PRESS RELEASE

London, 29 April 2013

BOURSE CONSULT LLP ANNOUNCES NEW SENIOR PARTNER

Bourse Consult LLP, the leading capital markets infrastructure consultancy, today announced that Hugh Simpson has been appointed as Senior Partner of the partnership. Hugh takes over the running of the partnership from its founder, Lynton Jones, who becomes Chairman Emeritus.

Hugh has been a leading member of the partnership since 2005 and has participated in several major projects. He is currently Advisor to the European Central Bank on their T2S securities settlement project and is a non-executive director of CME Clearing Europe. Prior to joining Bourse Consult, Hugh has been CEO of Crest (whose merger with Euroclear he led) and held senior positions at the Bank of England and the IMF.

Lynton Jones, who is stepping down as chairman of the partnership after leading it since its inception in 2002, said “I am delighted that Hugh is taking over the management of Bourse Consult. He brings a broad range of expertise to the position and is a very well regarded senior figure in the industry. His specialised knowledge of settlement has been a major advantage to Bourse Consult in the many projects it has now completed and I have no doubt that the partnership will continue to grow and prosper under his leadership.”

Hugh added “It is a great pleasure for me to be taking on this role. I am fortunate to have as colleagues in Bourse Consult several individuals who have an eminent background in the capital markets infrastructure field and I am honoured by their vote of confidence in me. I feel sure that the excellent reputation Bourse Consult has established in this field over the last eleven years will continue to be enhanced in the years to come, and I look forward to playing a leading role in that growth.”

NOTE TO EDITORS

Bourse Consult was founded in 2002 and since then has participated in a number of major projects. It led the project to create the Dubai International Financial Exchange (now Nasdaq Dubai), and participated in the project to build the Hong Kong Mercantile Exchange. More recently it has led the research into the creation of a Renminbi market in London and has authored a number of well-received publications on, inter alia, The Competitive Impact of London’s Capital Market Infrastructure, The Future of Clearing and Settlement in Europe and the City’s Role in Providing for the Public Equity Financing Needs of UK SMEs. It has during recent years worked for clients in the UK, Australia, Brazil, Israel, the Gulf, Morocco, Nigeria, Kenya, Poland, South Africa, Sweden and the United States.

CONTACTS:

Lynton Jones:   jlj@bourse-consult.com, +44 7771 993 048

Hugh Simpson: hs@bourse-consult.com, +44 7976 357 360

Basel III, the global regulatory standard on banking regulations including capital adequacy, imposes prohibitive capital penalties on banks which deal with clearing houses that aren’t CPSS-IOSCO compliant. As part of its preparation for Basel III (which comes into force from 2013), the JSE asked Bourse Consult to undertake an audit of JSE’s clearing house, Safcom, to determine its alignment with these CPSS-IOSCO principles.  As a result of this work, several detailed recommendations were made to the JSE on how Safcom could become fully compliant.

JSE undertook the necessary work to achieve compliance throughout the latter part of 2012. Following these changes its regulator (the Financial Services Board, FSB) undertook a comprehensive review which resulted in Safcom now being certified as a “Qualifying Central Counterparty” (CCP). This achievement is very important to derivative traders because failure to comply means banks would have had to hold up to ten times more capital as surety, resulting in the derivatives market becoming increasingly expensive to trade in.

Safcom is the first Clearing House in the world to obtain this status. Bourse Consult congratulates JSE on this important achievement and is proud of its role in this exercise.

The full press release can be read here.

Politicians in the last days have done enormous damage to regulators and the regulatory structure in its baying for blood against Barclays and some of its employees. Hitherto, enforcement actions against investment firms were the business of regulators. No more it seems as politicians seek their own prosecutions in the press and in the court of public opinion.  

The SFO’s belated decision to launch a criminal enquiry into the actions of Barclays sets a dangerous precedent for both regulators and the regulated community. In its investigation into this case the FSA (which was solely responsible) had a number of ways to deal with the situation. It could have: undertaken disciplinary measures under its civil powers; agreed a settlement under its civil powers with a reduced penalty (which was the initial outcome); or, pursued a criminal prosecution with the police or the SFO. But only one should have been pursued, not two as now seems apparent.

The FSA clearly came to the view, for one assumes good reasons, that negotiating a settlement with Barclay’s under its civil powers was the best solution and in the public interest. It is important to note that it would have taken this decision after very careful consideration and after consulting its own lawyers and perhaps external counsel. It may have even consulted the SFO and it is also quite likely that the Bank of England would have been informed also, as the Bank of England is partly responsible for the oversight of wholesale banking under the Non-Investment Products Code (Although we haven’t heard much of this fact, perhaps because the FSA is a dead duck but the Bank is the next regulator.)     

Now in the clamour by politicians to look the toughest and not responsible, and in an attempt to gain the political high ground it appears strongly that the SFO has been badgered into an investigation, and the ground cut away from under the FSA in its decision to settle. This is extremely damaging to FSA and to us all in the industry.

In the event of wrongdoing it is accepted industry practice that it is easier and cheaper for both sides to reach a settlement if at all possible. This is why FSA gives a discount for cooperation and an agreement to settle rather than fight. The quid pro quo is that the matter is then regarded as closed with no further action taken. The lawyers on both sides would have negotiated the settlement in good faith and in the knowledge that closure was part of the settlement. Barclays was not under any compulsion to settle and could have fought the case possibly with a reasonable chance of success. Market manipulation (rather than insider dealing) is an extremely difficult matter to prove and it is no coincidence that FSA enforcement actions or criminal prosecutions for the offence are extremely rare – in the UK no more than a handful since the regulation of markets first came about in 1986. To prove beyond reasonable doubt (which is necessary not only in a criminal action but also under FSA’s own civil powers in a serious case such as this with a large financial penalty) that these actions were market manipulation is likely to be extremely difficult in the first place and more so as this relates to a reference price which impacts investments rather than being an investment itself. All this difficulty no doubt influenced the FSA to agree a settlement. Better to have a fine of almost £50 million than a protracted and expensive prosecution which might fail. And, if the individuals were subsequently sacked (as we have been given to understand) and their authorisation withdrawn, FSA could raise significant difficulties for them if they surfaced again and reapplied for authorisation.    

FSA is now in the appalling position of having its word impeached by a politically motivated decision. Who now can trust FSA in settlement negotiations knowing that they might be trumped by politicians and exposed to a double jeopardy? Why should a firm or individual ever trust the FSA again? Also, what now is the status of this settlement? Is it potentially invalid and can Barclays even try to get its money back?

Whatever the rights and wrongs of this case, worse than the damage done to Libor is the damage now done to the reputation of FSA (and its successor the FCA) which looks weak and incompetent and prevented from abiding with what it agreed and is right in law. And finally the SFO is also in a terrible position in being forced to pursue a case which was likely to be difficult to prosecute with any chance of success, and now made worse by politicians seeking the high moral ground and perhaps prejudicing the chances of a fair trial.

The writer has worked for the Securities and Investments Board (the forerunner of the FSA) in senior capacity as a markets supervisor, and additionally has been extensively involved in enforcement actions for market manipulation, first as a prosecuting authority for exchanges, second as a member of a disciplinary regulatory panel (the SFA), and finally as an expert witness acting for the defence.

The Oxford Institute for Energy Studies has recently published a paper by Associate Consultant Patrick Heather which assesses the development of the European Continental Gas Trading Hubs.

The paper is a natural successor to Patrick’s 2010 paper ‘The Evolution and Functioning of the Traded Gas Market in Britain’.  Although the drivers and challenges for gas trading on the European Continent have been different from those of Britain, the desire for change at an EU policy level, the catalyst of the economic recession and the sea-change in the acceptance of trading have all contributed to an astonishing development in European gas hubs over the past few years.

Based on extensive research and discussion with the key actors intimately involved, the paper provides deep insights into the characteristics of the individual hubs, the reasons behind their particular evolutionary path and their characterisation as ‘Trading Hubs’ (NBP and TTF), ‘Transit Hubs (ZEE and CEGH) and ‘Transition Hubs’ (GPL, NCG, PEGs and PSV); a framework which assists the reader in better understanding the current and future role of each.

The paper provides a comprehensive and timely review of gas market developments against the backdrop of the on-going transition from long term oil-indexed contracts to hub based contracts.  In anticipation of this transition reaching its logical conclusion, the question in the paper’s title i.e. “are the European gas hubs fit for purpose?” relates to the ability of the hubs to provide a reliable basis for hub-based pricing in long term contracts.  After studying the development in trading liquidity and the close correlation of prices between the hubs, the answer from this paper is an emphatic ‘yes’ although the exact roles of the individual hubs will probably continue to differ.

The paper will be of great interest to all who have an interest in understanding Europe’s natural gas market especially as it continues in its transition from the ‘old world’ of oil indexed contracts to the new age of traded markets.

THIS PAPER IS FREE TO DOWNLOAD
http://www.oxfordenergy.org/wpcms/wp-content/uploads/2012/06/NG-63.pdf

The UK Chancellor of the Exchequer joined leading City institutions today (18 April) at the Gherkin, 30 St Mary Axe, to launch a new initiative designed to strengthen London’s position as the leading western hub for international renminbi (RMB) business – and boost the RMB’s wider international use for trade and investment.

The City of London initiative on London as a centre for renminbi business will help deliver a private and public sector strategy for London to become a centre for RMB products and services, complementing Hong Kong and other financial centres. A new report published by the initiative today quantifies the already significant renminbi business being done in London.

The initiative is facilitated by the City of London Corporation. The current members are Bank of China, Barclays, Deutsche Bank, HSBC and Standard Chartered, with observers from HM Treasury, the Bank of England, and the Financial Services Authority. The initiative seeks to provide leadership to the wider financial markets on technical, infrastructure and regulatory issues relating to the RMB product market in London.

It also advises HM Treasury on maximising London’s capacity to trade, clear and settle RMB and articulates practical next steps and long-term aims for the further development of the RMB market in London. Additionally, the group advises HM Treasury and other UK authorities on any financial stability concerns members may perceive.

George Osborne, Chancellor of the Exchequer, said:

“I welcome this initiative, which will further strengthen London’s development as the leading Western Hub for the international Renminbi market. As the world’s leading financial centre, London is uniquely well placed to assist China in its goal of further expanding the international use of the RMB.”

Stuart Fraser, Chairman of the initiative’s Steering Committee and Policy Chairman at the City of London Corporation, said:

“As the world’s leading global financial centre, London is perfectly positioned to act as the western hub for RMB as exchange controls are gradually relaxed. London has many natural advantages, including: time-zone, a trusted legal system, a respected regulatory framework, deep pools of liquidity and a strong track record of innovation. We are also home to global institutions that have expertise in utilising RMB-denominated products and services to benefit clients by facilitating trade with China. This will increase exports and help deliver jobs and growth in the UK and Europe.”

The report published today by the initiative presents a picture of the renminbi products and services offered by London institutions and the volume of business traded in London in 2011. London: a centre for renminbi business, commissioned by the City of London Corporation and authored by Bourse Consult, demonstrates that a significant amount of renminbi business is already being done in London, including services for retail clients, services for corporate clients and interbank and institutional business. These products and services benefit clients by enabling them to conduct international transactions cost- effectively and securely and allow risk to be hedged and managed.

The total amount of London customer and interbank RMB deposits revealed in the survey is in excess of ¥109 billion. Customer deposits – deposits in accounts for personal, corporate and institutional customers – amount to ¥35 billion (compared with a total customer deposits volume in Hong Kong in December 2011 of ¥589 billion). This indicates that a pool of RMB liquidity is being established which will be valuable in developing the potential of London as a centre for RMB business, not only in forex but also in investment products and other instruments.

Click here to download a copy of the report.

Bloomberg Business week recently produced this amusing but helpful chart to explain the main implications of Dodd-Frank on various groups impacted by it.

Over the years Bourse Consult has built up a reputation for providing high level expertise in some of the more important areas of financial market infrastructure. We are sometimes asked for  examples of specific projects that we have advised on and the sort of bodies we have advised. While client confidentiality does not always allow us to give complete details of the projects we advise on, we thought it would be useful for potential clients if we gave an indication of some of the more recent projects we have been involved with. more >>

There is a high level of interest currently in “access rights” in market infrastructures – that is, the right of of one infrastructure to provide a service to its customers based on the service provided by another infrastructure, for example, to clear trades executed on a given trading platform. It has been one of the most contentious issues in the discussion of EMIR (the draft regulation covering OTC derivatives and clearing houses in Europe) and is at the heart of the the issues raised by the proposed merger of Deutsche Borse and NYSE Euronext. However, the term is often used in a broad way, whereas there are many important distinctions, which can mean that what appears to be an effective “right of access” achieves very little in practice.  This post tries to explain what to look for in judging whether a “right of access” is worth anything. more >>

The European Central Bank has just hosted a wide-ranging conference looking into the future of securities settlement. It was particularly valuable for bringing together an impressive spread of panellists from around the world, as well as the “usual suspects” from within Europe. And while Europe is focused on integrating markets, preparing for T2S and dealing with more urgent problems, it is valuable to be reminded that the rest of the world is moving forward and not always along the same track that Europe is following.

The recurring theme in discussions was the dilemma between consolidation and competition. Is it better to consolidate market infrastructures into a single entity and achieve economies of scale, even at the cost of creating a monopolistic leviathan? Or is it better to retain a (small) number of competing entities, forgoing some efficiency gains but making up for them through the stimulus of competition?

While most of the rest of the world seems to be aiming for consolidation, the consensus for Europe (at least, from the users of infrastructures) prefers competition. As the focus of the discussion was on settlement, this implies that the current settlement infrastructure ought to consolidate down to a small number, say, 3-4 CSDs that will compete with each other by holding down prices and stimulating innovation. However, if this competition is to be effective, it needs to be competition across the whole continent. Consolidation onto one CSD for north-west Europe, one for central Europe and one for southern Europe, for example, would not result in true competition. They would just divide the market rather than fight over it.

The difficulty in arriving at this result is that in order to compete head-to-head, CSDs need access to the same raw material – in their case, issues of securities. And at present access to issuers is controlled by national CSDs. If a foreign CSD wants to hold Spanish, German or French securities, for example, it needs to hold them in the Spanish, German or French CSD and pay a fee to that CSD for doing so. The “home” CSD will thus always have an advantage in offering the securities issued into it.

The key to creating an environment in which there is true competition between CSDs across the continent, therefore, lies in opening up access to issuers. Fortunately, there is a provision in the consultation paper on CSD legislation that would give issuers freedom of choice over the CSD into which their shares are issued. The practical implementation of the proposal, is of course, horribly complicated, because of differences between countries which are rooted in company law, such as whether or not shares or registered, whether they are immobilised or dematerialised and so on. In a separate discussion paper, the Commission has suggested that the freedom to choose CSD could be limited to issues traded on a regulated market and they would still need to comply with the requirements of the governing law of the issue.

In spite of the practical difficulties, however, this seems an admirable objective worth striving for, both to open the door to competition among CSDs and, not least, to bring benefits to issuers, who generally gain least from developments in financial markets, even though without them the markets could not exist.

As news comes that the shareholders of both NYSE-Euronext and Deutsche Borse have approved their proposed merger, leaving the decision firmly in the hands of the European competition authorities, the UK’s Office of Fair Trading has published its report on the proposed BATS-Chi-X merger.

It notes that the LSE/Turquoise, Chi-X and BATS are the only platforms with a market share greater than 1% in trading of UK-listed equities. Chi-X made a profit for the first time in 2010 and BATS is expecting to make a profit for the first time in 2011.

The OFT’s decision to refer the proposed merger to the Competition Commission is based on its concern about the consequences for competition if the number of effective rivals was reduced from three to two. Interestingly, it arrives at this conclusion in spite of the fact that few customers were opposed to the merger and many, indeed, were in favour.

The next step is a review by the Competition Commission, expected by December (assuming the merger is still on by then, as some shareholders in CHi-X are reported to be looking at alternatives).