (Download FSA PS09/11).

PS09/11 rules that, from 31 December 2010, all financial firms must provide a Single Customer View (SCV) of all accountholders, so that they can pay back all deposits, regardless of debts, to those accountholders within seven days of a bank default. It also demands that banks keep a SCV in order that any customer with holdings over £50,000 across all bank operations, including all subsidiaries, are informed and aware of these holdings all being with the same bank. Finally, this is required so that the FSA can demand a list of all customers’ deposit holdings on demand and within 48 hours should a bank fail.

In practice, this is going to cost the UK’s banks millions of pounds, as the cost of the SCV demands major system changes across all core systems including data cleansing, tagging, linking and increased storage costs to accommodate new data fields. These fields, there are 25 of them, create a standardised aggregate view of all deposits across businesses, products and relationships, for all financial firms (in the UK).

According to the FSA’s consultation process: “the set up and maintenance costs of new IT systems for quick claims processing are estimated at £891.8m over five years. Firms' obligations to tell customers about the FSCS scheme, along with telling customers which trade names are covered by a particular authorisation, would have estimated set up costs of £34.6m and ongoing annual maintenance costs of £4.2m.”

For full details of the cost implications of this change to the Scheme, read Ernst & Young’s 67 page analysis.

Meanwhile, adding insult to injury, not only is this new reporting going to be checked for the quality and method of implementation across UK financial firms, but it will also be used to assist examining a banks’ liquidity (PS09/16 www.fsa.gov.uk/pubs/policy/ps09_16.pdf), stress testing (PS09/20 http://www.fsa.gov.uk/pubs/policy/ps09_20.pdf), living wills and more.

By 31st July 2010 firms must show their plan for the SCV to the FSA and by 31st January 2011, they most provide a customer report illustration to the FSA.

Great.

And they are not alone.

The European Union has proposals for a similar Deposit Guarantee Scheme, as does Australia (APRA’s proposed scheme, Download DP-FCS-for-ADIs-Jan-2010) and the USA.

Again, a range of disconnected global activities in response to a once in a century occasion when the banking system collapses.

So is it worth it?

This was the core of a debate we had at the Financial Services Club last week with:

• Peter Taylor, Director, Retail, British Bankers' Association;
• Martin Gibbon, Head of Risk Technology, Financial Services Risk Management, Ernst & Young; and
• Rekha Modi Gomes, Compliance Director for the EMEA Consumer Region, Citi;

Chaired by PJ Di Giammarino, Chair of the Capital Markets Chamber at the FSClub.

Various issues were identified, with the over-riding problem being the timescales and the clarity of the required change. This is not unusual, as all regulations are too aggressive in implementation timeframe and too poorly understood to be clear, and this one is no exception.

For example, many banks have multiple systems developed over decades, with some sourcing customer addresses as a data field from a core shared data dictionary whilst others have the field stored as a customer code in a flat file, for example. Integrating such disparate systems in a short timeframe is going to be nigh on impossible.

The core therefore is not the addition of new data fields or reporting customer details, but the changes to the enterprise customer data model, the restructuring of the operating model for data quality and verification, the model for resolving technical issues and providing technical support and more.

Equally, if this was required by a bank, why haven’t they done it before?

Because there’s no business case.

And, because there’s no business case, it is incredibly difficult to build momentum to support such a massive data restructuring project for simply achieving a regulatory tick in the box. Therefore, there has to be a need for using this change program to improve a bank’s ability to cross-sell, up-sell and deepen the customer relationship.

But again, this has never happened in the past.

For example, I worked with a bank in 1989 to re-engineer their mortgage process to gain a SCV. The mortgage process was chosen because it went across all divisions – credit, insurance, deposit accounts and money transmissions.

We gave up after a while because it was too difficult: “too many disparate systems across too many silos” was the response from the Executive. In fact, the real reason was that the silo-owners, the functional heads, were resisting the change as they felt it would lose their powerbase. That was even thought the CEO supported the project!

I bumped into the Board Member of the bank in question recently and asked if they had ever tackled that mortgage process. “No”, he said. “Still too many different products across too many different systems and divisions with too many baronial empires”.

Similarly, I used to market data warehouses that were building enterprise SCV for 1:1 marketing, cross-selling and up-selling.

Did anyone want one?

Not really.

Sure, they could all see the advantages of a SCV, but the internal empire barriers were too great to ever achieve an ENTERPRISE anything.

Maybe this time, it’ll work because the regulator demands it but this will still be a challenge.

But I do wonder when one panellist stated that the banks view this as a regulatory change with no business case, and that the regulator only has a narrow SCV of the customer’s deposit holdings, with no interest in their credit exposure.

In other words, this is disjoined-up regulation at a domestic, regional and global level.

Shucks.

So why aren’t there solutions out there to make this easier?

Probably because the operating model of days of old prohibited the SCV. For example, most large banks are the result of the merger and acquisition of lots of smaller banks in the past. That’s why there are so many disparate old systems around, is the excuse of many.

So what’s the result? Where’s the answer? How do we solve this?

Although the debate never got around to an answer on this, my own answer comes back to data standards and reference data. The fact that the UK is adding 25 new data fields is great, but we’ll probably find that each European member state adds 15 to 31, dependent upon their country (a bit like IBAN and BIC); whilst Asia and America do their own thing.

We need to co-ordinate global standards, particularly as the banks that are too big to fail are the ones with a footprint across all of these regions. Are we seriously asking these global banks to make multimillion dollar changes to their core systems that are different and distinctly separated in every country and region?

Ridiculous.

No wonder the debate concluded with over 60% of the audience rejecting the idea of SCV being achievable.

More Background:

• The Banking Bill
• FSA tells UK banks to spend a billion on technology
• Robbing the prudent to protect the irrational
• Building Societies hate our compensation scheme

This house believes that SEPA does matter ... or does it?

We had a great debate at the FSClub the other day, with the provocative title: “this house believes that SEPA (the Single Euro Payments Area) does matter”.

The evening was chaired by the more than capable Bob Lyddon, who coordinates the IBOS Association secretariat, and four panel members who ‘played’ parts in being proposes and opposer of the motion.

Proposing the motion were two leading European Proponents: Gilbert Lichter, CEO of the Euro Banking Association (EBA) Clearing Company that runs STEP2, a Pan-European ACH; and Fred Bär, Managing Director for Euro Services at Vocalink.

Opposing the motion were two devilish Brits, set up in the form of Paul Smee, Chief Executive of the UK Payments Council; and Simon Bailey, who is currently starring in 'The Phantom Of The Opera', at Her Majesty's Theatre where he plays the role of Raoul.

Pardon?

Whoops, sorry, it’s not that Simon Bailey. It’s Simon Bailey of Logica ... an easy mistake to make.

On the night, Bob kicked off the motion by making clear that there are four immutable facts about SEPA which were not up for debate. These are that there is no end-date set as of today (although I think one is coming); the Core and B2B SEPA Direct Debits schemes are in production; the fact that there is no requirement for central bank reporting for transactions under €50,000 is good for efficiency; and cross-border direct debit and credit transfer euro transactions must now cost the same as domestic transactions.

With those four foundation points, Bob then asked Gilbert to take the floor.

Gilbert gave a resoundingly balanced view, stating that the old days of cross-border margins and operations were a luxury. The way correspondent banks worked and the form filling required for cross-border payments were a big issue in inhibiting trade across Europe, and those days are now gone as European Commission Regulation 924/2009 makes it clear that every bank in Europe must now be reachable for SEPA Direct Debits.

As these changes will alter the behaviours of payments processors and payments users, innovations will follow, as innovation follows buying behaviours. By way of example, Gilbert cited Spain where SEPA payments have increased from 3.5% of transactions to 13.6% in the last quarter.

All of this means that SEPA does matter, because it is fundamentally changing European commerce and pushes banks to the management table.

Paul Smee responded with a worrying opening line that SEPA reminded him of the old Samuel Johnson saying that ‘a woman's preaching is like a dog's walking on his hind legs. It is not done well; but you are surprised to find it done at all’.

There was a sharp intake of breath as, in today’s politically correct world, Paul should really have substituted the word ‘dog’ for ‘bitch’ [editor: stop there!].

Paul’s comment was far more relevant to SEPA than the incorrectness of the statement however, in that if SEPA were that needed, then how come there haven’t been any SEPA street parties yet to celebrate. Again, I would claim that there have been a few ... but then SIBOS, EBA Days and IPS aren’t exactly street parties are they, as we all celebrate inside bars of the world but, there you go.

Paul continued by saying that the reason for the lack of celebrations is down to the fact that:

• SEPA is not critical and nor are payments. No-one wakes up thinking about how important any of this is, unless you abolish cheques;

• SEPA doesn’t matter because it has been a top-down process driven by politicians with no user involvement. The European Payments Council (EPC) must engage with the user communities, such as those represented by the UK Payments Council, for this to succeed; and

• SEPA is not working because, based upon the UK’s experience with the Faster Payments Service, if you have a regulatory mandate involving technology change, IT will support this but the business community will not. In other words, SEPA needs a business requirement to succeed, not just a technology change.

A few heckles raised meant that it was time for the seconder of the motion, Fred Bär, to respond to Paul’s comments.

Fred began with comments that banks do innovate, with the direct debit being a good example, but it can take a long time to be pervasive especially when there are so many constituencies, groups and actors involved (was he referring to Simon?). That is why it will take twenty years for a baby of this size to be born. Nevertheless, the fact that it is so difficult – with IBAN and BIC usage being a good case in point – does not make it worthless and SEPA is worthwhile and does matter.

However, it could have mattered more if the launch of the infrastructure was supported by a regulation that mattered. Unfortunately, this regulation – the Payments Services Directive – lost all credibility just as things were moving forward, and when we were at a point when the regulation needed to be more credible than ever before.

Then the Phantom that is Simon stood up and delivered the most damning attack on the program of all of the evening’s speakers who, remember, are all playing ‘a part’ in the program and do not necessarily believe the views they are presenting.

Anyways, Simon began by asking what exactly is SEPA, and to whom exactly is it supposed to matter for? His point is that there is no common definition of SEPA, as demonstrated by some referring to it as the Single Euro Payments Area and others the Single European Payments Area.

There is no clarity of ownership, which is why there is no ownership; there is no legal representation and the legislation meant to provide clarification is unclear; there is no business case for SEPA with users, the ACHs, the corporations or the banks and, where there is a business case such as with einvoicing, it has nothing to do with SEPA.

All in all, it is just a political need that is driving SEPA and nothing else. So what is SEPA? No-one knows, so how can it matter?

Bob then opened the evening to an open discussion with the audience, who asked intriguing questions, such as: “where are the imperatives for SEPA? What will make this happen?” and put the provocative point, such as: “SEPA doesn’t matter because there are far more important things taking over the agenda today, like Obama’s banking reforms, balance sheet capitalisation and liquidity”.

I think my favourite comment had to be from one panel member though, which was that SEPA seems to be moving in ever decreasing circles “having started with a vision and ended with a committee”.

Anyways, we concluded the evening with a vote and, surprisingly, the motion was carried by a single vote.

So yes, this house does believe that SEPA matters ... just.

Meantime, returning to the theme of the Phantom, the sequel to the Phantom of the Opera comes out soon. It’s called: Love Never Dies, and I wonder if that’s what we’ll see with SEPA.

SEPA Never Dies; it just goes on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on ... bring on the end-date ...

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Banking meets the BBC, an evening with Hugh Pym

After two years of non-stop bank bashing in the media, how do the journalists and press really see the banking system today? How do they report this news and is it really objective and neutral, or inflammatory and overdone?

Find out with an evening with Hugh Pym, Chief Economics Correspondent with the BBC.

Hugh Pym is a financial and political journalist working for the BBC. He was a BBC radio journalist from 1986 to 1987, then producer of Business Daily at Channel 4, 1987-1988, correspondent with ITN, 1988-1998, and a freelance broadcaster with Sky Television in 1999-2000. He was a BBC special correspondent covering Economics until 2008, when he took on the role of acting Economics Editor during the maternity leave of Stephanie Flanders. Following her return, he became the BBC's Chief Economics Correspondent, a newly created role.

He has published books: What Happened? And Other Questions About the Credit Crunch (co-author with Nick Kochan), A Study Of Gordon Brown's First Year in Office as Chancellor of the Exchequer (also co-written with Nick Kochan), and a historical survey of the reign of Philip II of Spain, which he co-wrote with Welsh historian Alun Vaughn. In the 2001 General election Pym stood as Liberal Democrat parliamentary candidate in the North Wiltshire constituency.

If you would like to attend, then register here: http://www.fsclub.net/public-events-detail.cfm?id=82

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.

 
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Europe's new regulatory agenda

We had a fascinating and packed meeting at the Financial Services Club this week with David Doyle, EU Policy Advisor, discussing the challenges of the new Barosso European Parliament and their legislative drive in financial services.

David is a regular visitor to the Financial Services Club, and runs our European Financial Regulatory Advisory Group.

In a broad and wide ranging speech, he presented key views around MiFID, the PSD, Solvency II, UCITS IV, Basel III and more, as well as commentary on Jacques de Larosière’s committee and the appointment of Michel Barnier to succeed Charlie McCreevy.

Here’s a summary of the key points David made.

The Commission is taking a 'safety first approach' to regulating capital markets and market actors, and will fill in the gaps where European or national regulation is insufficient or incomplete.

The over-riding principles of their approach are that:

• All that is of systemic importance should be regulated and supervised;
• There is a need for a better well-capitalised finance industry, with less leverage;
• The Commission must leglislate to avoide the perverse incentives in the financial sector that encourage excessive risk taking or over reward;
• Supervision should have the right tools to grasp complex, inter-connected and globalised financial activities; and
• To restore trust, investors and consumers should benefit from clearer, more coherent and effective safeguards.

At this point, audience members asked lots of questions about whether the European approach would be the same as, or coordinated with, the US approach.

David’s feeling is that it is being co-ordinated on the big ticket items – risk, leverage, capital, bonuses and such like – but the rest is still open competition in terms of the way payments, capital markets and specific aspects of the market are operating, such as hedge funds.

There are then the key changes that should be introduced by the new Barosso team in the near term as a result of the Jacques de Larosière. Of these changes, David believes that the new supervisory bodies:

• European Securities and Markets Authority (ESMA)
• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)

Will be the key here.

These new authorities will have teeth, and will be responsible for ensuring that any EU member states who are not following the line of regulatory oversight are brought to order.

This will be in play within two years:

2009-2010 ►national FSAs powers strengthened + focus on harmonising national rules to reduce cross-border differences

2011-2012 ►implement Pan-EU-wide supervision via ESMA/EBA/EIOPA

and will mean that the large states who are proactively interpreting directives will be in a far stronger position than those states resisting such supervision.

In practice, this means the UK, Netherlands are going to be fine; France and Germany will have some wrinkles to iron out; other nations will get a note to say they need to fine tune some stuff; and Spain and Italy will get a large wet fish slapped around their chops.

After all, every Directive I deal with – MiFID and the PSD in particular – it’s Spain and Italy who always seem to be dragging their heels.

David also made an interesting point here, which is that not only will the new regulatory bodies have teeth to drag member states before Brussels to explain why they are dragging their heels, but also resources to assist when assistance is needed. Therefore, in the case of Sweden where their key person for transposition of the PSD left at a critical juncture, this future structure would allow the EBA – the European Banking Authority which is not to be confused with the EBA, the Euro Banking Association, that operates STEP2 and EURO1 – to provide people to fill the gaps. These people may be promoted in from regulatory authorities in other EU member states for example and, in so doing, it will fill the gaps.

David then rifled through all of the areas for legislation and key directives including:

• The Payment Services Directive
• MiFID and Market Abuse updated rules
• Capital requirements Directive III & IV
• Remuneration
• Pan-EU Supervisory Mechanisms
• Hedge Funds & Private Equity
• OTC Derivatives
• Solvency II – Insurance
• Responsible Lending & Borrowing
• Packaged Retail Investment Products
• UCITs IV
• Credit Rating Agencies

It was real insight and incredibly useful stuff.

Unfortunately, if you want to know what he said about the above, you’ll have to hire our experts in the European Financial Regulatory Advisory Group or join the Club.

It might be worth you doing that anyway as our next meeting is on SEPA!

There is a free lunch after all

On 1st February 2010, Gresham College is hosting the second Long Finance event at The Willis Building, 51 Lime Street, London EC3M 7DQ, UK. 

The event supported by the Financial Services Club and it is free, including a free lunch, from 11:45 to 14:30.

Speakers will include the musician Brian Eno, Stewart Brand of the Whole Earth Catalog, Bernard Lietaer who co-created the ECU, and many other interesting characters all examining the question: “how would we know when our financial system is working?”

For more detail, register at Gresham's website: http://www.gresham.ac.uk/event.asp?PageId=45&EventId=1019

So there is such a thing as a free lunch after all?!

On another note, the 13th annual Digital Money Forum takes place in London on 10th-11th March 2010 and will have some fun with "The Dragon Factor's Got Talent".

They're inviting new companies in the payment space to come along and showcase their ideas in the form of a competition where each firm will get to make a 10 minute "elevator pitch" to the audience (with no slides or visual aids).

A kind of payovate for the EU payments markets (see Finovate for more on that one).

At the end of the Forum the firms will be "judged" by an expert panel, who will award a prize to the pitch they think most likely to succeed as a business.

So everyone will have fun, see some new ideas and perhaps see a new business get international attention.

If you're happy to come along and pitch, the organisers will provide a complementary delegate place for the event and a room for the night at the conference hotel.

Just contact Dave Birch if you are interested.

Financial Ruin to Financial Reform

Members of the Financial Services Club are invited to join an upcoming forum organised by the Industry and Parliament Trust on Thursday 25th February at the House of Commons.

The theme of the morning seminar is: “Financial Ruin to Financial Reform?” with an introduction from George Osborne MP, Shadow Chancellor of the Exchequer.

The keynotes look interesting with presentations from:

• Andrew Haldane, Executive Director, Financial Stability, Bank of England
• John Kay, Economist, Financial Times
• Teresa Perchard, Director of Policy, Citizens Advice Bureau

If members want to attend then please register with admin at balatroltd.com.

The usual price to attend is £235, but this is especially discounted 10% to £195 for FSClub members.

Similary, if you’re interested in the IPT’s event that follows this on 3rd March, which reviews the “Dangerous Computers Act” with speakers:

• John Hayes MP, Shadow Minister for Life Long Learning and Skills
• Dr Andrew Williamson, eDemocracy programme, Hansard Society
• Edward Leigh MP, Chairman, Public Accounts Select Committee Research in Motion, Blackberry

... then you may want to register for that one too!

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M-PESA reaches 8 million people and $3.37bn

Just checked out Safaricom's results presentation for the first half-year 2009-2010, and found some interesting slides on M-PESA:

 

 

 

Fascinating results ... especially as Safaricom were not the instigators of M-PESA.

At the start, they could not commit to a risky project of this nature with resources and so Vodafone brought in a third party firm, based in Cambridge and led by Dr Tim Murdoch.  Tim happens to be joining our panel on 11th March on "Innovations in Bank Retailing", alongside Errol Damelin, Founder & CEO of Wonga.com, and Michael Davison, Senior Managing Consultant with IBM Global Business Services.

Tim's team were integral to the launch of M-PESA and not only wrote the software but also designed the business processes and provided operational and technical support during the pilot and after launch.

If you're interested in this area, come and join us on 11th March by registering to attend.

[Hattip to Brett King]