Commentary

What is a Convertible Bond (CB)? CBs are hybrid instruments combining a corporate bond and a buy option on the underlying share. They thus offer the best of both worlds: their equity component allows investors to participate in market upswings, while their bond component offers a protective buffer. Their performance is dictated by credit spreads and the performance of the underlying share. These traits have made this asset class the object of increasing interest, as reflected by the major inflows into dedicated directional funds over the past three years. A special dynamism is evident in the Asian CBs market – the only market of any discernible size among the emerging regions, with USD 20 billion of new issues this year as of November 30th 2011 (48% of 2011 total number of issues / 28% of the total volume). Attraction of Asian CB market? Ø Play Growth While Europe’s future remains uncertain and growth in the US is only gradually recovering, the emerging nations, although not immune to the global slowdown, are still growing healthily. Traditionally regarded as export-oriented economies, the countries of the Asia-Pacific region are establishing themselves as major drivers of global growth by virtue of their size and the pace of progression in their consumption and GDP. Ø Look for asymmetry Against this backdrop, CBs are a smart way for investors to expose themselves to Asian growth, enabling them to benefit considerably from equity market rallies with a “parachute” effect in the event of a decline. They offer an attractive rate of return (superior to their European or US counterparts for the same credit rating) and inexpensive options: the average options of Asian CBs today look cheap. It is worth mentioning that equity sensitivity is quite low in the universe at present. Lower deltas mean the credit component is stronger. Furthermore, it reacts with more volatility for a higher beta region. Ø Dynamism and Diversification With capitalization totalling USD 78 billion (according to UBS), the Asian CB market consists of about 600 securities and constitutes a dynamic and diversified market in which all sectors and major economies of the region are represented. However, roughly half of the pool is issued by Chinese and Indian companies. Even if nowadays about 60% of the pool is listed in USD, we are seeing an increasing number of bonds issued in local currencies (HKD, SGD, AUD, KRW, CNY). Another characteristic of this market is that a large proportion of the bonds issued are not rated, even if the issuing companies are, themselves, subject to a rating (S&P, Moody’s, Fitch). The absence of a rating is not, however, an indication of poor quality. Indeed, a number of issuers are blue chip regional companies. Ø Cheapness CBs are currently attractively valued in technical terms. This is especially true for Asian CBs. The attached chart compares the price of CBs with their valuation based on a sum-of-the-parts analysis (sum of the valuation of the bond component and the option). In other words: Participate in the region’s potential without assuming all the risks CBs thus currently offer an attractive risk/return profile and serve as a useful tool for boosting the performance of diversified portfolios. By virtue of their asymmetric profile, they allow investors to take advantage of the huge potential offered by the region without being exposed to all of the risks. Source: BoA Merrill Lynch

The next generation of cross-border electronic trading is gaining strong traction over the past few years in the global financial markets. Ironically, in some Asian markets, it can take seconds to execute an equities order. For algorithmic traders who use sophisticated algorithms to trade thousands of shares in mere milliseconds, any slowdown in the transactions can mean loss instead of profit. The spilt second is where traders’ enormous opportunities lie.In other words, slow trading speedscan be seen asthe result of hidden transaction costs. Yet, if financial institutions can deliver high speed capabilities while keeping costs down, they can gain a valuable competitive edge while elevating their game. High Frequency Trading (HFT) involves the use of computerized algorithms to generate short-term trading signals with a very short risk-holding period.In 2010, HFT accounts for 70% of the turnover of equity markets and over 50% of U.S. equity trade volume. In Asia, HFT drives 40% of market trading activity in Tokyo and around 10% to 30% in Asia Pacific. So what has been holding Asia’s financial markets back over the past few years? State regulations, opposition from entrenched interests and the lack of critical IT infrastructure are some of the key reasons. The current IT infrastructure of many financial exchanges and financial service institutions in Asia is to be enhanced to meet the anticipated demands for micro-second transactions.Many Asian financial institutions are wising up to this fact – local and regional investors, hedge fund managers and investment banks are exploring all possible means to step up for the IT arms race. Now, IT infrastructure has been widely regarded as a necessity to capture this spilt second advantage and compete with its peers. For most algorithmic traders, HFT means the need for high performance for cross-border electronic transactions. How can financial institutions improve their connections to key Asian financial markets? This calls for a new generation of sophisticated Financial Data Centres that provides proximity advantages and ultra-low latency solution. Proximity advantages, as the name suggested, means proximity to the financial exchange. In Hong Kong, for instance, the first Financial Data Centre, to be completed in 2013, is built next to the Hong Kong Exchange’s next generation data centre in Tseung Kwan O.This physical proximity of the trading systems will significantly matter on the latency networks.

A momentous step forward has recently been taken by the Chinese government in its quest to apply a Value Added Tax (VAT) across both its goods and services sectors.

China’s informal and unregulated shadow banking system has grown rapidly in the past two years, and now accounts for over one-fifth of total credit in the economy. Among the reasons for this rapid growth are: (i) efforts by depositors to shift from standard bank accounts to higher yielding wealth management products; and (ii) incentives for lenders to circumvent tighter prudential regulations imposed on the formal banking system. The shadow banking system has played a useful function in the past, by channeling credit to profitable businesses, especially SMEs that might otherwise have been credit constrained.

Islamic Risk Management standards aim at enhancing and improving the current standards in the shariah compliant banking industry.

What a difference a year makes, or does it? Here we are at the beginning of a new year, ready to manage the challenges before us. It's also a good time to take stock of what has changed and not changed over the past year. Unfortunately, the global economic and regulatory pressures of the past years are still with us, which will have a meaningful impact on how we do business during the period ahead. While favourable trends are difficult to find these days, one of the shining stars is the offshore RMB market. RMB settlement volumes in Hong Kong more than doubled over the past year, RMB cash deposits soared to well over RMB 600 billion and the number of issuers tapping into this market continues to grow. There is also increasing interest in Reg S and Rule 144A securities issuance, and we're hearing about plans to issue the first CNY-denominated sukuk. The most active issuers of CNY-denominated paper are based in mainland China and Hong Kong. They are working through both syndicated and non-syndicated distribution channels, targeting both local and foreign investors. Issuers are mostly using one of two options to tap the “dim sum” bond market, either by issuing RMB-denominated securities through the Hong Kong Central Money Markets Unit (CMU) or the international central securities depositories (ICSDs), such as Euroclear Bank. Within the two options, the issuance process is very similar, except for inclusion of the “lodging agent” that only accompanies issuance through the CMU. International issuers are already familiar with the ICSD issuance process, which is the same as for Eurobonds. We find that issuers are becoming more sophisticated when selecting the place of RMB securities issuance, considering where they will be more likely to reach a local or international investor base. Moreover, if there are any special requirements, such as the need to collect tax certificates specific to the issuer’s jurisdiction, they are including this consideration in their choice of venue. Due to its strong position as an international financial centre and hub to mainland China, Hong Kong has clearly established itself as the natural offshore RMB centre. Singapore, New York and London are also positioning themselves as alternative offshore centres, and RMB-denominated bonds are now even listed in Luxembourg. Trades in some RMB bonds may be settled in a currency other than the RMB, which are known as synthetic bonds. The offshore RMB market is still a relatively short-term paper market. More than 96% of issues have a tenor of five years or less. In addition to RMB-denominated bonds, we are also seeing equities, investment funds and hybrid securities in RMB. Thus, the internationalisation of the offshore RMB-denominated securities market is a reality. And, with this favourable trend comes the responsibility for market participants to manage exposures arising from different types of transactions involving these securities, particularly on a cross-border basis. For example, the CME Group, the world’s largest futures exchange based in the US, will allow international investors to use the RMB as collateral for trading in all its futures products in January 2012. These are some of the reasons why Euroclear Bank is a strong supporter of collateral pooling, where assets held in a domestic market, either in the local CSD or with local banks, can be used to support collateral needs for cross-border transactions outside the home market. This also means that assets held in Euroclear Bank can be as easily moved to the domestic market or abroad for the same purpose. The range of securities that may be used as collateral is enormous, when considering that Euroclear Bank has more than €22 trillion of assets held in custody. The collateral management services to be offered by local entities, such as the local CSD, can be white labelled or offered as a Euroclear Bank service to their clients. Settlement of collateral movements occurs locally between local CSD accounts, and local CSDs retain full ownership of their contracts and relationships with their members. The service can also be extended to help local market participants manage their collateral needs for central counterparty margin management. And, the range of transactions are almost limitless, including repos, derivatives, securities loans, central bank monetary policy operations, access to central bank liquidity and more. The international capital market community has been seeking ways to ease access to China and promote best practices within this fast-changing market. For example, SWIFT and the Asian Securities Industry & Financial Markets Association (ASIFMA) have organised and led various working groups to tackle issues relating to reference rates, the distinction of trade versus non-trade settlement, the differences between onshore and offshore transactions, and the possible need for a new currency code (CNH) for offshore CNY, among others. There are also some exciting developments happening on a pan-Asian dimension. A task force comprising Asian central banks, CSDs and Euroclear Bank are looking to create a post-trade infrastructure for the clearing and settlement of Asian bond transactions. A pilot platform is being conceived for launch in the first months of 2012. The Hong Kong Monetary Authority, Bank Negara Malaysia and Euroclear Bank will streamline cross-border settlement of Asian bond trades, build a common securities database, manage relevant corporate actions, facilitate the primary issuance of new securities and perform the necessary collateral management functions to ease cross-border flows. The beauty of this common approach is that it tackles local market issues and needs using existing infrastructure, thereby limiting up-front investments and providing a quick time-to-market timeframe. Moreover, it enables each country to develop its local bond market at its own pace, offers issuers the opportunity to reach investors in multiple markets through a single platform and provides the foundation for future initiatives to harmonise market rules and practices across markets. We look forward to welcoming other Asian infrastructures to connect to this common platform and to consider the appropriate involvement of other business partners, such as SWIFT and global custodians. The world's capital markets have their sights on the APAC region. While Asia is not immune to the turmoil storming through the US and Europe, the growth prospects of many Asian and South American markets are expected to outperform the western world. The success of the offshore RMB market is clear and is evidenced by the confidence investors have shown in the stability and promise that the region can offer. The infrastructure service providers have an important role to play in furthering progress while keeping a very watchful eye on managing the risks associated with more global market participation in the region.

Everyone working within financial services agrees that the number and frequency of new regulations is increasing dramatically, resulting in a significant diversion of management attention and resources without improving operational effectiveness or firm performance.

“Now this is not the end. It is not even the beginning of the end, but it is, perhaps, the end of the beginning.” Winston Churchill, 10 November 1942 There is no doubt that regulation is a driving force in the payments industry and will be so for the foreseeable future. At the moment however, many minds are focused on the Single Euro Payments Area (SEPA) End Date regulation. Formally known as the European Commission’s proposal for a regulation establishing technical requirements for Credit Transfers and Direct Debits in Euros and amending regulation (EC) No 924/2009, the SEPA End Date regulation promises to deliver a clear deadline for migrating domestic payments instruments on to SEPA standards. This deadline is important because September 2011 migration rates are far from matching set expectations, with only 21% migration for SEPA Credit Transfers (SCTs) and just above 0.1% for SEPA Direct Debits (SDDs) having taken place so far. In the original proposal, full migration to SCTs will occur 12 months after the regulation goes into force and for SDDs, 24 months after enforcement. Member States are permitted to set earlier dates than those outlined in the proposal. Since the proposal was published and debate has taken place at the EU Parliament, most observers now believe a single migration End Date will be imposed, probably for the end of January 2014 for both SCT and SDD migration, that is 24 months after the regulation is voted upon. The next few weeks will still see debates around smaller issues regarding the obligations of end users, consumer protection, etc. The Regulation itself is bound to be voted upon and published beginning of next year. There is therefore not much time for reflection on next steps. Act Swiftly, Act Decisively Although the SEPA advent will hit Eurozone and European banks at first, side effects will be felt for Asian banks running operations in the SEPA zone or transacting in EUR with European banks. This At a time when the SEPA landscape is still being shaped with the forthcoming End Date Regulation, Asian banks should start assessing how they will be impacted now. Some steps to take include:

Imagine having instant and total control of your money. To spend, save, invest and pay whenever you need to just by tapping your finger or saying the word. Today, by and large, you still have to come to your financial service provider, be it online, on a mobile phone or in the branch. But mobile device sophistication, network speed and innovation are converging to place banking straight into your hands. For consumers these developments are good news as they will have greater control of their money than ever before. For banks, however, they represent one of the biggest and most fundamental shifts in the rules of engagement that we have seen in a lifetime. In the future the basis of competition for banks will not be products or channels, but how well they understand the needs of their customers. It will be about how much value they can add to people’s lives. We live differently now. Together, technology and customer demand are driving a complete transformation of how banking is done. There is a growing global tribe of consumers who want anytime anywhere access to services and banking is no exception. These consumers are looking for personalised experiences and they want to be treated as individuals, not aggregated together. The implication of this is that banks cannot continue as before and expect business to stay the same.Banks have to become not only innovators, but also proactive in coming up with solutions that meet customers’ needs, predicting those needs before customers know they have them. This means banks have to transform from utilities into service organisations that offer a great lifestyle experience. I believe that banks now face a choice. Either to continue as they are and see new competitors infringe upon their core business – or innovate and become market disruptive, expanding those same boundaries to take banking into new territory. There is real scope in the next few years for banking to evolve beyond the basics of savings and lending to a much broader set of services. One obvious example is unlocking data in order to offer customers personalised, value-added services – alerting them to nearby deals or new and better ways to grow their wealth. There is no point pretending a transformation on this scale is going to be easy. Banks are large and complex organisations not traditionally focused on innovation or speed-to-market. Today, many face issues getting the right technology for their customers. It is a long leap from there to the brave new world of banking. In the future, banks will have to become serial innovators, move with the urgency of start-ups and look for ideas everywhere. The task is not only to meet customers’ needs but to capture their imagination. It is a challenge but – in an increasingly digitised world – not one exclusively faced by banks. Going forward, the industry has to pay more attention to how banking fits into different contexts – what it lets people do. In many ways, we have only just scratched the surface of how banking is going to change. As the boundaries of consumer banking become increasingly blurred, banks will need to forge new partnerships to meet customer demand. Banks need to study not so much each other, but other industries more adept at engaging and inspiring consumers. They will need to be prepared to form strategic alliances outside of the traditional confines of banking to reach people in the spaces where life is now led.  

There's an interesting twist in the way the Basel III framework for bank regulation will be applied in Australia. This is because, unlike most western countries, Australia does not enough government bonds on issue for banks to hold to meet the liquidity requirements required under the Basel III framework. Over the years running through to 2008, the Australian government ran budget surpluses and the stock of government bonds outstanding was negligible. During the global financial crisis occurred, the government's budget moved into deficit but these were small relative to budget deficits in other western countries and the Australian government has committed to return the budget to surplus in the next fiscal year. In gross terms, bonds on issue of the federal government and state governments are, respectively, 15% and 12% of gross domestic product. To meet a liquidity coverage ratio of 20% of their balance sheets, banks would need to hold bonds equivalent to 40% of GDP. To address this shortage of high quality liquid assets (HQLA), the Australian Prudential Regulation Authority (APRA) proposes that Australian banks will be able to use a back-up liquidity facility provided by the Reserve Bank of Australia for the difference between their bona fide HQLA (cash, deposits with the Reserve Bank and government bonds) and the requirements of the new ratios from the Basel III requirements. And they are to pay a fee of 15 basis points for this liquidity facility. Australian banks (along with the Canadian banks) are under much less stress than banks in other western countries: they had fewer risks when the global financial crisis first hit in 2008; they've maintained strong capital bases; bad debts are relatively small; and their direct exposures to the Euro-zone problems are very limited. Liquidity support provided by the Australian central bank to the banking system has been at normal levels for the last two years, whereas in Europe and the US it is at double to triple the levels that existed before the global financial crisis. Australian banks are finding good opportunity to attract customer deposits, both retail and corporate. As a result, their deposit base has grown more strongly than their lending and the need to raise funds in wholesale markets has declined. Term deposits with banks have become a major asset holding of Australian households and for the 450,000 self-managed pension funds which between them account for almost a third of assets of the pension fund industry. Australian banks have recently been given approval to issue covered bonds (on which the buyer has recourse to both the issuer and the secured collateral). Two of the major banks quickly took up the opportunity; however, their issues of covered bonds were priced at yields similar to those on senior unsecured debt issued by banks. Market participants are expecting Australian banks to make sizeable issues of covered bonds next year - at yields below those on non-secured borrowings. In 2012, the banks have A$80 billion of debt maturing (almost half of it carrying the government guarantee that was introduced in the dark days of the global financial crisis and is closed to new debt raisings). Three major banks reported their full year financial results in early November. Each was a strong result, with rates of return on equity in the 15% to 16% range and useful increases in dividend payments. Australian banks are looking for appropriate opportunities to acquire banking assets, particularly in Asia, should European banks be divesting such assets at attractive prices. 

Despite volatility in the global economy, one long-term trend is certain: economic power, capital inflows and trade activity continue to shift to Asia. Within Asia itself, the banking industry is being reshaped by powerful regional trends including increasing domestic consumption, higher intraregional trade, rapid urbanization and the remarkably fast uptake of mobile technologies that are bringing financial services to millions of people.

The FATCA (Foreign Account Tax Compliance Act) legislation was enacted into US law on 18 March 2010 as part of the HIRE Act (Hiring Incentives to Restore Employment). It comes into force after 30 June 2013. Initial reports indicated that FATCA would create some 1,000 jobs in the US treasury and bring in some much-needed currency to help to manage US budget deficits. Figures between US$100b and US$350b have been quoted as the amount of money that the Inland Revenue Service (IRS) can expect to raise from FATCA.

As the banking industry moves through bonus season, more and more professionals are expected to test their worth on the job market and seek their next career opportunity. If you are one of these professionals, before you start your search make sure you review the below top tips for career success to give yourself the best chance of securing the right job for you.

Through the ABIL project BBVA has managed to create a completely new self-service banking experience. True to their philosophy of customer centric innovation, the ABIL machine was designed using a holistic approach grounded in user desirability, business viability and technical feasibility. 

Mobile financial services (MFS) today encompass a variety of offerings from mobile banking, bill and credit card payments to money transfer and cashless payments, catering to the different usage demands of developed and developing markets. The convenience of having a mobile wallet is extended to every individual who carries a mobile device. With an estimated 83% of the world’s population holding a mobile device as of end 2010 , the potential user-base and demand for MFS is significant. MFS presents a huge opportunity for financial institutions to address the needs of the unbanked population in the emerging markets of Asia, currently estimated at 1.6 billion adults .

Asia Pacific: rapid growth in fast payments The Asia Pacific payments market is sometimes seen as slower than that of the west. Despite this, the region is changing rapidly, with new developments in areas such as mobile payments and workers remittances. Richard Davies, Logica’s Asia-Pacific director, takes a view from the ground, and discusses how institutions in APAC are innovating in high speed payments. Speed in the east In the west, speed is king. With the rising popularity of instant communication methods, such as email, twitter and text messages, consumers – be they retail or corporate – are increasingly demanding that their banking services are delivered in an equally expedient manner. Asia Pacific, however, with its all too often siloed financial infrastructure, is often viewed as slow and less advanced.