Commentary

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.

The impact the global financial crisis had on financial services has been well documented; however one of the most interesting insights it revealed, was the power of analytics on the industry. When you look at the companies that have emerged the strongest from the crisis, they owe a great deal to the astute use of real-time predictive analytics. These firms had the systems and organizational structures to capture and act upon early warning signals, monitor a changing environment and adjust responses accordingly. They not only understood what happened in the past, but what it meant, and what they needed to do next.

Now, more than ever, there is a greater call for Asia to step up and play a bigger role in international financial institutions and along with this greater role will come the challenges of regulation. United States Deputy Secretary of Treasury, Neal Wolin, on a recent address to the Singapore Exchange, said global coordination on financial regulation will create strength in the international market in averting a future crisis.

Despite a lack of confidence in US and European markets and economic activity, Asia remains a relatively positive environment for investment banks and the talent pool continues to remain tight. Hiring senior bankers to capture this growth remains challenging with execution risk being a significant factor. Far too many processes fall over in the closing days, right at the decisive moment. Some of the seeds of a failed senior recruitment are sown early; others come out of the blue. Unfortunately, many hiring managers still do not pay enough attention to mitigating against ‘deal failures’. Here are the top five ways to mitigate against deal failures in senior IB hires. 1. Ensure a clear understanding of candidate motivations It seems almost obvious to point out that the identification and analysis of the lead candidate’s motivation to move is critical to a successful recruitment, yet it is frequently overlooked and interest itself is taken as a sufficient indicator of motivation. Surface motivations may be very obvious and are as varied as they are numerous – excitement at the potential of the role; a desire to join a superior franchise or platform; dissatisfaction with their current position due to a change in leadership, reporting, resourcing, strategy or compensation issues; feeling complimented by getting the call, to be entertained, to find out competitor information – yes, candidates do this too! - or just boredom and the need for a fresh challenge. It is often the more subtle motivational factors that can be harder to tease out: A desire to leave that is born out fear of declining relevance, or success, or a need to move location for personal reasons. It takes the superior skills to get under the skin of the individual and to identify candidates who have compelling reasons to move and who satisfy the bank’s unique hiring proposition. The motivations should be thoroughly explored ad documented by the search firm and then specifically tested by all on the interview panel. 2. Appropriately manage compensation expectations The compensation mix between basic salary, bonuses, long term incentives and compensation models can be radically different or geared to different time horizons, but at some level, there must be parity or upside. Some hiring managers hope to bridge any gap through force of argument, but success is rare. It is useful to understand the compensation priorities of the candidates and their stage in life or personal circumstances. Presenting an offer without a convincing understanding of the qualitative and quantitative components of the candidate’s best alternative to a negotiated agreement (BATNA) is a clear mistake, and remains too common a reason for late stage collapse of senior hiring processes. If one bank is in the market paying above market packages candidates often think this is their market value it isn’t unless that particular bank is offering them a role. Also candidates will try and trade on their last significant bonus year even if it is not the previous year. In these instances the search firm must be helping their client manage expectations. 3. Adequately and realistically consider competing bids Demand for senior investment bankers who can monetise relationships is very high, and understanding and discussing the complete panoply of options in front of the candidate and their opinions of them is vital. Try to be objective for them rather than just market your own opportunity. Ongoing dialogue with the candidate does not end with their resignation from their current employer. Especially in Asia, other institutions may be happy to attempt to attract candidates away with other opportunities through the gardening leave period. All bankers have their price, either financially or through the changed position, that would convince them to stay. It is also critical to understand, ahead of resignation, the capability of the candidate’s organisation to address his or her professional concerns, and to engage on these issues head on with the candidate. If the candidate’s mindset is not firmly out the door already when they go into resign, the risk of successful counter-offer is always high. For the hiring manager it is very important that they have a line of communication to the candidate while they go through the process, to encourage, react and offer supporting argument where required. As resigning candidates can be bombarded by calls from colleagues looking for explanations and frequently switch off their phones, it can be helpful to supply them with a separate mobile. With the candidate tasked with returning calls to this phone at the earliest opportunity, it can prevent those long silences where the hiring manager is left in the dark about the progress of the resignation process. This is the time to welcome candidates and show them the ‘love’. They have just told their colleagues that they would prefer to work somewhere else and their current management will be making them feel guilty. The pull of their new team at a personal level is therefore important here. 4. Ensure momentum is maintained Banks need to insure against losing momentum by drawing up a checklist of internal requirements early in the process and addressing the easier components as soon as possible, even before completion of the interview stage. Maintain an awareness of the schedules of stakeholders with key signoffs, and brief them on upcoming approvals so that they can reflect and act more quickly when their signature is actually required. The capacity to react quickly can also be important particularly in counter or competitive bid situations. Key internal stakeholders should be informed ahead of time if they need to be on standby, whether it is to mark up an offer to persuade or to motivate, or just to offer advice on a last minute query. Banks are run using complex matrix management with natural tensions often occurring between the global headquarters and Asia regional management, within regions, between business divisions and within business divisions. It is crucial to get a consensus on what a successful candidate will look like and who needs to approve their hire. 5. Find internal consensus Not all internal interview processes are simple and there may be inescapable diversity of opinion or internal complexity. The key here is to make sure that the candidate is clearly briefed on what to expect. Lack of broad consensus from all relevant stakeholders can lead to inconsistency of messaging to candidates, confusion and credibility issues. Shared agreement on what is being sought is the bedrock on which all successful searches are completed. Candidates process the information they receive during interviews as they occur and by the end come to a quick conclusion. Rightly or wrongly they expect potential employers to give them feedback equally quickly. Delays in feedback, or other delays in the recruitment process that are perceived to be within the control of the potential employer may send the wrong message and put candidates off pursuing opportunities. Hiring transformational talent in Asia is not going to get any easier, indeed the challenges are only likely to increase exponentially. Having an integrated business and human resource strategy is still a challenge for some organizations, but even where this is in place there should be a significant focus on hiring plan execution and risk mitigation. Paying appropriate attention to the above areas is critical and will help to mitigate execution risk. However, hiring managers should also be aware of the following: counter offers; changes in candidates’ personal circumstances; missing details in documentation; inadequate referencing; and leaks.  

Heroes of the first decade!