Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Property

Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Archive | November, 2016

KPMG targets SMEs with cloud software

Posted on 21 October 2014 by

KPMG, the audit firm that serves 24 of the FTSE 100 companies, is fighting to win business from faster-growing small and medium sized enterprises – by offering a cloud-computing accountancy service for a fraction of its normal fees.

It has spent £40m to develop cloud-based software that can allow businesses to go online and prepare their accounts, do their bookkeeping, administer their payrolls, and file VAT and corporate tax returns.

    Iain Moffatt, head of Enterprise for KPMG, said the new service represented a “transformational change in our business”, and was aimed at the “Googles of tomorrow”. They will be charged a monthly fee starting at £150, rather than the £600 plus per hour charged by senior partners for auditing or advising larger companies.

    By offering these services, KPMG is attempting to take on the market leading providers of accounting software to SMEs, which include Sage, the FTSE 100 technology business, and Intuit, the US company that relaunched its QuickBooks online service last year.

    Sage One, a cloud-based accounting software product, costs from £10 plus VAT a month for basic accounting. Sage and Intuit sell products to accountancy firms as well.

    Traditionally, KPMG has focused on medium-sized and larger companies – leaving the smaller companies to rivals such as Grant Thornton, BDO and Baker Tilly.

    However, by taking them on directly, it is joining an increasingly crowded market for SME accounting services, as larger firms compete to sign up fast-growing SMEs.

    Last year, Deloitte established its “UK Futures” programme – its attempt to work with the 1,000 fastest growing SMEs in the country. PwC sponsors the private business awards while EY runs a global entrepreneur of the year programme.

    Grant Thornton, which has a strong focus on technology businesses, recently published a “mid-market manifesto” detailing policies to help medium-sized businesses grow.

    Matt Smith, of the Centre for Entrepreneurs, a lobby group, said: “Accountants are certainly moving further down the ladder to engage earlier-stage entrepreneurs.”

    Part of their motivation has been the slower pace of recovery at their traditional clients, according to Carl Williams, northwest managing partner of Grant Thornton. He said the bigger firms were searching for revenues after their tax and corporate advisory work reduced in the downturn. “The dynamic growth is in the mid-market,” Mr Williams argued. “The Big Four know that and have started looking for it. But they will return to the big businesses when that work picks up.”

    KPMG said it was hoping to win more lucrative work from SMEs, such as corporate finance advice, as they grow. It is also expanding its middle market private capital business, and plans to hire up to 50 partners and directors across the UK.

    Chris Hearld, Northern UK chairman of KPMG, said the firm needed to identify high-growth, or “gazelle”, companies early rather than approaching them when already established.

    These gazelle companies make up about 7 per cent of the UK business base but account for half of all jobs growth, according to the Nesta think-tank.

    Banks warned of stiffer penalties

    Posted on 20 October 2014 by

    Daniel Tarullo, governor of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, July 11, 2013. Dodd-Frank Act measures designed to prevent a repeat of the global credit crisis will be largely complete by the end of this year, financial regulators told lawmakers at a hearing today on the 2010 law. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Daniel Tarullo©Bloomberg

    Banks are not doing enough to curb misconduct and face stiffer punishment if they do not improve, Federal Reserve Governor Dan Tarullo has warned.

    “If banks do not take more effective steps to control the behaviour of those who work for them, there will be both increased pressure and propensity on the part of regulators and law enforcers to impose more requirements, constraints and punishments,” Mr Tarullo said.

      William Dudley, Federal Reserve Bank of New York president who gave a scathing speech last year criticising bank ethics, on Monday echoed many of Mr Tarullo’s comments. He added that if banks did not shape up, they may be broken up although he did not specify how that could be done.

      “The inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” Mr Dudley warned if banks did not improve their conduct.

      “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.”

      Officials believe investigations into the alleged rigging of benchmark rates and other incidents show that bankers have not learnt lessons from the financial crisis. Mr Tarullo and Mr Dudley cited allegations over manipulation of Libor and foreign exchange rates, facilitation of tax evasion and inadequate anti-money laundering controls.

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      They also said that although banking regulators do not have the authority to criminally prosecute individuals, they can force the dismissal of employees and ban them from working in the industry.

      “Somewhat like criminal prosecutions, these are not easy cases to make,” Mr Tarullo said. “But it is important that we be willing to expend the resources to initiate such actions in appropriate cases.”

      They made their remarks at an NY Fed conference focused on reforming bank culture, which is part of a broader crackdown by regulators on bank conduct amid continuing scandals.

      Bankers were closely watching speeches by regulators for signs of the next steps they may take to crack down on conduct.

      If banks do not take more effective steps to control the behaviour of those who work for them, there will be both increased pressure and propensity on the part of regulators and law enforcers to impose more requirements, constraints, and punishments

      – Dan Tarullo

      Some bankers predict the conference and focus on ethics could be used to strengthen a bank compensation proposal aimed at curbing excessive risk taking, which Mr Tarullo and Mr Dudley cited. Mr Tarullo said he hoped regulators would soon finalise the plan.

      The proposal would require certain executives of the largest US banks to defer at least 50 per cent of their bonuses for at least three years. The amount ultimately paid would be adjusted to reflect any losses during that time.

      What is more worrisome to bankers is the potential for regulators to use the focus on ethics to set up a system similar to the UK’s Banking Standards Review Council, which was created last year to revamp banker conduct.

      Mr Tarullo did not cite the Banking Standards Review Council but Mr Dudley did, noting the attendance of Sir Richard Lambert, who is head of the council. Mr Dudley said similarly to the UK council, he encouraged the largest US banks to work together to improve their culture and rebuild public trust.

      He also said senior management at banks needed to “hold up a mirror to their own behaviour”.

      Investors weigh Venezuela debt default

      Posted on 20 October 2014 by

      Venezuela Ukraine

      In the famous Big Mac index of global currency values against the US dollar, Venezuela makes a surprise entrance as the third most expensive place in the world to eat a burger.

      This unexpected finding can be explained by two factors: the array of fixed exchange rates set by a country that has to import almost everything apart from oil and the rampant inflation that has pushed up prices more than 60 per cent in 2014.

        For investors in the country’s debt, it is not good news. Nor is the fact that oil prices are dropping, reserves are falling and the country is experiencing a widespread shortage of basic goods. As one local blogger wryly pointed out, how will the Economist carry out its Big Mac index in future when McDonald’s may not be able to source the necessary ingredients to make burgers?

        Against this gloomy economic backdrop international investors are reassessing the likelihood of Venezuela making payments on its external debt.

        The cost of buying insurance against a failure by Venezuela to make a payment on its debt via five-year credit-default swaps is now higher than for any other country and last week rose to levels not seen for five years. Meanwhile, the yield on Venezuela’s benchmark 2027 bond hit nearly 18 per cent, the highest in five years. Bond yields move inversely to prices.

        Venezuela’s president Nicolás Maduro insists the country has the resources to meet its obligations, but the country’s spectacular underperformance makes it ripe for default, say economists Carmen Reinhart and Kenneth Rogoff. They note that since Venezuela became independent, it has defaulted on its external debt in 1826, 1848, 1860, 1865, 1892, 1898, 1983, 1990, 1995 and 2004.

        The last decade has been relatively benign for sovereign and corporate defaults and even Argentina’s default earlier this year was viewed as a technical and idiosyncratic event that had little to do with the country’s willingness or ability to pay money to creditors.

        But, after years in which low rates and high liquidity have encouraged bond investors to take greater risks, last week’s volatility in global markets have spurred some to rethink their positions. As a result, yields in debt issued by countries like Venezuela, Ukraine, Greece and Ghana jumped.

        “What is happening in vulnerable bond markets at the moment is a warning about the sort of conditions we could see in all markets if investors start to focus less on the high levels of liquidity and more on risk,” says Richard Jeffrey, chief investment officer at Cazenove. “If views shift, then you might see abrupt changes in prices and yields as investors exit positions.”

        If views shift, then you might see abrupt changes in prices and yields as investors exit positions

        – Richard Jeffrey, chief investment officer at Cazenove

        Deutsche Bank argues that, although the economic crisis and policy inaction in Venezuela have increased the nation’s vulnerability, authorities have the ability and willingness to pay external debts. “We believe the administration recognises the importance of access to external financing and would be willing to take the necessary measures and continue honouring external obligations,” it says.

        Aryam Vazquez, global emerging-markets economist at Oxford Economics, agrees. “The markets had been expecting Venezuela to change its economic policy after it was hinted by a former economy minister and that hasn’t happened so the bonds are being hammered,” he says.

        “But the idea of imminent default is far-fetched. The country has access to a new credit line from China, external debt is not that large in terms of GDP and the government has prioritised paying external debt obligations.”

        Earlier this month Venezuela repaid $1.5bn of debt and debt to GDP levels are far below the debt burdens of Greece, Italy and even the US and UK.

        In Ukraine, meanwhile, where the conflict with Russia continues to weigh on the economy in spite of a $17bn International Monetary Fund programme secured in April, there have been fewer reassurances. The yield on Ukraine’s 2017 bond rose above 16 per cent last week, the highest point since it was issued. The cost of buying protection against Ukrainian default has doubled in the space of four months.

        “If the IMF were to stick to its rulebook, debt should be restructured. But Ukraine’s extraordinarily difficult political circumstances present the IMF with a dilemma,” writes Oxford Economics.

        The tipping point, say emerging markets analysts, could come next year when repayment is due on a $3bn bond to Russia in December 2015. If a default occurred then the shockwaves would be felt across emerging markets, says Nick Hayes, manager of AXA Framlington Asia’s global strategic bond fund.

        “Argentina’s default was highly technical and was seen as an isolated event because the country had the means to pay its creditors. But, if a country defaulted because it was unable to meet its payments, that would come as a shock to bond markets and would be very likely to change the way that risk assets are viewed across all markets.”

        Wall Street wants cyber security group

        Posted on 20 October 2014 by

        People walk by the JP Morgan & Chase Co. building in New York in this file photo from October 24, 2013. Names, addresses, phone numbers and email addresses of roughly 76 million households and seven million small businesses were exposed when computer systems at JPMorgan Chase & Co were hacked in a recent cyber attack, the company said in a statement October 2, 2014. REUTERS/Eric Thayer/Files (UNITED STATES - Tags: BUSINESS)©Reuters

        People walk by the JP Morgan & Chase Co. building in New York

        The financial industry body that represents some of the biggest firms on Wall Street has called for the creation of an inter-agency government group to help co-ordinate cyber security in the face of mounting attacks.

        The Securities Industry and Financial Markets Association, or Sifma, made the recommendation on Monday as it unveils suggestions for how regulators can harmonise cyber security efforts to bolster defences against potential attacks.

          Despite a spate of high-profile data breaches, cyber security guidelines remain a patchwork of conflicting rules and recommendations.

          Creating an inter-agency body to help co-ordinate efforts between the private sector and public bodies could improve cyber security across jurisdictions and different businesses, Sifma said.

          The industry group is also calling on regulators to hold third-party data and service providers to the same cyber security standards as banks and other big financial companies.

          Cyber attacks are “one of the top threats” to the financial services industry, said Karl Schimmeck, Sifma’s managing director of financial services operations. “Collaboration is the best and most effective way to produce a solution.”

          Sifma warned that many of the risks facing big banks, asset managers and other financials could come through third-party partners who are charged with managing electronic systems and storing the vast reams of data used by Wall Street.

          Sifma wants regulators to “increase their coverage of third parties and put pressure on these third parties to meet the regulatory expectations of the financial services firms that they serve”.

          Assessing cyber security measures is currently part of regular bank examinations conducted by the Federal Reserve and the Office of the Comptroller of the Currency.

          But regulators have also called for tough standards for all of the parties involved in cyber security breaches to eliminate weak links between third-party vendors and banks.

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          Cyber warfare

          Cyber security

          As online threats race up national security agendas and governments look at ways of protecting their national infrastructures a cyber arms race is causing concern to the developed world

          Further reading

          “We see the asymmetry in the requirements of non-bank companies, or the absence of requirements for non-bank companies to take measures to protect personal information,” Fed Governor Dan Tarullo said in testimony to Congress in September. “I feel to some degree we’ve all got one hand tied behind our back.”

          The Obama administration has also urged Congress to pass stalled legislation that would set up national standards for reporting cyber security breaches. Senate Judiciary Committee Chairman Patrick Leahy, the Democratic sponsor of the bill, is working on a bipartisan compromise with Senator Chuck Grassley in hopes of moving the plan forward, according to a person familiar with the efforts.

          Financial institutions also worry about the potential pitfall of sharing information on cyber security. For example, there are different interpretations between the US and Europe about whether IP addresses are public or private, and can be shared.

          A bipartisan bill sponsored by the Senate Intelligence Committee in July attempted to address some of those concerns. The bill provides for liability protection when sharing cyber security threat information between the government and the private sector.

          Sifma has been pushing politicians to enact legislation that would make cyber “info-sharing” easier. But given that Congress will return in November to a lame duck session, political analysts are pessimistic that lawmakers will do so for the remainder of the year.

          Recommendations from Sifma come days after the Financial Times revealed that Fidelity Investments, one of the largest US mutual fund companies, was one of 13 financial institutions attacked by hackers believed to be the same group that stole customer information from JPMorgan Chase.

          The attack on JPMorgan resulted in the theft of names, addresses and other personal data from about 76m US households.

          Credit Suisse sued over Azerbaijan venture

          Posted on 20 October 2014 by

          Credit Suisse reported a 14 per cent rise in FICC revenues©Bloomberg

          Credit Suisse is being sued in a High Court trial over alleged “shortcomings” in its role over the sale of a company with rights to the largest onshore oil and gas project in Azerbaijan.

          Two companies owned by Zaur Leshkasheli, a Georgian businessman, allege that the Swiss bank failed to seek the best price on the 2008 sale of Caspian Energy Group, an oil firm set to up to work with the state oil company to develop the Kurovdag field, southwest of the capital Baku.

            Mr Leshkasheli’s companies
            , which owned an interest in Caspian Energy, are suing Credit Suisse for alleged breach of contract and negligence.

            Caspian, which was in a joint venture with the State Oil Company of Azerbaijan Republic (Socar), was eventually sold for $245m to Berghoff/GEA, a company linked to Russian oil magnate, Mikhail Gutseriev, the former chairman of RussNeft.

            However, Mr Leshkasheli alleges that Credit Suisse did not consider alternative offers including interest from Gazprom, Russia’s fourth-largest oil and gas producer, and claims he might have received at least $700m more for his stake.

            “What happened, or did not happen, with Gazprom Neft is perhaps the most glaring example, where its interest in acquisitions was known, its interest was keen, and it could have been exploited, but was not even explored,” written arguments for Mr Leshkasheli’s companies claim in the trial that opened on Monday.

            Credit Suisse had granted the two companies a loan on terms that required Caspian to eventually be sold using Credit Suisse as a mergers and acquisitions adviser.

            In opening arguments Jeremy Cousins, QC, representing Mr Leshkasheli’s companies, told the court that it was a legal principle that someone selling an asset on behalf of another owed a duty to obtain the correct price.

            However, the Swiss bank, which is defending the claim and is expected to open its case on Tuesday, alleges in its written arguments to the trial that Mr Leshkasheli “did not explain to the bank when he obtained the loan that there were very serious issues brewing between him and Socar and he could not count on their co-operation in the sale.”

            The sale to Berghoff/GEA “was the highest offer then available” and “the best price obtainable in the circumstances,” Credit Suisse claims.

            “The Claimants have, with the benefit of hindsight and a microscope, sought to identify every conceivable mistake or shortcoming in the sales process in the hope of establishing a breach of duty,” the bank continues in its court documents.

            The trial continues.

            Berlin and Paris paper over budget cracks

            Posted on 20 October 2014 by

            German Finance Minister Wolfgang Schaeuble (L) and French Finance Minister Michel Sapin address a joint press conference with the German and French Economy Minister at the Finance Ministry in Berlin, on October 20, 2014. German finance and economy ministers Wolfgang Schaeuble and Sigmar Gabriel meet their French counterparts Michel Sapin and Emmanuel Macron to discuss growth, as Paris seeks to avoid problems with the EU over its budget deficit. AFP PHOTO / TOBIAS SCHWARZTOBIAS SCHWARZ/AFP/Getty Images©AFP

            Wolfgang Schäuble (left) and Michel Sapin

            The French and German finance and economy ministers on Monday pledged to revive the stagnant eurozone economy by boosting investment.

            But any hope that the four-way meeting in Berlin would produce concrete reform proposals were quickly dashed when the ministers failed to provide details of their discussions.

              They studiously avoided criticising each other on the two big issues that divide Berlin and Paris – German demands that France reduced its planned 2015 budget deficit, and French calls for a public investment boost in Germany.

              “Each country – France, Germany and other EU countries – has its own tasks to solve,” said Sigmar Gabriel, Germany’s economy minister. Emmanuel Macron, his French counterpart, said: “Everyone should do what’s good for him at home, because what’s good for France is good for Germany and what’s good for Germany is good for France.”

              Wolfgang Schäuble, German finance minister, dodged a question on France’s proposed 2015 fiscal deficit target, saying it was for the European Commission to make the decision. Berlin is known to be critical of the planned 4.3 per cent deficit, in excess of the eurozone’s 3 per cent ceiling.

              Meanwhile, Michel Sapin, the French finance minister, insisted the budget rules were essential to the EU’s credibility but gave no hint that he might revise his budget. “It’s not about breaking or modifying rules – it’s about applying rules in the context of today, with very weak inflation and very weak growth,” he said.

              Mr Sapin’s and Mr Macron’s tone was quite different from that of an interview they gave earlier to the Frankfurter Allgemeine newspaper in which they called on Germany to raise investment by $50bn by 2017, to match the $50bn Paris is proposing in budget cuts.

              Mr Gabriel finessed an answer about this demand, saying the figure fitted well with the ideas Germany was already developing to raise the share of investment in gross domestic product from 17 per cent to 20 per cent, the average for the OECD, the rich countries’ club. He emphasised this would be done by promoting private investment – avoiding any concession to French pressure for Germany to relax its zero 2015 fiscal deficit target. The ministers left it to a meeting on December 1 to identify concrete investment plans.

              The immediate question remains what the European Commission will do later this month when it announces scrutiny of the French budget, and of Italy’s, which also comes close to breaking EU budget rules.

              Paris and Rome are resisting pressure from Brussels – and from Germany – to make revisions. Chancellor Angela Merkel last week told the German parliament: “All member states must accept in full the strengthened [fiscal] rules.”

              At the weekend, Der Spiegel magazine reported Ms Merkel’s officials had assured Paris that they would oppose penalising France if it failed the commission’s tests. In return they would seek a structural reform timetable.

              However, Norbert Röttgen, chairman of the German parliament’s foreign affairs committee, told the Financial Times that Ms Merkel had been so determined in her defence of budget rules that there was now “no political room for manoeuvre”.

              “I am convinced we need a compromise. But there is little room for a compromise.” he said.

              Willis in London insurance deal talks

              Posted on 20 October 2014 by

              Willis Group is in exclusive talks to take a majority stake in smaller rival Miller Insurance Services as pressure on wholesale insurance brokers is driving consolidation in the sector.

              US-listed Willis will obtain control of Miller and transfer its wholesale businesses to the 112 year-old UK company, which specialises in broking general insurance contracts. In return, Miller will transfer its retail-orientated and treaty reinsurance businesses to Willis.

                Miller, which had revenues of £113m last year, will continue to operate under its name and its partners at the company will retain a “significant partnership interest”.

                The sides said the talks are advanced, but warned that they could still fall apart.

                Barrie Cornes, an insurance analyst at Panmure Gordon, said the deal appeared to be a sensible combination. “There’s been increased competition among wholesale brokers to compete for business driven by too much capital in the non-life insurance sector. That puts pressure on the insurance premiums, which in turn puts pressure on insurance broking revenues.”

                The move comes two months after Willis rival JLT, the London-listed insurance broker, said its specialist insurance brokerage would combine with Lloyd & Partners to expand its international reach.

                Dominic Casserley, chief executive of Willis, said the combination “confirmed Willis’s deep commitment to London and the London insurance market”.

                Shares in Willis, which has a market capitalisation of $7.2bn, rose 0.5 per cent to $40.48. The company is one of the larger insurance brokers globally, competing with the likes of Aon and Marsh & McLennan Companies.

                Investors turn to junk ETFs amid sell-off

                Posted on 20 October 2014 by

                Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings.

                The research comes days after funds comprised of low-rated corporate debt recorded heavy outflows as investors sold riskier assets on concerns over economic growth.

                  It also comes in the midst of a heated debate over the soundness of the ETF structure when applied to securities such as high-yield corporate bonds.

                  Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.

                  Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.

                  The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated.

                  “It appears there’s some migration of trading to high-yield ETFs and that may be a commentary on the underlying liquidity conditions of the high-yield market,” said Robert Grossman, managing director of Fitch’s macro credit research.

                  Fitch’s analysis was echoed by market participants watching last week’s sell-off.

                  iShares, the ETF provider owned by BlackRock, published a statement noting: “On one of the most volatile days in the market this year, investors turned to iShares to express their market views.”

                  The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.

                  The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.

                  “We definitely saw ETF spreads go a little wider,” Eric Lichtenstein, part of the ETF market-making team at Cantor Fitzgerald, said of last week’s price action.

                  “But there’s so much volume in the ETFs now that certainly the ETF is trading at a better valuation than the underlying.”

                  “The ETF was giving you a real-time view as to where the fixed income market was going,” he added, noting that the HYG traded 8m shares on Monday last week, a US holiday.

                  The difference between the liquidity promised by ETFs and their underlying assets has prompted concerns
                  over the ability of some of the funds to withstand market stress or potentially distort prices.

                  ETFs rely on a complex ecosystem of banks and other financial players in order to create the “liquid wrapper” that makes them work.

                  During last year’s taper tantrum, at least two of the big financial companies that support ETFs curbed redemptions on some of their fixed income ETFs amid heavy one-way selling.

                  Market-makers at Cantor said there had been no similar incidents last week.

                  “To the extent that there’s selling of high-yield ETFs that results in redemptions, that could put pressure on the underlying market,” said Mr Grossman at Fitch. “We didn’t see it in the most recent period [of market stress] but that’s something that remains a concern.”

                  Goldman clash sheds light on Libyan fund

                  Posted on 20 October 2014 by

                  Saif al-Islam Gaddafi, left, and Mustafa Zarti

                  In 2008, Catherine McDougall was a young Australian lawyer seconded to the Libyan Investment Authority’s offices in Tripoli to assist its legal team and review financial transactions conducted by Goldman Sachs.

                  She was “shocked” by what she learnt, according to her witness statement detailed in a London court earlier this month.

                    In it, Ms McDougall details a “very angry tirade” allegedly unleashed by Mustafa Zarti, then the deputy director of the LIA, towards Goldman bankers Youssef Kabbaj and Nick Pentreath at the sovereign wealth fund’s 22nd floor offices at Tripoli Towers in a meeting in July 2008.

                    This meeting is among revealing details thrown up by a $1bn court case filed by the LIA against Goldman. The litigation is being closely watched for the light it sheds on the banking world and what was once one of the world’s most opaque state investment vehicles.

                    Key players in LIA

                    For a closer look at some of the personalities behind Libya’s opaque sovereign wealth fund

                    See below

                    Set up in 2006 by Colonel Muammer Gaddafi’s son Saif al-Islam to exploit the country’s vast oil wealth as it was emerging from 20 years of sanctions, the LIA started with $65bn of assets.

                    Western banks and hedge funds, including Goldman and Och-Ziff Capital Management, began intensely courting the world’s biggest sovereign wealth funds as a source of fresh capital in 2007 as they sought to replenish balance sheets battered by the global financial crisis.

                    On the LIA’s advisory board sat Lord Jacob Rothschild, scion of the famous banking dynasty, and Sir Howard Davies, the former regulator who had to resign as director of the London School of Economics in 2011. An independent report later found that £1.5m in donations the university accepted might have been the proceeds of bribes paid to the Gaddafi family by companies seeking “business favours” from the regime.

                    To head up the fund, Mr Gaddafi appointed his university friend Mr Zarti, and by 2010 the LIA had built a large share portfolio, accumulating stakes in foreign assets ranging from newspapers to football teams.

                    But it had also unwittingly entered into riskier financial derivative transactions that turned out to be lossmaking.

                    Now, the LIA is fighting back against the banks through litigation. In a pre-trial hearing, the LIA’s barrister claimed the wealth fund had been “taken for a complete ride” by the US bank.

                    It was at that 2008 meeting when the relationship between the LIA and Goldman allegedly began to unravel after the LIA questioned nine financial trades detailed in the pre-trial hearings.

                    Mr Zarti screamed and swore at the two Goldman Sachs bankers as he claimed the investment bank had “screwed” the LIA and that he “could come after their families”, her witness statement says.

                    “His curses were along the lines of ‘f**k your mother, f**k you and get out of my country’ and the two bankers seemed ‘very fearful and quickly gathered their things and left’,” Ms McDougall adds.

                    Goldman is fiercely contesting the lawsuit that it calls a “paradigm of buyer’s remorse”. It alleges in its defence document that LIA executives included “highly experienced” bankers who were perfectly capable of understanding the deals and that the LIA was not “as it now contends, financially illiterate”.

                    The US bank is one of several western financial institutions whose dealings with the LIA have come under scrutiny.

                    In March the LIA filed a $1.5bn claim against Société Générale and five others, accusing the French bank of helping to funnel bribes to close associates of Mr Gaddafi. SocGen said it planned to contest the High Court claim that it considers “groundless and without substance”.

                    LOS ANGELES, CA - FEBRUARY 10: Singer/songwriter James Blunt and Sofia Wellesley arrive at the Warner Music Group 2013 Grammy Celebration Presented by Mini at the Chateau Marmont on February 10, 2013 in Los Angeles, California. (Photo by Joe Scarnici/Getty Images for Warner Music Group)

                    Sofia Wellesley, right, and James Blunt

                    The Goldman court battle has even dragged in Sofia Wellesley, pictured, the granddaughter of the Duke of Wellington who has just married pop star James Blunt.

                    Written arguments submitted to the hearing by the LIA quoted a 2007 email sent by Ms Wellesley, then working for the fund, saying it was staffed by “a team of clearly naive and unqualified individuals . . . doing their best in the face of extremely intelligent, ambitious and experienced individuals”.

                    However, in its written arguments for the hearing, Goldman claims the LIA’s trades “were not difficult to understand” and “there is no suggestion that the LIA lacked sophistication to make those investment decisions”.

                    Robert Miles, QC, acting for Goldman, told the court that the LIA’s case depended on the fund demonstrating that its staff were “unsophisticated” about finance. He added some of the claims made by the LIA about corporate hospitality were “tittle tattle”. Goldman claims that the LIA “freely entered into commercial bargains which have turned out badly for it”.

                    The US bank has already said in its defence that its relationship with the LIA did not go beyond “an arm’s-length one between banker and client”. It denies that the LIA was “acting under the defendant’s influence”.

                    The LIA is now considering further legal action to recover $700m it invested in Netherlands-based Palladyne International Asset Management and to investigate several other smaller transactions.

                    PIAM, which is led by Ismael Abudher, the son-in-law of Libya’s former oil minister, is accused in a separate lawsuit filed by a previous employee of serving as a “kickback and money laundering operation” for the former Libyan regime. Palladyne has referred to the allegations as “untrue and ludicrous”.

                    The litigation is being seen as a way of drawing a line under the LIA’s turbulent past and the Gaddafi era. But it is also likely to help the LIA’s newly appointed management team, which has set about driving up standards of corporate governance, to move forward with more certainty about its direction.

                    Key players in the Goldman-LIA saga

                    Mustafa Mohamed Zarti was the deputy executive director of the LIA and was a friend of Saif al-Islam Gaddafi, pictured, the son of the former Libyan dictator.

                    Saif al-Islam Kadhafi, son of Libyan leader Moamer Kadhafi, speaks during an interview with AFP in Tripoli on February 26, 2011 amid political turmoil and an insurrection against Kadhafi's crumbling regime. AFP PHOTO/MAHMUD TURKIA (Photo credit should read MAHMUD TURKIA/AFP/Getty Images)©AFP

                    Saif al-Islam Gaddafi

                    The pair met in Vienna while Mr Zarti was studying for an MBA at Webster University. At the time Mr Gaddafi was also studying at Imadec business and law school.

                    Mr Zarti previously worked for the Opec Fund for International Development between 2003 and 2005, according to court papers. While at the LIA, Mr Zarti and his team started building a stock portfolio in large companies. He became deputy head of the LIA in 2007.

                    In a witness statement lodged before the court, Catherine McDougall says Mr Zarti “was keen to show he was connected to the London elite and would drop names like Rothschild”.

                    Driss Ben-Brahim hit the headlines a decade ago for being paid millions of pounds in bonuses while at Goldman. The star banker joined Goldman in 1994 where he quickly made a name for himself as a specialist fixed income and derivatives trader.

                    Born to a Moroccan father and Austrian mother, he spent time at the European Bank for Reconstruction and Development and joined Goldman in 1996 specialising in fixed income and derivatives. He later jumped ship to GLG Partners, the hedge fund, from where he stepped down in 2012 as co-manager of Man’s GLG Atlas Macro Fund.

                    He graduated as an applied mathematician and engineer from Ecole Centrale de Paris in 1987 and earned an MBA from Insead in 1990.

                    Roger Masefield QC, acting for the LIA, told the High Court in the pre-trial hearing an email from Youssef Kabbaj in April 2008 with the subject “Driss” – referring to senior Goldman banker Driss Ben-Brahim – details a conversation with Mr Zarti about investments and claimed that it showed “[Goldman’s] roles as between principal, financier and adviser have become completely blurred”.

                    Libyan ambassador to the United Arab Emirates Aref Ali Nayed (L), Coordionator of Finance Sector-Libya Stabilization Team, Wafik Shater (2nd L), listen to Hatim Gheriani, member of the Steering Committee-Temporary Financial Mechanism, during press conference at the Libyan consulate in Dubai on September 21, 2011. AFP PHOTO/KARIM SAHIB (Photo credit should read KARIM SAHIB/AFP/Getty Images)©AFP

                    Hatim Gheriani, pictured, led a team that built the LIA from its initial start-up phase, and he was in charge of the fund’s alternative investment team from 2007. He holds a masters degree in finance and investments and had worked previously at the Libyan Foreign Bank, according to court papers.

                    He was also on the board of Banco Arabe Espanol with Mr Zarti. Mr Gheriani left the LIA in 2010 to work for HSBC in Dubai.

                    Youssef Kabbaj formerly served as Goldman’s head of North Africa. Ms McDougall, who at the time was seconded to the LIA, in a witness statement to the court said she was told by LIA staff about a “lavish trip to Morocco” and that there was “heavy drinking and girls involved” and the trip was paid for by Mr Kabbaj, mostly on his Goldman corporate credit card. There were also “expensive nights” in London, she said in the statement.

                    Mr Kabbaj left Goldman in 2009 to join GLG. He left the hedge fund in January 2013 to join Exotix, the expert in illiquid, emerging and frontier markets.

                    Basel to speed up leverage ratio work

                    Posted on 20 October 2014 by

                    Global regulators are speeding up work on the leverage ratio, a measure of bank capital that is seen as less vulnerable to manipulation, as leading countries push for a tougher benchmark.

                    The Basel Committee on Banking Supervision will now start work on the calibration of the leverage ratio next year, sooner than previously planned, said William Coen, the secretary-general of the Basel Committee, at an event in London.

                      The decision to fast-track the process suggests the finished rule could be unveiled as soon as 2015 or 2016, instead of the previous target date of 2017.

                      “We are publicly committed to finalising it by 2017. I think there is an appetite on the committee to start that work sooner rather than later,” Mr Coen told reporters.

                      The standard would still need to be consulted on, and the ratio will not be formally enforced on a global level until 2018. However, earlier clarity will probably lead to investor pressure on banks to accelerate their efforts to comply.

                      Under the traditional capital regime, banks’ loans and other assets are weighted by risk, leaving them susceptible to being skewed as banks use their own internal models to calculate capital.

                      But the leverage ratio simply relies on the value of the assets without reference to risk. That definition makes it harder for lenders to game the outcome and leads some regulators to see it as a more reliable measure.

                      The Basel Committee has already set a provisional leverage ratio that requires banks to hold capital equal to 3 per cent of their total assets, but it is likely to raise the number in its final calibration, given recent moves in some leading jurisdictions.

                      The US is already telling its banks they will have to maintain leverage ratios of 5-6 per cent. In the UK, the Bank of England is expected at the end of this month to announce its own leverage standard, with analysts predicting a ratio of at least 4 per cent and possibly more than 5 per cent.

                      Basel’s decision to move more quickly reflects a desire to minimise uncertainty among investors and bankers.

                      The committee is also by December expected to set out a hard floor for bank capital, limiting banks’ ability to use their own internal models to reduce risk-weights and therefore cut their capital needs.

                      The move comes as the Basel Committee attempts to hammer out a number of key elements of its regulatory agenda, including the upcoming publication of its net stable funding ratio – a liquidity standard.

                      The NSFR aims to ensure banks hold a minimum amount of stable funding based on the characteristics of their assets.