Thought Leadership Archives - The Industry Spread

The Buy Side Delves into Mobile Data

September 1, 2017 by Ivy Schmerken 1 Comment Filed Under: Thought Leadership Articles Tagged: alternative data, Buy Side, Mobile Data, Tabb Group

As hedge funds and quantitative asset managers hunt for unique sources of alpha, Wall Street’s attention is turning to analysis of location data generated by mobile phones.

Location data from mobile phones is now at the forefront of the push to combine data science techniques with machine learning techniques to produce actionable information on company fundamentals.

Third-party aggregators are seeking to quench the thirst of hedge funds for non-traditional datasets.

On Aug. 9, Thasos Group, an alternative data intelligence startup, launched Streams, a real-time location information feed that transforms mobile phone data into actionable insights for traders, investors and other business managers.

With GPS enabled phones spewing out torrents of data every minute, Thasos has built up the largest repository of location data after Apple and Google, the company said.

Thasos obtains data from hundreds of millions of mobile phones, which is then mapped to every store or venue owned by over 400 public companies. It then filters the location data from the cell phones, with the longitude/latitude coordinates from every venue owned by the 400 public companies.

This way, it can provide a more timely and accurate picture of foot traffic to retail stores, restaurants, malls and airports, deliveries to loading docks, hours worked on assembly lines and patient counts in hospitals.

Formed in 2011 and spun out of MIT Media Lab, Thasos has been selling its location information feed to about 25 hedge funds over the past two years.

Demand for location data is growing, “not because of its historical availability, but due to the ability to extract value from it,” said John Collins, founder and chief product officer at Thasos in New York.

John Collins

The most comparable data set in terms of forecasting earnings has been credit card transaction data, which has been a staple of hedge funds for the past two years, explained Collins. “But location data is a lot messier and a lot larger and is a lot bigger of a problem to solve since it comes from many different sources,” he said.

One hurdle is that most apps have not historically logged the locations of their users. Thasos said it knows the sources that have consistently logged their data for the past two or more years. Thasos obtains the cell phone data from app providers, whom they contract with directly.

“We’re in a position to know so we are well positioned to deliver data in the hedge fund space with respect to calculating the year-over-year change,” said Collins.

The trend has exploded in the retail sector where analysts at hedge funds and quantitative fund managers are vying for an edge.

Even before a company reports its quarterly earnings or same store sales, Thasos can calculate the foot traffic in venues owned by companies like Home Depot (NYSE:HD). “We cover 2,000 Home Depots, all 4,500 Walmarts and hundreds of thousands of locations for public companies,” said Collins.

“A lot of hedge funds and other kinds of buy-side firms are analyzing that data to see which retailers people are going to,” said Valerie Bogard, analyst with TABB Group, who follows the alternative data space for institutional buy-side and sell-side firms.

Valerie Bogard

When consumers download apps on their phones, they are often asked if they want to allow location tracking. Popular social networking platforms like FourSquare and Yelp (NYSE:YELP) will make recommendations based on the user’s location. “These apps are aggregating the data, making data anonymous and they’re selling to hedge funds and whoever wants it,” said Bogard. Hedge funds presented with this data can get an early indication of foot traffic at Walmart (NYSE:WMT) vs. Target (NYSE:TGT).

Predicting Economic Activity With Mobile Data

Because the mobile data is collected in real time, and is associated with ticker symbols of the public companies, it can be analyzed to predict economic activity ahead of quarterly earnings releases.

On July 26, Thasos released a report on real estate investment trusts (REITS) that invest in shopping malls, predicting a decline in foot traffic by anchor stores, including including Macy’s (NYSE:M), Nordstrom (NYSE:JWN), Dillard’s (NYSE:DDS) and Sears (NASDAQ:SHLD). The report accurately predicted a sell-off in REITS that occurred after Q2 earnings were released. Prior to that release, many mall REITs reported or suggested that year-to-year growth in foot traffic across their mall properties was positive.

“What we’re talking about here is macro-trends based on mall traffic counts,” said Jamie Benincasa, senior vice president, FlexTrade Systems. Mobile is the next step in terms of sourcing data sets in order to make information investment decisions, said Benincasa.

Jamie Benincasa

The Trend Accelerates

While hedge funds are consuming market data – stock quotes, historical data and company fundamentals — there is a push for less obvious data.

“Everyone has consumed the normal data sets. Therefore everybody gets the same ideas. In order to be more original, they are looking at these alternative sources of data,” said Benincasa.

While the largest quants are the early adopters of alt data, this most recent dataset is becoming more distributed and accessible to firms that don’t have the internal resources to analyze it on their own. And as mobile phones, satellites and drones become cheaper to produce, alternative data has gained more adoption from smaller hedge funds, long-only asset managers and sell-side firms, said Bogard.

Aggregators are out there pulling in location data, credit card transaction data on an anonymous basis. Then there’s satellite data and public web site scraping and then using analytic techniques to find comparisons, added Bogard.

In 2016, TABB conservatively estimated that the market for alternative data in the U.S. is currently around $200 million and could double within the next five years.

London-based Neudata Limited is one such firm that is helping hedge funds and the institutional investment managers find and evaluate alternative data sources.

Unlike firms that sell alternative data, Neudata provides an independent data research platform, which covers datasets that span commodities, equities, FX and fixed-income asset classes. Varieties of data types include: crowdsourced, economic, location, satellite and drone, sentiment, social media and weather. “We are an outsourced resource to the buy side,” said Rado Lipuš, founder and CEO of Neudata. “We find new data sources for them, and second we do due diligence on these data sources and provide metadata about the data sources,” said Lipuš.

Rado Lipuš

“We try to make sense of hundreds of these data sources,” continues Lipuš. His firms answers questions, such as what’s the content; what’s the universe; how much history is there; is it an aggregated format; is it clean; is it unstructured, etc. “There are a lot of questions and the questions will be different for the fundamental or quant,” said Lipuš.

According to Lipuš, many of the quants have an in-house team vetting the alternative data sources. “We do the same thing on an outsourced capacity.”

Outsourcing the Data Science

The value in outsourcing is that aggregators are performing the heavy lifting so that hedge funds and asset managers can hire fewer data scientists.

“Normalizing the data is one of the hardest problems to solve,” said Collins, who explains that Thasos removes the noise, such as cars that drive by or people who not actually customers of casual dining restaurants.

“Obviously, the large quants are doing this internally, but in terms of processing and analyzing [data], there is a lot of data that people don’t care about,” said Bogard. “There is a lot of processing involved in terms of finding that diamond in the rough, in terms of [finding] a specific data point.”

Those working with large-scale data sets, whether from mobile phones or sensors, are applying machine learning to extrapolate the data they are interested in, said Bogard.

“It all ties into the big data construct. It would be impossible to weigh these factors, such as foot traffic and credit card transactions, without sophisticated hardware to tune the artificial intelligence. That is becoming less cost prohibitive and available to a wider audience,” continued Bogard.

“Now with the ability to handle larger and larger volumes of data in a shorter amount of time, and really discern these patterns with the application of technology, we should expect to see more and more of this,” said Benincasa.

However, firms that are examining alternative data sets “don’t necessarily want to broadcast how they are interpreting the information,” said Benincasa. They want to do the analysis in-house and keep it proprietary, he said.

How funds are using the location data varies from fund to fund, and depends on their level of sophistication, said Collins.

Traditional hedge funds that are not automated might plug the information into Excel and sum up the foot traffic data for the current quarter of the year, and the same quarter last year. They might compare the location data to credit card transaction data, said Collins.

On the opposite end, there are quantitative firms with thousands of positions that ingest the data directly into their multi-factor models that cover entire industries. “And so our data helps them understand whether they should go long or short on every company in a particular industry relative to another industry,” he said.

“Ideally, what the managers want is finding sources they can trade on, or finding sources that add to their factor model,” said Lipuš referring to the rules-based algorithms that quantitative asset managers build in-house. “They may be looking to address a small problem, just a factor that is weak or is missing in the model. It’s very subjective. That is where the art and science come together,” said Lipuš. Systematic funds will backtest the data to see how it behaves. Fundamental firms are looking for a supporting data source, which will prove an idea, he said.

Ultimately, most hedge funds are looking for a signal they can trade on.

While Thasos has been delivering its products as weekly deliverables, the overwhelming demand from clients is to move to a daily delivery system, said Collins

As location-tracking data is becoming more distributed beyond the top-tier quantitative firms, smaller hedge funds are also delving into it.

Ivy Schmerken

Though location tracking is not yet considered to be mainstream, it’s moving in that direction, said Bogard.

Ethical FX via the Global Code

June 13, 2017 by Ivy Schmerken Leave a Comment Filed Under: Thought Leadership Tagged: FX Global Code, Guidelines

Foreign exchange participants are getting a crash course in ethical behavior.

With the release of the FX Global Code for the wholesale foreign exchange market last month, the FX industry is counting on a single set of guidelines to prevent bad behavior in currency trading.

Launched by the Bank International Settlements on May 25 in London, the final release caps a two-year effort by central bankers in the FX Working Group (FXWG) and private sector Market Participants Group (MPG) from 16 jurisdictions around the globe.

The standards are seen as a reaction to several FX rate-rigging scandals in the London Interbank Offered Rate, which began in 2012 and resulted in multi-billion dollar bank fines. Around the same time, pension funds also began to file lawsuits against their custodians over the timing and price of the FX executions.

Guy Debelle

“All of us recognize the need to restore the public’s faith in the foreign exchange market. We share the view that the Global Code plays an important role in assisting that process and in helping improve market functioning,” said Guy Debelle, Reserve Bank of Australia Deputy Governor, who chaired the FXWG, in opening remarks.

While adherence to the 75-page document is voluntary, it seeks to establish a set of best practices that applies to wholesale market participants across all regions.

Dealers, asset managers and hedge funds, corporate treasury departments, benchmark execution providers, brokers, e-trading platforms, and affirmation and settlement providers fall within the scope of the global code.

The final document contains 55 principles covering six categories:

Ethics
Governance
Information sharing
Risk management
Compliance
Confirmation and settlement

It also covers complex topics, such as electronic trading, algorithmic trading and prime brokerage.

Providers of algorithmic trading or aggregation services to clients are told to provide adequate disclosure regarding how they operate, including information on fees, whether they execute as principal, and information on their routing preferences.

Last Look and Pre-Hedging

The code weighs in on the practice of “last look,” which has been the subject of much debate throughout the industry. As stated in the code, last look allows a market participant receiving a trade request to have a final opportunity to accept or reject the request against its quoted price during a specific time, known as the last look window.

What’s Next for the FX Global Code?

There will be a comment period on pre-hedging during the last look window, which is open until Sept. 20.
Major market participants will be signing the code over the next three to six months.
Eventually, there will be a registry or repository where participants can go to see who has signed on.
As a living document the code will have a light review on an annual basis, to understand how people are putting the code into practice and to review any market changes.
A more thorough review will take place every three years.

A big concern with last look is that if a liquidity provider rejects a trade request, then it gleans information from the client. “Last look should not be used for purposes of information gathering with no intention to accept the client’s request to trade,” states the code.

Some people may be disappointed if they think the global code is meant to ban last look because it doesn’t do that.

Chip Lowry

“Again the global conduct code does not prohibit last look, and different venues and liquidity providers may offer trading with or without a last look window,” said Chip Lowry, Senior Managing Director at State Street Global Markets, during a webinar hosted by the FXPA.

While the code is not meant to “outlaw any useful practice,” said Lowry, “there is an emphasis on providing transparency and disclosure to clients and counterparties on how the practice works, so that they have enough information to decide for themselves.”

“And, it’s up to them to make sure their clients and counterparties are sufficiently informed and allowed to make decisions about that,” said Lowry.

But many firms are asking what it means to adhere to the guidelines, which doesn’t impose legal or regulatory obligations on participants.

Lisa Shemie

The most obvious way a firm could adhere to the code is to put a “statement of commitment” on their web site, said Lisa Shemie, Associate General Counsel at Bats Global Markets, a CBOE company, during the FXPA webinar. Some firms may want to use the statement of commitment to commit to their counterparties bilaterally. A firm could also issue a press release, but there is no obligation to do so publicly.

There is also talk of creating a repository or public registry where any one can go to see which firms have adhered to the code.

Commercial Pressure to Adhere

Even though the FX code of conduct is voluntary, firms in the wholesale FX markets could face commercial pressure from central banks and/or clients to adhere to the code, said a speaker.

“It may be an osmosis type of mechanism, where in the next few months, we will see clients face other entities that have not adhered,” said Shemie.

For example, clients could refuse to face counterparties that have not adhered to the code.

As a venue, it’s possible that some clients could say to us they don’t want to see prices from any liquidity provider on our platforms that has not adhered. Venues like BATS will have to determine how or whether to accommodate that, said Shemie.

Since the code has received endorsements from central banks, which have oversight over bank dealers, it’s hard to see how they could ignore the code, noted Shemie.

Central banks, when acting as counterparties, have indicated they will require their trading counterparties to adhere to the code. When there is endorsement from central banks, it will be hard for firms they have oversight over to ignore the code, said Shemie.

Adherence to the code also entails more than just posting a statement on a shiny website. A market participant in the wholesale FX market is expected to align its business activities with the principles of the code.

FX Global Code Training

Large banks have embarked on training programs. For instance, Citigroup has embarked on a “sweeping educational initiative,” training about 1,300 staff globally on market conduct through a new handbook, as reported by Bloomberg in “FX Ethics Revamp Spurs Citigroup Training, App for Trader.” It used the ACI Financial Markets Association online portal to administer tests.

Asset managers are also educating their staffs on the new standards as part of their ongoing compliance training, an executive said in the Bloomberg article.

E-trading venues could also face commercial pressure to display quotes from liquidity providers that have committed to adhere.

Venues and FX technology providers are also covered. “There is specific language having to do with algo providers and aggregators,” said Shemie. “It’s important for non-principal participants like venues and FX technology providers to read the code and try to pinpoint the provisions that are specifically applicable to them,” she said.

But firms should not simply adhere and sign their name if they are not complying with the principles. “There’s case law in the US that having a policy and not conforming to that policy could be worse than having no policy at all,” said Shemie.

James Singleton

However, some skeptics suggest that the guidelines lack regulatory teeth and fall short in a number of areas. “While it may have market changing potential, it is not likely to create a reformed, transparent and ultimately fair market,” wrote James Singleton, founder and CEO of Cürex Group Holdings, LLC, an FX execution services provider in a report on its web site.

“The chief reason for that is the fact that the Code is ultimately aspirational,” wrote Singleton in “A Buy Side Code of Conduct for Best Execution Outcomes, The Ten Commandments.”

Instead, Singleton suggests that the code should serve as a wake-up call for the buy side to seize the responsibility they have for best execution outcomes for their customers.

Indeed, the code tells clients to regularly evaluate the executions they receive. “If there is one outcome from the code, it’s that the buy side and corporate users of FX should start measuring their executions,” said State Street’s Lowry. “That is something that a lot of people don’t do today. I think that is a good thing for the industry.”

Ivy Schmerken

Discretionary Managers Seek Alpha in Alternative Data

May 31, 2017 by Ivy Schmerken Leave a Comment Filed Under: Thought Leadership Articles Tagged: alternative data, big data analytics, ExtractAlpha, Quantopian

Alternative data providers see huge potential in providing their data to discretionary asset managers who are losing assets to quantitative and systematic funds.

As active managers trail the performance of passive index funds and exchange-traded funds (ETFs), discretionary fund managers are scrambling to consume big data analytics into their decision making process.

While early movers in the big data analytics industry have mainly been quant hedge funds and systematic fund managers, the next wave is going to be discretionary fund managers, according to panelists at an event sponsored by Wall Street Horizon, Estimize, OTAS Technologies and FlexTrade Systems.

“We’re at the point of crossing the chasm. The early adopters have adopted it. And [now we’re] crossing that barrier between early adopters and the mainstream,” said Vinesh Jha, founder and CEO at ExtractAlpha, who spoke at “Uncovering Alpha in Alternative Data Sets” held on May 17.

Leigh Drogen

There’s been an explosion of alternative data sources, such as satellite imagery data and credit card data that didn’t exist 10 years ago, said Leigh Drogen, founder and CEO of Estimize, an open earnings estimates platform, speaking at the event.

However, discretionary asset managers have more difficulty incorporating big data sets because they lack a process, said several panelists.

“The challenge is to provide this content into the trader workflow of the discretionary managers who are not even quants who have a hypothesis about how the market works,” said Tom Doris, founder and CEO at OTAS. Technologies, on the panel. “They look at those signals and data sources in an ad hoc fashion,” said Doris.

Jamie Benincasa

Quantitative hedge funds such as Bridgewater and Renaissance Technologies have invested in big data analytics and generated higher returns than many of their peers. “Everybody wants to be them because they want to have returns like them in the systematic quant space,” said Jamie Benincasa, senior vice president and head of global sales at FlexTrade. These firms are household names in the hedge fund space that are probably on an 8-10 year run.

But these firms are not going to reveal which data sets are of value, “or precisely tell you how it works,” said Benincasa. “They want as much data as they can get and they will spend the money to do so,” he said.

Pointing to Quantopian, a platform for quants to create and test their own algorithms, Benincasa predicts that the next generation of alpha generation is going to come from that crowd. Anyone can open an account on Quantopian’s network and create its own algorithms. Quantopian then monitors performance and allocates capital to quants with the best performing strategies.

Defining Alternative Data

Vinesh Jha

While big data is a nebulous term, perceptions are also shifting on what constitutes alternative data. “There has been a bunch of data sets sitting out there but no one thought of them as data,” said Jha. News analytics and social media analytics companies are turning text from 10Qs and 10K filings and earning call transcriptions into data that computers understand. That means turning this data into sentiment or extracting data from them. “Fundamental investors have been using this data for years, but this is alternative data for quants,” said Jha.

Barry Star

Even some of the older data such as earnings estimates has been optimized and is now perceived as alt data. “Our data is the quintessential example of an old data set, an earnings calendar,” said Barry Star, Wall Street Horizon’s founder and CEO. ”We reinvented it,” said Star. “Individually the events that we track could be considered old alpha, but people are constantly coming up with new ways to utilize the data, “ he said. Take the case of Date Breaks— if the earnings date for a company moves from Monday to Thursday there’s all kinds of information involved in how many days the date moved. Does it move forward? Does it move backward? There is alpha all over that information,” Star said.

Challenges with Workflow Integration

But it can be challenging for hedge funds and asset managers to integrate big data into their front-end investment and trading processes.

Drogen said he’s been contacted by discretionary funds that want to build a quantitative process. Someone with “a good quantitative background in a discretionary firm takes our data, reads our research and takes our factor model and figures out if it would have added alpha.” But the decision is left to the portfolio managers. “The PMs have to buy into it. It is religion vs. a science problem. If they don’t solve this, they’re going to get left behind,” insists Drogen.

Tom Doris

According to Doris, the difference between systematic and discretionary manager is mainly that one is process driven, and the other is non-process driven. “So-called systematic managers tweak their models more than discretionary firms alter their portfolio holdings,” he argued. “If they’re already systematic about their approach, they can use the data. It’s not onerous for them to change their process.” The problem then is to get the big data and analytics into the trader’s workflow, said Doris.

“Quants will take the signals directly into a black box, then push out trades via an API to the market because they don’t want anybody to see them,” said FlexTrade’s Benincasa. However, “discretionary managers are looking to funnel the data through their order and execution management systems.”

To bring alternative data into the trader’s workflow, Benincasa cites the integration of the FlexTRADER EMS with OTAS’s market analytics delivered with natural language processing technology, and the Symphony messaging system. From OTAS, traders can capture the natural language, highlight it and send it via Symphony to the PMs. Then the PMs can send an order back, and the trader highlights the order, clicks, and the order lands on FlexTRADER’s blotter. Additionally, social media is available as heat maps and ticks on the blotter, so a trader can now run an alert saying a particular name spiked, get social media sentiment in this name, and determine what is going on, he said. “We’re in the business of consuming these analytics and providing traders with the ability to feed it back from the market to the PMs who may not have access to these data sets,” said Benincasa.

Despite some of these hurdles, discretionary firms are striving to harness alternative forms of data. “The main variable is how they build their teams,” said Drogen. Some firms make the mistake of building a data science/quantitative research team in a separate building and then selling Excel spreadsheets and research reports to the PMs. Those that have done it right build a trading desk with a quant, two engineers, a data analyst, the PM and fundamental analysts sitting together, suggests Drogen. Then there’s a data acquisition and repository team on top of that responsible for buying data and other things. “The PM needs to operate as a pod where those quants and engineers understand the process,” said Drogen.

Ivy Schmerken

Balancing Risk & Opportunity

March 30, 2017 by Andrew Parsons Leave a Comment Filed Under: Thought Leadership Articles

East Asia is one of the world’s most diverse and vibrant regions. Its economy is also the most dynamic. With 6.5% growth in 2015, according to the World Bank, it outperformed the rest of the world. Despite the drag that China’s slowdown is expected to pull on the other economies of the region, they still represent a massive opportunity for businesses across the globe. With opportunity comes risk. Here’s the top five fraud and anti-money laundering (AML) risks that could face businesses wanting to expand in the East Asian region:

1) Isolated systems create risk
Asian businesses tend to manage fraud and money laundering data in isolation. This stops them seeing the whole customer, and can increase their exposure to crime. It can also lead to ‘false positives’ and block good customers or transactions by mistakenly flagging them as risks. Financial institutions must meet counter-terrorism financing and AML regulations without affecting good customers. PwC’s 2016 Global Economic Crime Survey suggests that current system alerts fail to spot 50% of these incidents. It is not enough for businesses to consider the data contained in a single, local, system. They need to bring together customer data from multiple systems and look at all the data available to them.

2) Reluctance to share data holds back progress
In Europe, fraud bureaus pool ‘bad’ data from organisations across different sectors. Asia, on the other hand, has a cultural reluctance to expose possible weaknesses in internal systems. This means that openly sharing information about the level of exposure to fraud is still rare. Things may be changing. Nearly 100 South Korean firms share known fraud data in an active fraud bureau which we run with the Korean Credit Bureau. This recently exposed a Thai taxi driver who had defrauded 17 different organisations by taking out $350k in loans. The ROI for organisations willing to share their data within a closed, tightly governed community of this kind can be as much as 75 to 1. But it does need a strong spirit of collaboration.

3) China’s slowdown will increase risk
When economic growth slows, financial crime tends to rise. Reduced investment in systems and resources exposes organisations to risk. As the criminals become more and more sophisticated, it’s important to stay abreast of the latest trends and threats, and respond accordingly. Across Asia, insider fraud has climbed (up 9% from 2014 levels according to PwC), with the highest growth among senior management. It’s a totally different picture compared to Europe and North America. There, frauds are more likely to come from external, rather than internal, groups or individuals. When organisations are looking at their fraud and AML processes and systems, they must ensure they also include robust employee screening and monitoring.

4) A shift to identity-based application fraud
The take-up of ‘chip and pin’ cards in the region has increased security for the two billion people who use them. Fraudsters unable to carry out transaction frauds using stolen or cloned cards will look for other weaknesses to exploit, like false account opening.

5) Increasing disruption to business models will introduce new risks
Robust checking of application data is essential, and needs to involve more than just identity details and credit history. Has the person applied for other products elsewhere in the organisation? Are we sure they are not on any AML sanctions lists? Has any of their data been identified as part of an incident elsewhere – including within partner organisations? (That’s where fraud bureaus come in.) Doing this quickly over the Internet or a mobile channel presents a major challenge to fraud teams. They are already under pressure from commercial colleagues who want to sign up customers quickly but organisations need to adopt a more holistic approach to be sure of covering every angle.

GBG delivers fraud, risk and compliance solutions through identity data intelligence. GBG’s global FX client base focus on the GBG’s solutions that support global AML and KYC through identity verification and ongoing monitoring. Click here to learn more.

How corporate culture can be one of the best tools to fight financial crime?

March 16, 2017 by Andrew Parsons Leave a Comment Filed Under: Thought Leadership Articles Tagged: Andrew Parsons, company culture, financial crime, gbg

The role of corporate culture in the fight against financial crime?

Fraud. Money laundering. Bribery. Asset misappropriation. Does your business have financial crime under control? With forty-eight percent (48%) of financial services organisations reporting having been affected by financial crime¹ the financial services industry is the most threatened by this type of criminal activity and as a result needs to have, and does have, the best and most robust prevention and detection tools and processes in place. However, criminals evolve quickly and so must the fraud and risk management strategies that protect businesses and their customers.

Do you know what you’re up against?

Ten percent of economic crime is discovered by accident¹ which suggests organisations may not have fraud prevention and risk management completely under control.

The first step to preventing fraud is to identify the scope of the problem, and while most business leaders admit fraud does exist within their organisation, there is a knowledge gap when it comes to producing actual fraud figures.

You’d be surprised at the percentage of individuals who report having provided incorrect information when creating an online account. See the figures on GBG’s Risk Management Infographic.

Businesses and government organisations are prioritising the implementation of processes and solutions to address fraud across the board to create an accurate benchmark for fraud prevention whether it originates from an external or internal perpetrator.

While it may be common knowledge amongst industry experts that the majority of fraudsters operate inside the organisation they’re defrauding, these criminals continue to get away with their illegal activity. This is likely because when a criminal operates from within, they’re fully aware of what tools and processes are in place to detect suspicious or fraudulent activity and how to avoid those mechanisms. Fortunately, internal fraud has decreased over the past two years as a result of improvements to corporate culture.

Corporate culture impacts financial crime.

Organisational culture is a primary driver in employee behaviour, and research shows that companies with an ethical, cultural climate are less likely to have employees engaging in unethical behaviour. The majority of modern organisations have clearly defined values that underpin their company culture that can be found on their website, in their offices, and are likely regularly communicated to their staff. While employees may take some cues from these words culture can only be created through the attitudes and the actions of the people who make up the organisation, especially the leaders.

Leaders need their teams on side because it is likely the individuals who are in the thick of things – the administrators, the managers, the analysts, the specialists – who are likely to see or hear something suspicious. This group make up the whistleblowers. Whistleblowers are good for good business; however, the label is still controversial. Organisations are faced with a challenge as they become more reliant on team members who often put their reputation – and in some cases their livelihood and safety – on the line in order to report wrongdoing. Encouraging staff to come forward to report wrongdoing or suspicious behaviour and protecting them from or compensating them for any consequential reprisals are connected issues that must be addressed in conjunction in order to foster a true shift in attitude towards whistleblowing.

The world of financial services will continue to change to combat the evolution of financial crime. Regardless of the changes placing the right people and the right teams on the front lines and behind the scenes will be an essential component in the fight against financial crime.

Click here to find out more about how GBG supports organisations with global AML and KYC through identity verification and ongoing monitoring.

GBG Forex Online Trading Infographic

This article was written by the team at GBG.

Andrew Parsons

Business Development Manager, APAC

Email Andrew at andrew.parsons@gbgplc.com.

Connect with Andrew on LinkedIn.

¹Source: PwC Economic Crime Survey 2016.

MiFID II Regulations to Impact U.S. Asset Managers

March 16, 2017 by Ivy Schmerken Leave a Comment Filed Under: Thought Leadership, Thought Leadership Articles Tagged: asset management, MiFID II, STA

North American broker-dealers and asset managers domiciled in the U.S. are watching their European counterparts gear up for compliance with MiFID II.

But will MiFID II affect U.S. broker-dealers and asset managers based in the U.S.?

Could the massive regulation that requires asset managers to unbundle research payments from executions, and quantify the value of research for its clients, find its way onto U.S. shores?

That question was the focus of an open call held by the Security Traders Association (STA) on March 2 examining the impact of MiFID II on North American broker dealers and asset managers.

Under the MiFID II delegated acts, which go into effect on Jan. 3, 2018, asset managers will need to pay for research from their own P&Ls, or set up so-called research payment arrangements (RPAs), which are to be funded by a commission sharing account (CSA) or a direct payment by the client.

Although the ruleset impacts firms based in Europe, U.S.-based asset managers competing for mandates against European investment firms could face competitive pressure to adhere to MiFID II rules.

Tom Conigliaro

“MiFID II is most relevant for global asset managers that are based in the U.S., but have a physical location in Europe where they serve European clients,” said Tom Conigliaro, managing director at Markit Brokerage and Research Services.

“Technically the European operations of those firms are within the bullseye of the regulations,” explained Conigliaro.

“While global firms can continue to operate their U.S. divisions under existing U.S. rules, operating a global business under two starkly different regulatory regimes is very challenging,” says Conigliaro.

“Most global firms are going to opt into MiFID across the globe, and that’s how the massive regulation will ‘leak’ into the U.S.,” he said. “Global asset managers would prefer to adhere to the stringent regulatory standard, so they can operate synergistically across the globe,” he added.

Buy-side firms that fall under the MiFID II rules on unbundling research payments from executions will need to:

Track interactions with research counterparties.
Regularly assess the quality of research and its contribution to the investment process.
Establish a research budget.
Allocate the budget to the strategy level.
Manage payments either directly or through an RPA Administrator.

“For a U.S. asset manager that doesn’t have a physical presence or any jurisdiction in Europe, these firms are not in the bullseye of the regulation,” he said. However, practically speaking, U.S. managers that are managing European mandates or competing for European clients’ assets will face competitive pressure as clients come to expect the level of transparency they are receiving from asset managers in Europe.

Most asset managers will view MiFID II as a positive, due to its transparency, disclosure of prices and better reporting.

For instance, a state pension fund or college endowment fund could be evaluating investment managers including a European firm that is following a MiFID unbundled research regime. That firm is providing more transparency and disclosure than a U.S. domiciled manager is providing

“In this scenario, a North American asset manager that is not in compliance with MiFID II could be seen as having a competitive disadvantage,” Conigliaro suggested.

Rather than sit tight and watch how developments unfold, U.S. asset managers can take steps to align with best practices.

“A lot of U.S. asset managers are doing this already, such as setting budgets for their research, having an evaluation program, paying attention to ratings and rankings of their research, and providing data to their clients “to tell a better story” about performance based on the research, which the client is ultimately funding,” said Conigliaro, noting that “You can do all of these things that are aligned with the spirit of MiFID to the letter of the law until either there is a seismic shift from the industry, or a client calls demanding more transparency that it gets from reports from its other managers in Europe.”

Ivy Schmerken

Rather than being caught flat-footed, this gives asset managers a head start when they have no choice but to comply with a MiFID II-oriented regime.

Is Friction-free on-boarding possible in Financial services?

March 7, 2017 by Andrew Parsons Leave a Comment Filed Under: Thought Leadership Articles Tagged: AML, customer experience, gbg, identity verification, KYC

Can financial institutions provide friction-free customer experiences?

Balancing regulatory requirements with customer experience is like walking a tightrope, and it’s one on which many businesses have lost their footing. For regulated traditional financial institutions and FinTech disruptors, the complex regulatory frameworks they must adhere to can often make this challenge all the greater.

One Click

The simplification of online engagements, particularly in the e-retail channel, has had the effect of vastly changing consumer expectations across a host of industries. One click procurement (as patented by Amazon in the US as far back as 1999) has driven phenomenal revenues and put the customer front and centre, removing potential friction in online transactions, increasing retention and customer spend. The reduction in friction and the ability to generate greater revenue was so significant that it was licensed by Apple into their iTunes and App Store services. Interestingly, this patent (which covers US only) actually lapses in 2017, meaning we could well expect to see retailers accelerating take up at that point.

Customer expectation

So, these vast organisations have by nature set the benchmark for friction-light transactions. The consumer’s experience shapes their expectations, and creates a desire for similar experiences when they transact in markets other than e-retail. Often this desire, combined with a lack of detailed understanding of the complexity inherent to a market (e.g. Financial Services), allows consumers to assume all procurement and onboarding processes can and should be as simple. But in reality, the complex requirements of Anti Money Laundering (AML) legislation fundamentally prevents a comparably simple experience in the Financial Services market… or is that just an excuse?

The Target Demographic

Nowhere is this expectation of seamless engagement greater than in millennials, a generation born into technology and thus more conscious of the digital channel than ever before. With consumers still as unwilling as ever to change bank account providers, these millennials are the fuel for the new “Challenger” banks and they must be won if a new offering is to survive and stand a chance of becoming an established entity amongst the traditional players. It has been commented however that then managing to retain millennials is another complex issue, as the same characteristics that encourage them to open an account could just as easily see them leaving – meaning organisations will have to work harder to retain them through the provision of ever more relevant, accessible product and services.

The Challengers

In Financial Services, the challenger’s differentiator is often to focus on the use of technology to mimic successful methods of engagement from other markets. Activities seen as ‘the standard’ in e-retail (such as goods/service selection and procurement methods, enhancement and offering of multiple communication channels with their customer, simplification of point of access to their services via app, enhancement of mobile offerings, and streamlining the sign up/onboarding experience) are all areas of differentiation opportunities – and those that deliver these differentiators are both reaping the rewards and hurting the traditional entities.

Click here to find out more about how GBG supports organisations with global AML and KYC through identity verification and ongoing monitoring.

Six Trends for Currency Markets

January 27, 2017 by Ivy Schmerken Leave a Comment Filed Under: Thought Leadership Articles Tagged: Market Trends

Political shocks such as Brexit and the U.S. election of Donald Trump jolted the foreign exchange markets in 2016, fueling more trading activity for hedge funds and bank trading rooms. Uncertainty around a stronger U.S. dollar and higher interest rates could drive more volatility into 2017.

FX market pundits are pinning their hopes on lighter regulations, the evolving landscape of liquidity providers, a more active buy-side, the transforming potential of blockchain, and the future role of humans in the process.

However, some participants were not entirely optimistic.

In 2017, prepare for “more volatile FX markets, less liquidity among banks and better [electronic trading] platforms,” predicted one panelist at the Markets Media FX Trading 2016 event.

Here are six topics to keep in mind for currency market structure in 2017:

1. The Volcker Rule & Liquidity

Regulations such as Basel II and Dodd Frank’s Volcker Rule have made it difficult for banks to warehouse risk, such that some traders were skeptical that bank-dealers could recover their clout as liquidity providers.

“That the Volcker Rule is probably on the chopping block as quickly as any other provision is largely because it’s causing the most trouble in terms of reducing the capacity of banks to compete,” said one person. At a minimum, more clarification is needed on pre-hedging activity, which one person said is treated as if it is a crime.

Liquidity was top of mind at the gathering of FX professionals, who expressed concerns about a GGP flash crash on Oct. 7 and whether such volatility spikes would occur in the future.

“I would agree that the kind of liquidity crisis we are seeing now will continue,” said Jack Drohan, president, ACI, The Financial Markets Association, who spoke on the FX Futures panel.

Traders mentioned macro-events like the Swiss National Bank’s abandonment of the Swiss franc’s peg against the euro on Jan. 14, 2015, which sent shockwaves through the prime brokerage community. Prime brokers raised fees on hedge funds and dropped clients, which may have contributed to the downsizing of global FX volumes.

Between 2013 and 2016, hedge funds and principal-trading firms reduced their FX spot trading activity from $580 billion three years go to $390 billion in 2016, according to the Bank for International Settlements (BIS) report released on Dec. 11.

2. Algorithms & Speed Bumps

In 2017, speed-based trading strategies could become less important to currency markets.

“The introduction of speed bumps in the form of latency floors by major inter-dealer platforms have made such strategies less attractive,” said the BIS report, which cited steps taken by ICAP’s EBS on its matching engines to prevent fast traders from detecting information on orders and then canceling their quotes on other venues.

In the report, BIS cited a shift away from high-frequency trading strategies that rely upon “fast execution and short-term arbitrage.” In particular, “certain algorithmic strategies primarily based on speed have reached a saturation point.”

As these trends evolve, 2017 could see a continued shift from aggressive latency-driven strategies to more passive strategies based on electronic market making.

3. Buy Side Goes Direct

David Ullrich, SVP, FlexTrade

“Buy side will trade with buy-side in dark pools,” said David Ullrich, SVP of Foreign Exchange at FlexTrade. FX participants contend that volume will increase if Dodd Frank is rolled back. “We’ve all seen the staff reductions at top banks in terms of experience, along with the rise of alternative sources of liquidity. I don’t think that trend changes unless there is a change in regulation,” said Ullrich referring to the Volcker Rule. But Ullrich insisted that the buy side will need to become more of a force. “Asset managers need to react more directly to the marketplace,” said Ullrich, who explained that the buy side needs the ability to post liquidity more directly to the marketplace rather than through a sell-side intermediary. As the buy side has a natural interest in the FX market for funding and hedging requirements, they add liquidity to the overall market, he said. As they control one side of the market — the buy or the sell — either side could be sufficed by a non -bank liquidity provider or the banks themselves,” he added.

Though large banks have less capacity to warehouse risk, Ullrich expects that “Virtual markets will pick up the slack,” referring to alternative liquidity sources outside of the traditional sell side. He also predicted that FX markets would become more integrated with credit managed across different tenors and spot venues.

One of the missing pieces of the equation is access to credit, since most alternative liquidity sources only allow for spot trading, but the asset managers need both spot and forward liquidity to manage hedges and rolls, he explained.

“Credit is the necessary ingredient,” said Ullrich in a follow up interview. Many participants at the FX event made reference to credit as being expensive and as an impediment. This could be solved if derivatives are posted to an exchange or if credit itself can be packaged and sold potentially, said Ullrich.

4. Revamping Post-Trade Infrastructure

Jill Sigelbaum, Global Head of FX, Traiana

With the growth of electronic trading and efficiencies from automating the front office, the focus is shifting to cost cutting in the back office. “There is still some inefficient use of humans in the post-trade area that can be replaced by technology,” said Jill Sigelbaum, global head of FX at Traiana on the FX 2020 panel. The back-office is still much like it was 25 years ago, she noted. “Though items are typed instead of written, there are still extra people, she said. However, this doesn’t mean that humans are being cast aside. Instead, humans would be repurposed to manage the technology that didn’t exist before.

5. Blockchain to the Rescue

Several FX executives predict that blockchain, the distributed ledger technology underpinning bitcoin, is going to have a big impact on delivering real-time clearance and settlement in currencies. Blockchain is a data structure that makes it possible to record transactions and share it among a distributed network of computers, as defined by The Wall Street Journal.

Many financial firms are experimenting with blockchain as a transparent way to store and verify transactions without a central authority, which could help to speed up and cut costs as well as replace legacy infrastructure.

For example, R3CEV LLC has signed up 70 banks that are committed to investing, or sharing ideas and experimenting, with blockchain. “They’ve [invested in blockchain] because of processing and the ability to allocate less credit and for the cost of credit to be less at risk,” said one FX industry executive. Credit risk has been an inhibitor to FX trading as it’s challenging for prime brokers to extend credit to counterparties that are simultaneously trading through multiple prime and executing brokers across multiple FX ECNs and other venues.

If blockchain can be adapted to facilitate real-time settlement between counterparties, then the ability to assess risk is quicker, reduced from two days to immediate, which leads to real-time executions and less margin and higher volumes, one attendee said.

“Credit will be freed up to a point where it’s monitored properly in sync with execution,” said another attendee.

6. Future of Humans: Directing the Algos?

While technologies such as big data analytics, algorithms and machine learning can potentially be integrated to make trading decisions, participants contend there is still a role for human interaction. “I don’t believe that human interaction is going away,” said one market participant. “Humans will make better use of machines or algorithms to enact the direction and desires of the person behind the algo,” said one panelist. “There will always be a place for someone who has the ability to deal with large clients and large orders,” said the person.

“You may need humans with different skill sets. But you still need humans,” said Traina’s Sigelbaum.

Buy-side firms will also look to technology to take on the mundane tasks that allows traders to focus on complex trades. “Technology will help the asset managers reduce workflow on routine areas, so they can focus attention on more important trades, such as larger size alpha generating trades,” according to FlexTrade’s Ullrich. “You’ll see heightened activity in trades that mater, which in turn allows for probably a tighter sales and buy-side relationship as well,” said Ullrich.

Reading the Tea Leaves for Currency Markets

While no one can forecast what 2017 holds in store for currency markets, there is recognition that foreign exchange markets will continue to evolve through regulatory changes, shifts in liquidity providers, speed bumps, technology innovations, such as blockchain, while humans adjust their roles.

At the same time there are loose ends that pose risks such as whether traders could expect the occurrence of another flash crash, or whether banks will continue to utilize ‘last look’ in their trading platforms, a practice that allows banks to reject quotes after they’ve been accepted, which concerns the buy side.

Meanwhile, buy-side firms managing international portfolios are paying more attention to currency hedging. Already the BIS study found that institutional investors, such as pension funds and insurance companies, raised their FX activity by nearly a third or 32%, up to $800 billion in 2016.

“If volatility is going up, asset managers may need to allocate more time into managing FX risk,” said Peter Lundgreen, CEO of Lundgreen’s Capital at the event.

With so many uncertainties, Trump’s market-moving tweets, and geopolitical risks in the world, it will be interesting to watch how these six trends play out.

How Can FlexTrade Help With Your FX Trading?

For a complete review of your firm’s FX trading requirements and a demonstration of FlexTrade’s foreign exchange solutions for the sell side and buy side, please contact us at sales@flextrade.com for the Americas, sales_eu@flextrade.com for the EMEA, and sales_asia@flextrade.com for Asia.

What Demands Will Pull the Buy Side Towards an OEMS?

January 19, 2017 by Ivy Schmerken Leave a Comment Filed Under: Thought Leadership Tagged: EMS, OEMS, OMS

Competitive forces are at play in the OMS and EMS markets where vendors are expanding their capabilities at both ends to build the coveted OEMS.

Due to tighter IT budgets, compliance mandates and expansion of electronic trading across asset classes, firms may be looking to bring these two platforms together.

In the recent Aite Group report, “Buy-Side Trading Technology: Multi-Asset EMSs’ Listed Derivatives Functionalities,” the financial markets research firm discusses market trends and the industry’s ongoing interest in an integrated solution for multi-asset trading.

Industry pressures to achieve operational efficiencies, cost savings and increased value from an integrated trade life cycle are behind the push to bundle both platforms, which, in turn, is what’s driving consolidation, according to Aite’s report.

Following are highlights

Leading EMS vendors are working on developing the global, multi-asset class EMS to retain and win new clients.

OMS vendors are venturing into EMS turf, either through internal development or acquisitions of front-office trading platforms.

While buy-side OMSs have been multi-asset capable for quite some time, sell-side legacy EMSs still remain largely a single asset class market, and product best-of–breed.

OMS vendors will integrate more multi-asset trading functionality by buying or building trading and analytics solutions like EMSs.

OMS vendors will attempt to offer an integrated solution –an order execution management system (OEMS).

Large institutions are demanding that execution features be added to their existing OMS systems, while smaller active trading clients are insisting on risk management and compliance features be added to their EMS platforms. Hence, it was inevitable that the OMS and EMS would rapidly converge, states the report.

Rajiv Kedia

“Not only is this a trend, but it’s almost going to become a requirement,” comments Rajiv Kedia, principal and associate Founder at FlexTrade Systems, whose firm offers an integrated OEMS to the buy side called FlexONE. While many hedge funds started off with an EMS, workflow changes, trading and compliance requirements have impacted their need for an OMS. “As time goes by, and as the expected compliance is increasing on hedge funds, they need much faster turnaround, especially for the quantitative firms,” emphasized Kedia. With the surge in compliance rules, hedge funds that began with an EMS for trading are looking to add OMS features. For example, hedge funds that have 500 securities in their portfolio and need to run these lists through pre-trade compliance checks may not be able to execute more than a few lists per day. But if they run these same lists through an EMS, it could take a few split seconds, and they could almost automate the whole process, according to Kedia.

The idea of an integrated OMS and EMS (or OEMS) has led some OMS vendors to start to expand their OMS functionalities by integrating EMS-like features to create a next generation solutions dubbed OEMS. On the other hand, a few EMS vendors are working hard to incorporate OMS-like features into their existing EMS systems, and are on the brink of introducing an EOMS.

Among the desired features of an OEMS are synchronized blotters, just-in-time compliance checks and standardized workflows between the two systems. In response to regulatory pressures, an OEMS can also produce an integrated book of records and a real-time holistic view of exposures.

In the past, compliance checks were typically performed at an OMS level, and not much else was done in the EMS. Now this is changing, according to Kedia. Today, the EMS has more functionalities that were once associated with the OMS, including compliance, risk checks and regulatory checks. “I think that trend is going to increase,” he said.

It’s also possible that an order that passed compliance six hours ago is no longer in compliance. For example, say that a fund can only have 1% of stock, and that the trader enters an order for 100,000 shares, and it passes compliance. When the trader begins executing the order at 2pm, the price is $100, but what if the price moves up to $105? The order would fall out of compliance. With an integrated OEMS, compliance checks can be run continuously. If the trader has options tied to the equities, there is an interdependency of one position to another, so it makes sense that one system can do it all, said Kedia.

Overall, there are advantages to using one system as opposed to two. When “there are two disparate pieces of technology,” Kedia said, “You have to make them work together. Any time anything changes or if there is a break in one system, the other has to be accommodative,” he said.

“If clients are given integrated workflow, they are happy to use one system,” says Kedia.

History of the OEMS

Twenty years ago, the OMS mainly tracked orders that were sent to sell-side counterparties, and delivered an average price for end-of-day books. Traders were still handling single orders and calling up their sell side brokers. Then they needed to break up the orders across several brokers and venues. The OMS was not equipped to handle this, noted Kedia.

The OMS could identify the locations were the orders were executed, but it could not slice up orders, continued Kedia. Clients started with the OMS, then they got an EMS. “The OMS was not designed to handle fast trading and lots of slices and routing to brokers. This forced the OMSs to integrate EMS functionality. On the other hand, the EMS was focused on a narrow piece of functionality, and the features around the OMS were actually more complex. Now the market is asking, “Why do we need two systems? Why can’t we have one system?” said Kedia.

Howard Tai

However, the convergence of these two systems is not going to satisfy all client segments. Most EMS vendors that are jumping into the OMS space are only able to provide a small subset of the entire OMS suite of functionality, notes Aite Group’s senior analyst Howard Tai. Thus, OEMSs tend to suit smaller hedge funds that are not ready for the full-blown OMS, stated the report.

With the complexity of managing multi-asset trading desks across global markets and time zones, market participants are bound to rethink the design of core investment management technologies, such as OMS and EMS, said Aite.

Even though the concept has been around for close to a decade, OEMS and EOMS rollouts are in their early days, reports Aite. Ultimately, it will be up to buy-and sell-side market participants to pick the platform that best addresses their business and trading needs.

OTC Derivatives (CFDs, Margin FX) Clampdown? Australia Proposes New Product Intervention Powers, Following Global Trend

December 23, 2016 by Paul Derham Leave a Comment Filed Under: Thought Leadership, Thought Leadership Articles Tagged: ASIC, regulation reform

What do the US, Quebec, Turkey, Belgium, France, UK, Hong Kong, Japan, Cyprus and now Australia, have in common? They all have existing or proposed product intervention-style powers to restrict the offering of various types of OTC derivatives to the public.

What do the following people have in common: The owner of a small, failing grocery store, a self-confessed shopaholic, and a new mum struggling to pay bills? Well, according to a CFDs and margin-forex business testimonial-style advert, they all solved their problems by trading their way out of them.

Government regulatory powers to protect consumers easily pick up advertisements like the real-life example above. However, these new product intervention powers have a far wider reach, which we explore below.

Trends

This article focuses on a Proposals Paper issued by the Australian Government on 13 December 2016, titled Design and Distribution Obligations and Product Intervention Power. This is the second proposal relevant to the OTC sector released in as many months – in November, the Australian Government released a proposal to charge OTC Derivative providers an annual levy of $61,400.

The December paper was followed closely by an International Organization of Securities Commissions (IOSCO) Report titled Report on the IOSCO Survey on Retail OTC Leveraged Products which acts as a summary of what’s going on, globally, in this space. It was released on 22 December. In all, the two papers and the report provide you with some not-so-light, Christmas-break reading.

Also, on 6 December this year, the UK regulator told its 104 authorised CFDs providers (including rolling spot forex contracts providers), that it was imposing stricter rules. To quote the announcement directly:

“The new measures include:

Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of these products.
Setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
Capping leverage at a maximum level of 50:1 for all retail clients and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1.
Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products.”

Two days later, on 8 December, we coincidentally ran our quarterly CFDs Compliance Forum in Sydney (we allow dial-ins), and the number one question was: Is Australia going to follow suit? At that time, all we had to go on was the Financial System Inquiry proposals to introduce a product intervention power, which came out almost exactly 2 years earlier. A week after the forum, we have a detailed 62-page proposals paper. (For the answer to the leverage question, go straight to numbered paragraph 4, below.)

Rationale

In the old days, Governments and their financial markets regulators used to subscribe to the efficient market hypothesis. To paraphrase, if you require product providers to disclose their product information, consumers will make the right, informed choice about whether to purchase the product.

Since then, behavioural psychologists have finally made the point that the factors that influence our decisions are far more complex. We trade forex because: our friend does, and she told us how much money she made over the weekend trading AUD/USD. We also trade forex because we trust the issuer’s brand. Some people dabble in binaries because they like to play the odds and keep things simple. But, it turns out that consumers don’t read the 50+ page product disclosure statements on issuer websites. Fancy that!

So, governments around the world have restricted certain products from particular markets in various ways. We have curated legal advice in around 10 non-Australian jurisdictions about offering OTC derivatives, and of course, every country is different. However, many of them are following a trend – move over disclosure, product intervention is the new black.

ASIC’s proposed powers

Australia’s regulator, ASIC, is soon to receive a serious weapons upgrade that will go far beyond the old tools of product disclosure statement stop-orders and misleading or deceptive conduct remedies (although as noted above, these powers would have been more than adequate to stop the testimonial-style advertisement we described at the beginning of this article).

In summary, Treasury proposes that:

Issuers of financial products to retail clients in Australia, and their distributors, will be caught by the new “design and distribution” obligations.

This means that Australia’s 70 retail OTC derivatives product issuers will be caught – and so will any introducing-broker operators who target people in the Australian jurisdiction.

Issuers will be expected to identify appropriate target and non-target markets, distribution channels, and conduct ongoing review to ensure distribution is appropriate.

Australian issuers already have ASIC’s RG227 which suggests that issuers maintain and apply a written client qualification policy that meets certain requirements. However, this regulatory guide does not have the force of law, and most brokers elect not to comply with some of the benchmarks on an “if not, why not” basis.

Distributors will be expected to ensure their products are distributed in accordance with the issuer’s expectations and comply with reasonable requests for information.

ASIC will have powers to make interventions in relation to the product, a product feature, or the types of consumers that can access the product or the circumstances in which consumers access it.

The paper provides examples such as imposing additional disclosure obligations, mandating warnings, requiring advert amendments, and restricting or banning the distribution of the product.

When looking closely at the commentary, it appears that ASIC may not be able to directly require restricted leverage. Rather, it can restrict who can access high leverage, by saying something like “We think that offering leverage of more than 1:20 to retail clients would cause significant consumer detriment, so stop it.” So, ASIC can achieve the same outcome, but possibly not as directly or easily as the FCA can (the FCA has broad product intervention powers).

The proposal paper is a bit unclear, however. For example, on page 36, it suggests that ASIC could set minimum standards for certain products or product features.

What is clear, is that under this proposal, ASIC could require disclosure of standardised risk warnings, including profit-loss ratio, as well as prohibitions against bonus promotions. It can also restrict certain products, including products with certain leverage levels, from being available to certain client groups.

ASIC can make a product intervention if it identifies a risk of significant consumer detriment.

This will require ASIC to undertake consultation before making an announcement (the UK’s FCA did this before its leverage/disclosure announcement, too).

ASIC’s product intervention can only last for up to 18 months under the proposal, during which time the Government will consider whether the intervention should be permanent.

This stretches out the period from 12 months, as initially proposed in 2014. However, it falls short of the UK’s permanent intervention power.

In terms of timing, the obligations will apply to new products issued 6 months after the reforms become law. Existing products will have 2 years to come into line with the new obligations.

It’s quite possible that these proposals will become law some time next year.

Next steps

Consultation on the proposal paper is open until 15 March 2017. As we have done in the past, if industry participants have a shared desire to lodge a joint submission, we’re happy to crowd fund something appropriate.

Our lawyers across Sydney and Melbourne have deep expertise in the matters discussed in this paper – which also span across into other product types, including insurance, superannuation, non-cash payments, credit, and managed funds. We would be happy to talk about this article in January 2017, when the office reopens.

Contributors

Paul Derham (Partner, Melbourne)

Jesse Vermiglio (Melbourne)

Alexa Freeman (Sydney)

About us: Holley Nethercote Commercial & Financial Services Lawyers is a legal practice that focusses on regulatory compliance and commercial law. It has 30 staff across two offices – Melbourne (head office) and Sydney. It runs industry forums that often include government regulator attendance across the following industries: OTC Derivatives, Remittance, Fintech, Financial Advisory. Contact us to attend these forums.

The Buy Side Delves into Mobile Data

Predicting Economic Activity With Mobile Data

The Trend Accelerates

Outsourcing the Data Science

Ethical FX via the Global Code

Last Look and Pre-Hedging

What’s Next for the FX Global Code?

Commercial Pressure to Adhere

FX Global Code Training

Discretionary Managers Seek Alpha in Alternative Data

Defining Alternative Data

Challenges with Workflow Integration

Balancing Risk & Opportunity

How corporate culture can be one of the best tools to fight financial crime?

MiFID II Regulations to Impact U.S. Asset Managers

Is Friction-free on-boarding possible in Financial services?

Six Trends for Currency Markets

1. The Volcker Rule & Liquidity

2. Algorithms & Speed Bumps

3. Buy Side Goes Direct

4. Revamping Post-Trade Infrastructure

5. Blockchain to the Rescue

6. Future of Humans: Directing the Algos?

Reading the Tea Leaves for Currency Markets

What Demands Will Pull the Buy Side Towards an OEMS?

History of the OEMS

OTC Derivatives (CFDs, Margin FX) Clampdown? Australia Proposes New Product Intervention Powers, Following Global Trend

More than just a news source

Links

Social Media

Subscribe