3 November 2011

Bank for International Settlements’ Cecchetti Lays Out Case for Basel III, Calls for Greater Investor Vigilance

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Fourth Annual CFA Institute European Investment ConferenceAs G20 leaders met in Cannes to address Europe’s monetary and economic crisis, in Paris Stephen Cecchetti was calling for greater investor vigilance and tighter regulation of the shadow banking sector. Speaking at the fourth annual CFA Institute European Investment Conference, the Head of the Monetary and Economic Department at the Basel-based Bank for International Settlements defended new Basel III rules that tighten capital and liquidity requirements for banks against criticisms from bankers that the rules are curbing lending and holding back economic recovery.

Cecchetti began his talk by highlighting the imperfections of large banks. “While the financial pile-up had many causes, we must not overlook the critical role played by a number of very large global banks with insufficient capital, inadequate liquidity, and poor risk management practices,” Cecchetti said. “We are rewriting the rules of the road to prevent such an accident from recurring.”

On the subject of the much-maligned activities of financial regulators, Cecchetti told Conference delegates that “we know that the quality of regulation and supervision mattered, since the banking systems of some countries proved to be more resilient to the crisis than others.” A new framework for regulating and supervising systemically important financial institutions is now being developed by the Financial Stability Board and the Basel Committee on Banking Supervision. The new framework, Cecchetti explained, comprises three complementary components: greater loss absorbency, more intense supervision, and stronger resolution.

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Shining a Light on Europe’s “Dark Pools”

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Jasper Jorritsma, Marcus Hooper and Frédéric RomandIn recent years, there have been few more topical yet mythicized subjects in institutional finance than high-frequency trading and dark pools. In a session at the fourth annual CFA Institute European Investment Conference in Paris, three experts — Marcus Hooper, CEO of Pipeline Financial Group; Frédéric Romand, Head of Trading at Generali Investments; and Jasper Jorritsma from the European Commission — attempted to de-mystify these subjects by cutting through the complexity of today’s equity market structure.

The backdrop for these structural changes in European equity markets is of course the Markets in Financial Instruments Directive, known by its acronym as MiFID, which was implemented in 2007 but amended only two weeks ago after a year-long review process.

To tackle this timely subject, the panel discussion began with a debate on the new “Organised Trading Facility” (OTF) trading venue classification under MiFID. Jorritsma explained that the Commission had created the OTF category as a means to ensure that all systematized trading is captured under the MiFID framework, an objective that stems from the G20 mandate to ensure that as much trading as possible takes place on regulated electronic marketplaces. But according to Jorritsma, broker crossing systems — the “dark pools” of liquidity run by banks – would not be able to combine the crossing of client orders with bilateral execution against the broker’s own account under the OTF framework.

Generali Investments’ Romand noted that, practically speaking, dark pools have been around for more than 20 years in one form or another. Today’s electronic incarnations are just more technologically efficient ways for buy-side investors to get large block trades executed. There is a legitimate question about how much business is, or should be, executed in dark pools without having a detrimental effect on the price discovery function conducted on the “lit” exchanges — but without better data, it is impossible to tell what this limit is.

Among the panelists there was unanimous agreement on the need for a consolidated tape in Europe to give investors the transparency required to evaluate investment decisions and assess best execution. According to both Romand and Pipeline Financial Group’s Hooper, a consolidated tape is absolutely crucial from the buy side’s perspective. Jorritsma explained that the Commission has opted for a commercially driven approach to developing the consolidated tape under MiFID II. Romand also indicated that post-trade transparency — the public reporting of executed trades — would be very beneficial for other asset classes such as fixed-income and derivatives (another area MiFID II seeks to rectify).

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Global Trade Imbalances Are a Major Source of Instability, Says Economist Roger Bootle

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Roger Bootle, Capital Economics Ltd.At the fourth annual CFA Institute European Investment Conference, Roger Bootle, managing director of Capital Economics, provided a wide-ranging examination of the macroeconomic and institutional factors that contributed to the credit crisis of 2007-2009 and that underpin the ongoing sovereign debt crisis. He also contended that the financial services sector is simply too big relative to its contribution to society.

Bootle pointed to international trade imbalances as a major source of instability. These imbalances contributed to excess leverage at various levels of the global financial system, he said, and inevitably resulted in a liquidity glut that has constrained the effectiveness of monetary policy options within western economies.

“Like so much else, the financial crisis was made in China,” said Bootle, referring to the country’s massive trade surplus and foreign exchange reserves.

The economist also critiqued the pervasive and now disputable intellectual dogma of efficient markets, which has led to unrestrained and deregulated capital markets. He argued that the advantages of the supposed propensity of free markets to self correct is outweighed by the significant negative externalities that financial institutions impose on society. Bootle made a strong case for shrinking the financial sector, one premised on the observation that finance is today focused on “distributive” versus “creative” activities; that compensation within the industry is excessive; and that finance tends to divert societies’ brightest talents from other career pursuits.

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Münchau: European Financial Stability Facility Has Only Propagated the Eurozone Crisis

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Wolfgang Münchau, associate editor of the Financial TimesWolfgang Münchau might have been accused a few months ago of being unduly pessimistic about the future of the eurozone in his regular Financial Times columns and Eurointelligence articles. But as he himself confesses now, the successive months have shown him to in fact have been overly optimistic in his earlier diagnoses of the still-unfolding crisis. In a lucid and lively session entitled “The Way Forward for the Eurozone” at the fourth annual CFA Institute European Investment Conference in Paris yesterday, Münchau highlighted the impending disasters that will come if the necessary political will is not forthcoming — and experience to date has not been promising to say the least.

While Münchau does not foresee the total demise of the eurozone, there will certainly be significant changes (including the potential exit of Greece from the eurozone), and ultimate survival in any fashion will be achieved only with great difficulty, he contended.

As Münchau pointed out, the eurozone in aggregate is in relatively good shape. Its overall debt-to-GDP ratio is a manageable 80%. The euro currency itself enjoys relative stability, supported by sound monetary policies of larger member states. And the eurozone includes some of the world’s most advanced and competitive economies. If it were actually a single state, there would be no perceptible crisis.

Münchau emphasized that problems have clearly arisen from the large internal imbalances between large and small nations within the single market, the prime example being Greece versus Germany. Sovereign bonds issued by many nations within the zone have been shown to be anything but risk free — with the possible exception of German bunds — and the much-needed rescue packages that have been proposed are constrained by the requisite size and even legality.

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2 November 2011

In a World of Messy Multilateralism, Investors Must Embrace “Macro Diligence”

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Nadar Mousavizadeh, CEO of Oxford Analytica“We are in a political risk environment unlike any we’ve seen in the last 25 years,” declared Oxford Analytica CEO Nader Mousavizadeh in his speech today at the fourth annual CFA Institute European Investment Conference in Paris.

Mousavizadeh, who joined the London-based global analysis and strategic advisory firm after serving as special assistant to UN Secretary General Kofi Annan, went on to explain that we are in the midst of a fundamental crisis of confidence, with citizens around the world lacking faith both in markets and in the ability of political leaders to follow through on promises.

Greece provides an excellent example of the strained relationship between many states and their peoples, Oxford Analytica’s CEO noted. The surprise call for a referendum on austerity measures by Greek Prime Minister George Papandreou may be seen as a political risk for the embattled politician, but it in fact may be necessary to establish his political legitimacy.

Will the Greeks vote for austerity measures for themselves? While the outcome is uncertain, either way Papandreou will have given control back to the Greek people, Mousavizadeh asserted, adding:  “The euro has been 99% an elite proposition.”

By the numbers, Greece is small — less than 2% of eurozone GDP — but it marks a politically powerful chapter in the story of the common currency: If the Europeans cannot deal with Greece, Mousavizadeh asked, how can they deal with the other countries that are sure to encounter risks of their own?

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No Country Would Benefit from Abandoning the Euro, Declares Christian de Boissieu

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Christian de Boissieu, Council of Economic AnalysisThe eurozone needs a dose of supply side economics, said Christian de Boissieu at the fourth annual CFA Institute European Investment Conference today in Paris.

The Chairman of the Council of Economic Advisors to the French Prime Minister argued for major structural reforms to stimulate research and development, innovation, education, competitiveness, and entrepreneurship. Without investing heavily in a sustained reform agenda, de Boissieu contended, the eurozone will flounder at just 1.0- 2.0% GDP growth for the next decade. Eurozone economies would remain undercompetitive and its citizens underemployed.

The council’s thinking was the foundation of French President Nicholas Sarkozy’s €35 billion package, the Grand Emprunt, or “Big Loan,” used to finance the effort in France. But de Boissieu admitted that much more than a one-time stimulus was needed for long-term economic improvement. To avoid further pressure on public finances, he suggested a portion of the large 17% French private disposable savings rate be used to finance additional investments and de Boissieu is hopeful that the policy’s domestic success can ultimately be exported throughout the region. Read More

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“We are Looking Straight into the Face of a Great Depression,” says Simon Johnson

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MIT Sloan School of Management Professor Simon JohnsonIn the opening session of the fourth annual CFA Institute European Investment Conference today in Paris, MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment. “We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund. “We must step back and reform the system.”

Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.”

Johnson began his talk by pointing to the recent failure of MF Global as good news because it “barely caused a ripple in markets, despite its $40 billion balance sheet.” But he contrasted this with the conundrum of “too-big-to-fail” banks in the financial system, which have all benefited hugely from an implicit state guarantee. Citigroup survived even with $2.5 trillion of liabilities at the time of its rescue, Johnson noted, and the U.S. government-sponsored enterprises Fannie Mae and Freddie Mac lobbied hard to pump up their risk — but both had to be rescued by the U.S. taxpayer.

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Livestream: Crisis and Consequences — The Way Forward for the Eurozone

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Crisis and Consequences-The Way Forward for the Eurozone
Livestream with Wolfgang Münchau – 2 November 11:45AM EDT/ 15:45 GMT/ 16:45 CET

New Survey: CFA Institute Members in Europe Weigh In On Eurozone Crisis

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Last week, European leaders put forward a plan for resolving the eurozone’s sovereign debt crisis — a plan that has been thrown into turmoil by Greece’s surprise decision to hold a referendum on the bailout package. Now investment professionals are sharing their views.

In a new survey of 475 CFA Institute members based in Europe — among them, portfolio managers, research analysts, risk managers, and chief-level executives both inside and outside the eurozone — 51% of respondents said that they favor the creation of an EU Ministry of Finance with finance and tax-raising powers as the best solution to the eurozone crisis. In comparison, 33% said that they favor allowing for sovereign defaults and expelling eurozone countries with unsustainable economic deficits, and just 6% of respondents said that the best solution for the crisis would be abandoning the euro and returning to a system of national currencies.

 

Best Solution to the Eurozone Crisis

 

“Whilst it is difficult to predict what may happen to the euro and European markets in the coming months, the respondents remain positive about the longer-term future,” says Nitin Mehta, CFA, managing director for Europe, Middle East and Africa at CFA Institute.

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Livestream: Are We Now Looking at the Face of Another Depression?

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Are We Now Looking at the Face of Another Depression?
Livestream with Simon Johnson – 2 November 2011 4:05AM EDT/ 08:05 GMT/ 09:05 CET