BCR Publishing
We are the leading provider of news, market intelligence, events and training for the global receivables finance industry.
Working with industry leading organisations, experts, governments and universities, BCR Publications delivers expertise in factoring, receivables and supply chain finance to a global audience.
BCR has long been a beacon of innovation and excellence in the realm of receivables finance, playing an instrumental role in shaping the industry’s international landscape. Through its comprehensive conferences, insightful publications, and thought leadership, BCR has facilitated crucial dialogues and connections among industry professionals, driving forward the development of receivables finance globally.
Follow BCR Publishing
Free passes
For corporate treasurer roles/functions!
How to fix a problem like “IBOR”
| 22-01-2018 | treasuryXL |
The underlying financial products are not just derivatives – IBOR’s are also used to price floating rate loans, mortgages etc. The major problem beyond the fraud aspect is that the rates are supposed to express the interbank floating rates for various tenors. But with liquidity being very sparse in the interbank market, and the rates only being voluntary expert judgement of actual trading rates, do the rates truly reflect the cost of borrowing? ECB expects to replace EURIBOR by 2020 and the FCA to replace LIBOR by 2021. But what products can be used to replace IBOR?
Initially it appears that secured overnight rates could be the answer. Trades are reported to the relevant authorities and the transactions are based on secured lending. However, the tenor does not complement the existing fixings and financial products. A traditional EUR interest rate swap consists of an annual fixed coupon against floating 6-month coupons. Using an overnight fixing means that you would not know the 6-month floating rate until the end of the 6-month period.
To get around this problem a market could be used for existing basis spread products. As stated an overnight rate relates to secure, risk free transactions whereas IBOR relate to unsecure transactions. This means that with IBOR credit risk is built into the price. Certain additional products could be used to take an overnight rate fix to a 6-month fix – namely basis swaps. But who would supply the prices for basis swaps – the same banks who have been accused of fraud in the current IBOR process.
Another alternative is constructing the fixing from repo transaction with different tenors. But repo’s are sensitive to the credit risk of the collateral issuer. This means trading on the basis of Specials – clearly defined and named collateral issuers. With all the QE that is taking place there is an alarming shortage of high-quality government back paper that is in the free market that the very scarcity would lead to irregular pricing.
So whilst authorities have clearly stated that interest rate fixings can not carry on in their present form, they have yet to offer a valid alternative. In the meantime, contracts measured in 100 of trillions will need to be adjusted for the new method for fixings. The only people who will welcome these changes are the legal profession who get to redesign “all” the existing contracts.
[button url=”https://www.treasuryxl.com/community/experts/lionel-pavey/” text=”View expert profile” size=”small” type=”primary” icon=”” external=”1″]
[separator type=”” size=”” icon=””]
PSD2 – has it hit the ground running?
| 18-01-2018 | treasuryXL |
In the UK the process has gone even further – Open Banking has been enacted. Fintech companies are now in the position of taking over the ownership of the customer relationship that banks now have – assuming this is what the customer wants. The traditional relationship between a bank and a customer is now under threat. Banks, which have traditionally applied a one shop for all your financial transactions approach, will possibly have to change and look more like an App store from which customers can choose the services that they want.
To effectively compete in this new market will mean focus on data mining and achieving an economy of scale. It is not inconceivable that tech giants such as Google, Facebook or Amazon could start offering financial services on the back of their sizeable databases. Whereas banks have invested heavily over the years in their payment processes, new technology means that the costs are far lower for a new entrant.
But will PSD2 truly open the European market for financial services? Research indicates that we very seldom interact beyond our own national borders. The cost of banking, credit cards, mortgages, car insurance etc. differ greatly within the EU. A survey that was commissioned by the European Commission concluded that 80% of Europeans would not consider purchasing a financial product from another EU member state. Any dreams of one Europe are rudely interrupted by such research and public opinion. This is not to say that public opinion could not change – rather that the current market is not very elastic.
So PSD2 is up and running – how about the banks? PwC published a report in December 2017 after conducting interviews with senior executives in European banks. Just 9% reported they were ready, despite 66% saying it would affect their operations. Furthermore, a report was published today by the Dutch Data Protection Regulator stating that the legislation does not take privacy requirements enough into account. This despite the legislation being passed more than 2 years ago.
Eventually banks that are early to design their products specifically for this legislation and bring them to market could establish a clear lead on their opposition. Also, if the public reluctance to transact cross-border was to diminish, it is possible that – in the future – we could be purchasing our mortgages in Finland, our credit cards in the UK and our car insurance in Hungary!!
If you want more information please feel free to contact us via email [email protected]
MiFiD II – 10 days old: Status Report
| 16-01-2018 | Lionel Pavey |
MiFiD II is a regulation leading to reform in the European financial industry. This is an update to the original MiFiD regulation which started in 2007. It is expected to offer greater protection to investors and to increase transparency within the markets. There is a strong determination to move trading from “Over the Counter” such as voice activated markets, to more established electronic venues as these are easier to audit and monitor.
What are the aims of MiFiD II
What markets are affected
Who is affected
How will it work
What has happened since 3rd January 2018
Some major exchanges – Eurex, London Metal Exchange, ICE – have received reprieves from implementation and do not have to fully comply with open access rules for the next 30 months. This is despite legislation that took more than 5 years and was delayed for 1 year. This also means that certain investors will choose a deliberate route to market for their transactions that do not need to be fully reported on for the next 30 months.
ESMA (European Securities and Markets Authority) announced on 9th January 2018 that there will be a delay in implementing the cap on dark pool trading volumes until at least March 2018. These dark pools are favoured by investors and traders who wish to trade a significant amount of stock without the rest of the market knowing or the price moving.
Markets that have traditionally worked on voice activated trading – fixed income and interest rate derivatives – are still going strong. However, there is a threat to their existence if more trades are done on recognized exchanges and/or platforms.
What about research
As the cost of research has now been split from trading, it will be very clear what an investor is having to pay. Furthermore, analysts will be more inclined to only produce analysis on the larger “Blue chip” companies – both for equity and fixed income. There is a fear that smaller companies will now fall away from the spotlight and little or no research will be produced and published. Consequently, investors might become averse to taking a position in a small company where there is no research available. There is a threat that what independent research is produced will be biased as the cost for the research has to be earned back. There are rumours that maybe the exchanges will pay for research – this could be paid out of listing fees.
So, to conclude, MiFiD II is alive and running – but they are some serious disappointments compared to how it was envisaged. Perhaps such all encompassing legislation should be reduced to bite sized chunks and drip fed into the market. Any legislation that is late in being implemented and extends to more than 17 million words is, perhaps, not what the market needs and/or wants all in one go.
Lionel Pavey
Cash Management and Treasury Specialist