Beijing study trip: My top 4 experiences from my trip to Tsinghua University – by Vicky Lee


Vicky Lee, from South Korea, is a recent graduate of the MSc International Securities, Investment and Banking course at the ICMA Centre, Henley Business School. The ICMA Centre offers three scholarship opportunities each year for students to visit Tsinghua University as part of university’s annual Summer Program, and Vicky was one of a select few to be chosen. Here are her top 4 experiences from the trip

Tsginhua Vicky, Scott, Hugo

Charles Hugo Whiskard, Vicky Lee, and Scott Stephen taking part in Tsinghua University’s Summer Program 2016

When I first arrived there was a welcome dinner where we were all able to meet most of the students from the summer program. All the students were recommended to download WeChat as soon as we arrived as a form of group communication and information. Throughout the two-week program we attended lectures about the Chinese financial markets, visited the famous sights of Beijing, and study trips to financial institutions.

There were so many great moments from the trip, but if I had to choose, my top experiences would be:

1: The people – I really liked all the students who participated in the program. They were all very smart, nice, friendly and enthusiastic about Chinese culture and the experience at 20160706_191649Tsinghua University.  The bond among students became so strong that we still talk everyday using WeChat. Friendship will be the greatest asset you can get and the experience there was a turning point in my life.

2: The food – I enjoyed so many different kinds of authentic Chinese food, especially Beijing Duck and Dim Sum!

3: The university – Tsinghua campus is huge and very beautiful. PBC School of Finance buildings are located in a separate area, which is closer to the main Udaoku district, so it was very convenient for us to access all of restaurants, supermarkets and shopping malls. In addition, a building for lecture and a cafeteria were all within just a 2-minute walk!

20160708_161945.jpg4: The city – 
Beijing is an amazing city with so many places to explore such as forbidden kingdom, the great wall, summer palace, wangpujing (a famous landmark for street food), hou hai (a big lake and surrounding bars/restaurants, best for night view), nan luo gu xiang (street food, boutique shops and historical buildings and houses), sanlitun (mostly for night life, bars and clubs), etc. Beijing is a melting pot, and the culture and the beauty of the historical sites as well as advanced education system are something that you have to see.
This experience was truly the best thing I have ever experienced in my life. I learned so much, besides the knowledge of Chinese financial markets in the country with one of the biggest economies in the world. Words cannot explain enough how great it was to be there in person, and it helped me to grow as a person.

This opportunity offered in partnership with the ICMA Centre is a rare chance to have both global and exotic experience and build a strong relationship with people from other countries. If you’re an ICMA Centre student and have never been to China, I would highly recommend you take this opportunity. This program offers more than you expect, with unforgettable memories, a special journey and great people!




Could the result of matches in the European Football Championship influence the UK EU Referendum?

by Adrian R Bell and Dina Ghanma

“Some people believe football is a matter of life and death. I am very disappointed with that attitude. I can assure you it is much, much more important than that.” – Bill Shankly


If we are to agree with the great Bill Shankly, then we would not be surprised that a seemingly ‘irrelevant’ event during an election, such as a football match, could influence a national referendum.  A number of academic studies have indeed found that a causal linkage can be found between sports events and elections.  Why would this be the case?  It can be explained by human mood, or what we now term ‘Sports Sentiment’.  We speculate below that some interesting Euro 2016 results from England, Northern Ireland and Wales could influence the outcome of the EU referendum. We discuss what reaction would follow from staying in the competition, or coming home before the postcards!  Finally, we have to be realistic in accepting that it will be too difficult to truly know whether a relationship exists given the limitations discussed here, but it’s interesting to talk about the ‘what if?’…

Of the better known research on ‘Sports Sentiment’ is Edmans et al’s Journal of Finance (2007) paper, ‘Sports Sentiment and Stock Returns’[1]. The question they posed was whether or not the stock market reacts to changes in investor moods, with ‘international sports results’ being the primary ‘mood variable’. The paper indeed focuses on football (or “soccer”, as some might choose to less accurately call the sport), and presents the null hypothesis that markets are efficient, hence uninfluenced by the outcome of the “irrelevant” football matches. The Econometric model controls for some of the perplexing stock market “anomalies”, including the Monday effect, and investigates the ‘football/stock prices’ relationship in 39 countries.

The bottom line… is that they found a strong ‘loss effect’ whereby abnormal negative returns are observed the day after a sporting loss, with this loss more prominent for smaller stocks and after more important matches.

‘For example, a loss in the World Cup elimination stage leads to a next-day abnormal stock return of 49 basis points’. (Edmans et al, 2007)

It is interesting to note that this effect is not mirrored after big wins, suggesting that bad results have greater power over an investor’s financial decision-making whereas good results are not as impactful.

So, if it follows that ‘Sports Sentiment’ can affect investors’ mood with regards to finance and the economy, it might be fair to propose that a similar effect manifests in voters with regards to politics. The dilemma becomes deciding the intuition: would a good Euro 2016 result for the UK lead to voters keeping the status quo and voting ‘Remain’, or would it lead to a boost in national self-confidence enough to trigger a ‘Leave’ vote?

Does the research literature help us with this? In 2010, Healy et al published a paper titled ‘Irrelevant events affect voters’ evaluations of government performance’[2] where they looked at the relationship between the results of college football matches and the outcomes on national elections. They summarise saying, ‘We find clear evidence that the successes and failures of the local college football team before Election Day significantly influence the electoral prospects of the incumbent party, suggesting that voters reward and punish incumbents for changes in their well-being unrelated to government performance.’ If we proxy this to the Euro2016/Referendum context, the ‘incumbent’ would proxy to remaining in the EU, which backs the intuition that a good football result would support remain and a bad result would support a leave vote.

Agreeing on what our intuition should be is not the only difficulty we face in such research. Another difficulty is the lack of reliable polls that truly reflect voters’ intentions. Also, the few polls that are available are not timed compatibly with the Euro matches for us to draw credible relationships between the two. For instance, the BBC reported on the 12th of June that very few polls had been published in the last week[3], which makes it nearly impossible to gauge voters’ sentiment with a decent level of accuracy. However, one possible proxy would be to use the betting odds before, during and after each match.

We would also need to think differently about the matches for each of the ‘home’ teams. Perhaps the English matches would be the most significant simply because of England’s larger population, which we would assume means the presence of more supporters and hence the most influence on the result. It’s also not clear how the England vs. Wales match today would play out in the scenario, as here, the UK is playing against itself.

It’s also clear that other events could influence voter preferences towards ‘Leave’ or ‘Remain’, such as seemingly authoritative statements from politicians on pensions, family income, immigration and much more. It would be very hard to separate out all this noise from the driving causality of a football match. We now also have an added complication with our investigation – the football game is not even the front page news story! Football hooligans wreaking havoc in Marseille and now Lille has taken precedence, and this hideous violence has even provoked a threat from UEFA to disqualify both England and Russia if any further problems occur. Indeed, England being thrown out of the European competition might have its own greater effect on the referendum, too – this surely giving further support for a leave vote.

We will find out whether any of the UK’s home teams will survive the first round of the Euro eliminations or if they will pack up and head home before the Referendum being held a week from today. The revelation of all the results, football and referendum, might help us take a step forward in our research – as hindsight normally helps our analysis.

For now, enjoy the match, and may the best team win!

Dina Ghanma is a final year student from Amman, Jordan, studying the BSc Finance and Investment Banking course at the ICMA Centre. She was the recipient of the 2015 Chancellor’s Award for Best Performance at Part 2, and the winner of the 2015 Henley Challenge.



Dina Chanma is a final year student from Amman, Jordan, studying BSc Finance and Investment Banking at the ICMA Centre. She was the recipient of the 2015 Chancellor’s Award for Best Performance at Part 2, and the winner of 2015 Henley Challenge.


Professor Adrian R Bell is Chari in the History of Finance, Head of the ICMA Centre, and Associate Dean (International) at Henley Business School










[1] EDMANS, A., GARCÍA, D. and NORLI, Ø. (2007), Sports Sentiment and Stock Returns. The Journal of Finance, 62: 1967–1998. doi:10.1111/j.1540-6261.2007.01262.x



FUND RATING – by ICMA Centre alumnus Steve Gruppetta

Gruppetta Steve 93Steve Gruppetta studied MSc in International Securities, Investment and Banking at the ICMA Centre, and is now a finance professional and a consultant within EY’s Transaction Advisory Services after joining the practice from the asset management industry. 

What if we rate investment funds?

“Steve, this supposedly well-managed fund is losing money! My financial planner said it was a good investment, but clearly it isn’t!” a relative of mine remarked to me a few months ago. His adverse reaction towards actively managed funds is not unusual. Although everyone accepts that investment and risk are synonymous, the experience of seeing one’s capital eroding is alarming.

Many investors, who lack investment market knowledge often opt for actively managed retail investment funds, especially if given a little push by their financial planner. The aim of an active fund is to yield, net of fees, a higher level of risk adjusted return than its benchmark, the latter being an index of a weighted average mix of securities. For example, a fund that actively invests in large capitalisation US companies would have the S&P 500 index included in its benchmark and the fund would actively work on earning more than this benchmark.

So what can be done to objectively assess a fund’s value added and its ability to deliver abnormal risk adjusted returns? Is it possible to create a fund rating mechanism which indicates the probability of future outperformance? In other sectors, like corporate credit worthiness, ratings already exist. So why shouldn’t we be able to rate investment funds?

Companies like Citywire have already been issuing, for quite some time, ratings for mutual fund managers. However, the selection process is based on past performance and relative to the pool of fund managers being rated. J.D. Power’s annual US Full Service Investor Satisfaction Study ranks investment companies based on investor satisfaction. Yet this is purely subjective on what investors included in the study feel. Alternatively, Morningstar has developed its Morningstar analyst ratings for funds which is a forward-looking analysis that evaluates funds based on more qualitative measures. This is a good start yet many retail funds are still not rated and a comprehensive fund rating industry, with several rating agencies, is yet to be developed.

A suggested fund-rating mechanism

Although complex, a more holistic approach would be to consider several qualitative and quantitative factors affecting the probability of future returns. Below is a proposed list of variables that can be used in a fund rating mechanism:

  1. Fund manager’s skillBy far the dominant source of investment profit comes from the fund manager’s skill. Managerial skill relates to the asset selection and allocation ability of the fund manager. But how can this be gauged? Although always subjective, proxies could include:
    • Education. A solid background in finance education should help build superior market knowledge.
    • Investment experience. The longer a fund manager has been in this business the more likely a winning secutiry will be picked. Avery and Chevalier (1999) find that managers tend to take on bolder and more aggressive strategies as they gain experience due to better confidence and knowledge. At the same time however, more seasoned managers presiding over large funds may become more risk averse and passive over time to protect their income and reputation.
    • Entrepreneurial experience. Fund managers with a business background are more likely to spot winning companies whose issued securities may be under-priced and have potential for future growth. Entrepreneurial spirit is in fact a very important skill for activist fund managers, i.e. those who, like Bill Ackman, purchase enough equity in companies to affect change in corporate strategy with the aim of maximising the company’s potential.
    • Past performance persistence. If a fund outperforms its benchmark for a number of consecutive years then this would indicate that returns are more the result of the manager’s skill rather than chance and so it is more likely to further outperform in the future. Historical abnormal returns of a fund should however be linked to the fund manager and if he/she changes, past performance will probably be less relevant.
  2. Size of the fundLarger funds tend to benefit from economies of scale by spreading costs over a larger pool of capital. However, a larger than ‘optimal size’ fund could be detrimental for other reasons, such as funds which tend to become less actively managed as they grow larger, diluting the potential investment gains derived from active management. What is considered to be the optimal size for a fund would depend on both market and idiosyncratic factors such as fund regulation and the investment company’s infrastructure.
  3. Illiquidity of the fundThe longer the investment lockup period (time for which an investor ties up his savings in a fund), the bigger the potential to invest in less liquid yet potentially very rewarding strategies such as long-term long positions, convertible arbitrage or fixed income arbitrage. Additionally, fire-selling of assets to meet redemptions is less likely.
  4. Expense ratioThe higher the expense ratio of a fund, the more difficult it is for it to beat its benchmark. This is one of the reasons why passively managed funds, like Exchange Traded Funds (ETFs), have become so popular. When trying to outperform the market, actively managed funds have the additional hurdle of covering the higher costs associated with active management.

    This is not to say, however, that a manager’s incentive fees should be reduced. In fact, some studies, like Edwards and Caglayan (2001), observe that the performance of certain investment funds is positively related to a manager’s incentive fees and Agarwal et al (2009) found that high water mark provisions produce superior performance. Although high water mark provisions may act as an incentive for excessive risk taking, this should be mitigated by the fund’s risk management restrictions.

  5. Managerial ownershipIt is safe to assume that the more invested the fund manager is in the fund, the more driven he or she is to outperform.
  6. Risk management structureThe stronger the risk management structure of the fund, the better protected the investor is. If a fund over performs its benchmark yet it is investing in disallowed high-risk securities, the fund is nonetheless posing a significant threat to investors, since their risk aversion is not in line with these decisions. Since the financial crisis, investment houses have given risk management an increasingly higher profile, significantly strengthening their risk and compliance structures, albeit at higher costs.


For this idea to get off the ground it would need the investment community and the regulator’s support and must not be, nor seen to be, another layer of regulation. It would be targeted towards retail funds, acting as a useful aid to the less educated investor. It would also help boost investor confidence, increase efficiency of capital allocation and enhance profitability for investors. A fund-rating mechanism’s purpose would be to provide an objective indication of a fund’s probability of good future performance rather than a definite answer as to which fund will over perform. If this were the case, it would be very difficult for a fund to beat an efficient market in any case!

The rating system would apply to retail funds for starters. Eventually it could also find an application to institutional or hedge funds even though investors here are usually professionals and consequently very well educated in the investment world.

Perhaps with such a rating system investors, including my concerned relative, would sleep sounder at night since he would know that his money is placed in independently-vetted good quality funds rather than with what his financial planner wants to sell him.

Studies mentioned in this article refer to published academic research papers and have been obtained from online journal databases.

The ICMA Centre offers world-ranked Masters in Finance, including the course Steve studied, MSc International Securities, Investment and Banking. Click here to find out more and apply online.

Click here to view the blog on The Accountant

Careers in finance: 5 tips from Reading alumni Richard Perry

Richard Perry, Market Analyst at Hantec Markets and University of Reading alumni, blogs about his return to the university as corporate sponsor of the Finance Society, and gives his tips and advice to students wanting to enter the field of trading.

IMG_2839-e1458056420167I recently completed a course of seminars at the University of Reading during which I taught a group of students about some of my experiences of trading. My “Tips to Save You Pips” series gave me a chance to give something back to the university at which I count myself as an alumni, having studied there for my degree all those years ago. Many thanks to Sean Harper, President of the University of Reading’s Finance Society for allowing me to host the seminars and for making us feel so welcome. I found it to be a rewarding experience for myself and hope that the students found it similarly helpful for how they approach their own trading.

About the seminars

  • Seminar 1) The Importance of a Trading Strategy – I discussed this seminar the need for a trading plan and a need to look at your trading style to decipher how best you can approach your strategy. I also introduced the vital concept of “Risk Per Trade”.
  • Seminar 2) The Benefits of Trade Management – In this seminar I looked at the impact that Emotion Trading can have on your account, whilst also discussing the vital trading security tool that is the “Stop-Loss”.
  • Seminar 3) The Perils of Overtrading & Overleverage – A look at some of the ways you can fall into the trap of overtrading and some of the warning signs that can leave you in danger of being overleveraged whilst trading.
  • Seminar 4)  The 12 Steps of Trading Success – Is my walk through guide of how to approach trading in the correct mindset and ensure that novice traders are prepared as much as they can be when they start out on their trading journey.

As so often can be the case, it can take people time to gain confidence, but certainly towards the end of the series of seminars, as a group, we were having some extremely interesting discussions about financial markets and trading.

My advice to students

With regards to advice on getting into a career in finance, I can only go on my own experiences really.

Here are my top tips to students:

  1. Internships – Try to apply for internships as soon as possible, work experience is crucial. Clearly a finance related degree would help, but is not vital.
  2. Courses – Getting factual experience by doing online courses to improve your knowledge base is also important.
  3. Publications – Try to read some sort of financial publications on a daily/weekly basis – again this will improve your knowledge and understanding.
  4. Research – Do your research into the organisations that you are applying for as this will clearly help in an interview situation.
  5. Confidence – Above all though be confident and concise in both applications and interview situations.

I hope that this will help you in your prospective career in finance, and thanks to everyone who attended the seminars – I wish you all the best and good luck for your careers wherever they take you!

The ICMA Centre at University of Reading offers world-ranked undergraduate and postgraduate finance courses. The Centre is home to some of the most extensive dealing room facilities in the world, supported by Thomson Reuters and Bloomberg, and equipped with the latest trading simulation software to give students a practical experience of a trading too floor during their studies. Click here to find out more.

Read the original blog post on Hantec Market’s website.

ESMA offers hope for the grammatically challenged

Dear students

I recently jokingly suggested, in response to the draft assignments you submitted, that some of you had such poor grammar and punctuation that your only future in finance might be as an internet fraudster. This profession is notable for slack drafting. You may recall that a spelling mistake recently led to the discovery of a cyberfraud on the Fed.

However, I have just read the ‘Discussion Paper on the Draft RTS and ITS under SFTR’ published by the European Securities and Markets Authority (ESMA) on 11 March. Clearly, grammar and drafting were not high priorities in the department that wrote this beauty. Missing verbs and articles, incorrect prepositions and many other solecisms litter this document, which is not helpful, given that it extends to 187 pages and 145 questions.  I should also mention the description of a yes or no answer as a Boolean value: correct but unnecessary showing off.

But, dear students, for you, this offers hope. ESMA can be contacted at  103 rue de Grenelle, 75007 Paris, France.


Case study: Jasmine Mehta

Jasmine MehtaHi, my name is Jasmine Mehta and I graduated in July 2014 having studied MSc in Capital Markets, Regulation and Compliance at the ICMA Centre, part of Henley Business School, in Reading, UK.

Post Financial Crisis in 2008 and Sovereign Crisis in 2010, the lesson of more Responsible Investments on part of asset owners and more accountability from their asset managers was learnt the hard way. This course provided the perfect blend of Capital Markets and Regulation, which is the need of the hour ever since the Financial Crisis in 2008. The course provided the ability to smoothly transition to varied arrays of finance, which in my case was from capital markets to regulation to responsible investments.

I think the UK provides excellent Masters in Finance courses and the ICMA Centre is one of the best schools for specialised finance, with in-house Bloomberg and Thomson Reuters terminals forming an integral part of the excellent infrastructure offered. Such state-of-the-art technology, coupled with regular industry insight seminars, facilitates integration of finance theory with practice.

The ICMA Centre attracts many international students due to its highly learned and experienced faculty led by Professor Adrian Bell. Such international presence represents diverse ideas and thought processes which helped me broaden my horizon. And, now I’ve got friends in many different countries.

Beyond the ICMA Centre…

Immediately on completion of my course, I interned with Responsible Investor and thereafter started working with MSCI in London as a Marketing Analyst for ESG Products. Currently I’m working MSCI out of Mumbai, Leading APAC Marketing for ESG Products.

To those students looking to find their job next year; networking is key to showing your interest in a particular role and convincing people that you’re worth it!

Advice to future students

If you’re thinking about studying finance, my advice would be to make sure you chose a course that gives you practical exposure to the real markets, which in my opinion is the best value add to one’s CV.

If you’re interested in studying MSc in Capital Markets, Regulation and Compliance or any of our other world-ranked Masters in Finance courses, visit our website at and apply today.

How to make regulation even more complicated

I have been reading through the Basel Committee of Banking Supervisors’ (BCBS) Consultative Document of 5 November 2015 on Haircut Floors for Non-Centrally Cleared Securities Financing Transactions. This sets out the proposed incorporation into Basel III of the recommendations of Workstream 5 of the Financial Stability Board (FSB) on securities financing transactions. In particular, the paper sets out the framework for minimum haircuts to be imposed on non-centrally cleared SFT between banks and non-banks. If transactions do not meet these minimum haircuts, they will be considered uncollateralised for the purposes of capital adequacy calculations. The methodology of the proposals is problematic.

The first problem is that the measure of haircut used by the BCBS is not a haircut at all. A haircut is a discount of the cash value of an SFT to the value of collateral, ie the ratio of (1) the difference between the value of the collateral and cash to (2) the value of the collateral. The BCBS “haircut” is, in fact, a bastardised version of an initial margin. An initial margin is a premium in the value of collateral over the value of cash, ie the ratio of the value of collateral to the value of cash. For example, the BCBS/FSB “haircut” of 6% is actually an initial margin of 106%. The true equivalent haircut would be 5.66% (= (106-100)/106).

While the BCBS are being consistent with the way haircuts are expressed in Basel III for adjustments to collateral and exposure values for capital adequacy calculations, it is confusing to use the word “haircut” in regulations that are supposed to be applied at market level. This criticism may seem semantic but it is worth recalling the problems that the confusion between haircut and initial margin caused with term repo just before GMRA 2011. It would also be a good idea to ensure the BCBS terminology was consistent with the reporting requirements of the EU SFT Regulation (SFTR).

The second problem with the BCBS haircut framework is the method calculation of haircuts for individual SFT within a “netting set” (ie a portfolio of SFT under the same master agreement), at least as set out in the example on p6 of the BCBS paper. Each SFT with cash in the same cash currency or the same type of security against the same type of collateral (where the typology is that of Basel III supervisory haircuts) is given a representative “artificial traded haircut” according to the formula:equation 1

To simplify:

equation 2

where Ci is the sum of the collateral Sj (which can be cash in the same currency or the same type of security) and Ei is the sum of the exposures created by lending the same currency or same type of security Sk. The artificial traded haircut is represented by Hj,k. This means it is a haircut to be applied to Sj when it is collateralising an exposure to a loan of Sk. The artificial traded haircut has to be compared with the floor as shown in the table below or as implied by the following formula:

equation 3

Table 1

The artificial traded haircut only has to be calculated for security type Sj if it is a non-government issue and has been received net within the same netting set. On p6 of the BCBS paper, the following portfolio example is given:

Table 2


In the example, only security A is liable to minimum haircuts and has been net received. Security A is deemed the collateral in all the trades, which means these should be the following types of transaction:

Trade A = reverse repo of security A

Trade B = securities lending of security B v collateral security A

Trade C = securities lending of sovereign security v collateral security A

Trade D = repo of collateral security A

This view of security A as always being the collateral is confirmed by the calculation of the implied floor f as (1 + collateral floor)/(1 + exposure floor), in which A’s floor is in the numerator.

The problem with the BCBS proposal is the formula for the artificial traded haircut. It is complicated and therefore not good regulation. But the complexity is unnecessary. The idea of an artificial traded haircut is to prevent banks using a combination of several SFTs, which individually may not be subject to minimum haircuts, to synthesize a position which would have been subject to haircuts had it been transacted as a single SFT. For example, a repo of cash against corporate bonds would be subject to minimum haircuts (assuming it was also with a non-bank and was not centrally cleared). But a bank could try to replicate this transaction and avoid minimum haircuts with a repo against government bonds and a securities borrowing transaction between the same government bonds and the corporate bond, neither of which might be subject to minimum haircuts. To prevent such regulatory arbitrage, the BCBS applies minimum haircuts to securities lending and borrowing transactions even where there is no cash. It does so by implying an artificial traded haircut to each collateral type at a portfolio level using the formula above, as set out in the example above. If the artificial traded haircut falls below the floor for that type of collateral, all trades in the portfolio against that type of collateral are deemed uncollateralised.

But is the BCBS formula needed? Why not split each securities lending/borrowing (SLB) transaction into a repo and reverse repo, and imply the haircut from these notional transactions. For example, trade B in the BCBS example, 200 of A borrowed against 210 of B, could be seen as a reverse repo of 200 of A against cash, and a repo of 210 of B against cash. Using the regulatory haircut of 6% for A, the cash value of the implied reverse repo should be 200/1.06 = 188.7. If the cash value of the implied repo is assumed to be the same, then the value of B needed to fully collateralise the cash would, using the regulatory haircut for B of 10%, be 207.5 (188.7*1.10). As 210 of B is actually being given, this transaction falls short of the minimum haircut by 2.5.

In the case of the example portfolio, the difference with the BCBS is that trade D falls below the floor, as too much collateral is being given. Consider how this simpler approach would work in the case of the example portfolio:

Trade A reverse repo of 100 v 105 of A given A’s supervisory haircut is 6%, A should be 100 x 106% = 106 so trade A is short of haircut of 1 of A
Trade B securities borrowing of 200 of A v 210 of B this trade is equivalent to reverse repo of 200 A and a repo of 210 B: given A’s supervisory haircut is 6% and B’s is 10%, the reverse repo of A should be against 200/106% = 188.7 of cash, so the repo of B should be 188.7 of cash v 188.7 x 110% = 207.5 of B so because trade B is giving 210 of B, it represents a deficit of haircut of 2.5 of B
Trade C securities lending of 85 of sovereign bond v 90 of A given A’s supervisory haircut is 6%, A should be 85 x 106% = 90.1 so trade C is short of haircut of 0.1 of A
Trade D repo of 20 of cash v 25 of A given A’s supervisory haircut is 6%, A should be 20 x 106% = 21.2 so trade D is giving 25 of A, it represents a deficit of haircut of 3.8 of A

In total, the portfolio has haircut deficits of 4.9 of A and 2.5 of B, which is equivalent to 7.6 of B.

Does this approach lose the protection intended by the BCBS approach against regulatory arbitrage? Consider applying haircuts to the net notional trades in the example portfolio (where sovereigns have been deemed to be equivalent to cash):

Trade 1 reverse repo of 165 v 170 of A given A’s supervisory haircut is 6%, A should be 165 x 106% = 174.9 so trade A is short of haircut of 4.9 of A
Trade 2 securities borrowing of 200 of A v 210 of B this trade is equivalent to reverse repo of 200 A and a repo of 210 B: given A’s supervisory haircut is 6% and B’s is 10%, the reverse repo of A should be against 200/106% = 188.7 of cash, so the repo of B should be 188.7 of cash v 188.7 x 110% = 207.5 of B so trade B has a deficit of haircut of 2.5 of B

In total, the portfolio has haircut deficits of 4.9 of A and 2.5 of B, which is equivalent to 7.6 of B, the same as when haircuts are applied individually. And now consider applying haircuts to the gross positions of each type of collateral in the example portfolio:

 Position 1 outflow of cash & sovereigns of 165 there should be collateral of 165 x 106% = 174.9 of A
Position 2 inflow of A of 370 if 174.9 of A is required to collateralise the cash & sovereigns, there is a surplus of 195.1 of A — this is equivalent to 195.1/106% = 184.1 of cash, which is equivalent to 184.1 x 110% = 202.4 of B
Position 3 outflow of B of 210

In total, the portfolio has a haircut deficit of 7.6 of B, the same as in the previous approaches.

Why is the BCBS using such a complex approach?

Emerging market repo news

New bond and repo market segment opened in China 
China announces retail repo market. On 14 February, the PBOC announced a measure to boost the development of the bond market and increase direct financing by opening the Bank OTC Market. This is an extension to the existing interbank bond market. It is open to a wider range of investors including smaller financial institutions, licensed investment companies, qualified corporates and qualified retail investors (defined as having annual income over the equivalent of about GBP 50,000 and assets over GBP 300,000). Financial institutions wishing to trade in this market segment have to meet certain conditions and file with the PBOC. The market can trade central and local government bonds, PBOC paper and policy bank bonds through cash transactions, and pledged and outright repo. But it appears that non-qualifying investors can trade and repo AAA bonds.
The existing OTC market has allowed non-bank financials in since 1999 and some large corporates since 2002. The exchange-based market already allows retail investors but these are mainly money funds.
New Philippine repo market initiative
The Philippine Treasury has announced an initiative to try to reinvigorate its flagging government bond market, as expected US rate rises threaten to divert cross-border capital.  The plan is to accelerate and be more selective in the restructuring of the maturity profile of its debt through bond swaps. The Treasury is also looking at a primary dealer system and open the market to tax-exempt institutional investors like state-run pension funds. Prior to appointing primary dealers, it wants to revive the flagging repo market.
The Philippines has a large domestic bond market that has been playing a growing role in financing its development. Bloomberg reported that the ratio of domestic borrowing to total debt may increase to 88 percent next year and to 89 percent in 2017 from a planned 86 percent this year. But average daily bond trading fell to PHP 18.2 billion pesos last year, a three-year low, from over 20 billion in 2012 and 2013.
Plans for the repo market have not been elaborated but the Treasury is in discussion with the central bank and the Securities and Exchange Commission about an interbank “Specials Repo” programme. The scope for reviving repo was improved in January, when the Bureau of Internal Revenue agreed to exempt the repos from documentary stamp tax as long as these are transacted on a “true sale basis”.
At the moment, the repo market in the Philippines is dominated by the Inter-Professional Repurchase Agreement Market, an electronic platform run by PDEx, the Philippine Dealing & Exchange System, a subsidiary of the Philippine Dealing System Holdings Corporation (PDS), which also runs the Fixed Income Exchange (FIE), the Public Market segment for retail brokers, the Inter-Professional Market for institutional investors and an electronic Securities Lending/Borrowing platform for dealers, as well as the local SSS and CSD. The PDEx repo market has not prospered, another of the many examples suggesting repo and exchanges do not fit well together.

CFA Research Challenge 2016

Third year student Dina Ghanma talks about her experience competing alongside other ICMA Centre students in the annual CFA Research Challenge.

This year, and for the first time, the ICMA Centre proudly participated in the CFA Institute Research Challenge, a global equity valuation competition involving 70 countries and over 4,000 students worldwide. [1]

In 2013, our BSc Finance and Investment Banking degree became an official CFA Partner Program which brought with it many perks including five annual scholarships for the CFA Level 1 exam awarded to students who perform exceptionally well in Part 2. Gerald Lim, Sean Harper and Thomas Bowrey are amongst this year’s recipients, and I’m on the CFA IMC scholarship (another advantage extended to us by the Centre). So, Dr. Ioannis Oikonomou offered the four of us the opportunity to collectively represent the University in this prestigious competition. We were humbled by the request and happily agreed.

The challenge…

Hard work shortly followed. At the local level, the CFA assigned participating UK universities the FMCG company, Reckitt Benckiser (RB.LN), which is a FTSE100 constituent specialised in “health, hygiene and home” products including well-known brands like Nurofen, Strepsils, Dettol, Harpic, Durex and many more. As a multinational corporation present in over 200 countries, RB is a giant with many opportunities and obstacles in its path. Our task was not only to identify as many of these as possible, but also quantify them into monetary figures to eventually decide if RB’s shares are a good investment. After over a month of dedicated effort and research, we issued a ‘Hold’ recommendation upon considering all the associated valuation and operational risks.

CFA research challenge report

Extracts from our final report

On the whole, the experience lived up to its title of “challenge” since we encountered many complications and difficulties, but using all the resources and knowledge available to us, as well as the much appreciated help of our trusted mentor, Dr. Ioannis, we proceeded to overcome them as best we could. Although we unfortunately didn’t make it to the next round, my teammates and I are all happy we were able to participate in this excellent extracurricular activity. We learnt many important lessons, and added a notable item to our CVs! We truly hope the ICMA Centre remains involved in years to come. We can only go up!

Gerald Lim – “It was a great learning experience and I thank the ICMA Centre for providing us with the opportunity to apply what we’ve learnt into practice. I strongly encourage the ICMA Centre to continue its participation in the competition for the coming years.”

Sean Harper – “The Research Challenge provided fantastic experience in valuing a multinational for investment consideration. Ultimately, the ability to identify value and growth potential is a skill that will pay great dividends in a career in the field.”

Thomas Bowrey – “The CFA Research Challenge gave me an exciting opportunity to analyse a FTSE100 company by using the high standard skills and financial analysis techniques that I have learnt through studying this great finance degree at the ICMA Centre.”

Speaking personally, I felt the experience was very hands-on and engaging! I’m strongly considering a career in this field, so the Challenge was valuable practice, and I now feel even more prepared to face not only my upcoming IMC exams, but also the actual investment appraisal industry in the ‘real world’.

[1] In the CFA’s words, “The Research Challenge offers university students a unique opportunity to learn from leading industry experts and to compete with their peers from the world’s top finance programs. This annual initiative promotes best practices in equity research among the next generation of analysts through hands-on mentoring and intensive training in company analysis and presentation skills.” For more information about the competition, please visit:

Scary stories from the FT — but is it the story that is scary or the holes in the story?

Financial journalists have a difficult job. This is particularly true when they are commenting on markets. These are complex, subtle and dynamic systems which journalists have to observe from the outside. Their problems are usually compounded by lack any direct experience of markets and a paucity of professional or academic literature to consult. If journalists turn to market sources, they have to be wary of possible conflicts of interest. And one hopes that journalists recognise their own conflicts of interest: they are under pressure to produce sensational stories.

These challenges mean that there is a risk of poorly briefed and confused journalists  conjuring up articles that inflict damage on markets by encouraging poorly briefed and confused politicians to impose regulations that undermine the ability of markets to perform their essential functions. The consequences can be very real: higher financing costs to the economy and loss of livelihood by those working in finance. The risk is magnified where a journalist is leveraging the reputation of an influential financial newspaper like the FT.

An article that raised concerns appeared in the FT in November, penned by the respected financial journalist Patrick Jenkins. It was entitled “Regulators’ boost for securities lending has risky implications: banks use ultra-safe bonds as compliance shortcut”. It was a strongly-worded attack on securities lending and its role in collateral transformation, which is the process of acquiring higher-grade collateral by giving lower-grade collateral in a temporary exchange. The firm doing the upgrading will typically be doing so because, in the normal course of its business, it does not the type of collateral required by counterparties such as CCPs.

Jenkins dramatically accuses banks of going to “extravagant lengths” to “window dress” and “prettify” their end-year balance sheets. “What are they trying to hide?” he asks, given that securities lending is “probably best known as a proxy for hedge fund aggression because the short selling of equities relies on trading borrowed stock”. For Jenkins, it is “yet another example of the backdoor transfer of risk out of banks and into other parts of the financial system — namely the lightly regulated realm of shadow banking — which we may one day come to rue”.

And Jenkins argues that the securities lending industry has form when it comes to dodgy deals, as “only a few years ago, trades, particularly in Europe, were spurred by a tax avoidance wheeze…cross-border dividend payments used to attract punitive tax charges, but if equities were swapped with a domestic shareholder, such as a bank, the liability evaporated”.

What is being hidden, according to Jenkins, is that “banks are bringing German Bunds, US Treasuries and UK gilts on to their balance sheets, and getting shot of riskier equities by posting them as collateral”. And this business is booming because “policymakers have unwittingly created a new supply-demand dynamic”.

Jenkins’ new dynamic is “new rules on bank capital, liquidity and the clearing of derivatives transactions”. He argues that “there is a three-way regulatory arbitrage at play” in which:

  • “banks are boosting their liquid assets to comply with the new Basel III requirement known as the liquidity coverage ratio.”
  • “The second trick is that the exchange of assets can be a boon to capital, with equities that tend to attract higher capital weightings swapped for “risk-free” bonds.”
  • And thirdly, “with so much derivatives trading moving to central counterparty clearing, there is increasing demand for high quality assets to be used as collateral…and for that, government bonds — even borrowed ones — avoid punitive haircuts imposed on some equities”.

Jenkins skilfully manages to line up topical buzzwords for his article’s word cloud: hedge funds, shadow banking, tax avoidance and regulatory arbitrage.

So, what is wrong with Jenkins’ article?

He was absolutely correct to say that banks are upgrading their collateral. Banks need a stock of so-called High Quality Liquid Assets (HQLA) to meet their Liquidity Coverage Ratio (LCR). In other words, banks need sufficient HQLA to sell or repo out to raise cash to fund a projected net outflow during a severe 30-day market crisis. But why are collateral upgrade trades a problem? If your underlying business does not always generate enough HQLA and you do not permanently need more, it is entirely logical to borrow it through a collateral swap. And, if you are going to borrow to cover a 30-day period, it is perfectly sensible to borrow for that sort of period. It would be risky to borrow for one day and have to roll over.

As for swapping from equities to government bonds, Jenkins seems to have been misled by the ISLA survey to which he refers. This does not say that 90% of European government bond lending is against equity collateral. Rather, it says 90% of European government bond lending is against non-cash collateral. While the report suggests that “This supports very much the view that borrowers in securing access to HQLA are almost exclusively optimising balance sheet and risk weighted assets by providing other assets, often equities, as collateral in these transactions”, there is no hard evidence.

But, even if lots of equity is being swapped for HQLA, what’s the problem? Equity has little value for meeting the LCR. Common equity only counts as a Level 2B HQLA, which means it is only eligible if the national regulator permits and, even if it is permitted, is hit with a minimum 50% haircut and is subject to a 15% concentration limit. Moreover, most CCPs do not accept equity at all as collateral. If a collateral swap can extract some collateral value from equity holdings, it is sensible for a well-managed bank to consider doing so.

Perhaps the most serious mistake in the FT article is about the impact of securities borrowing on balance sheets and risk-weighted regulatory capital charges. Contrary to what the article says, borrowed securities do not come onto a borrower’s balance sheet and the borrower does not pay the capital charge on borrowed securities. This is because the risk and return on borrowed securities is retained, if only indirectly, by the lender. For the same reason, the collateral given in exchange for borrowed securities does not leave the balance sheet of the borrower and he continues to pay the capital charge on these securities. So the borrower cannot use a collateral swap to reduce his capital charge by borrowing HQLA against lower-grade collateral. Indeed, the capital charge of the borrower will increase given that he is taking risk by giving collateral to the lender. There is nothing being hidden here.

For the record, borrowing securities will also not help improve the other liquidity ratio introduced to complement the LCR, namely, the Net Stable Funding Ratio (NSFR). The NSFR, which is designed to enforce a stable asset/liability structure, basically follows balance sheet treatment, ie borrowed assets do not appear on the balance sheet of the borrower, while the collateral given does not leave the borrower’s balance sheet.

Nor will borrowing securities yield any advantage under the Leverage Ratio, arguably the tightest regulatory constraint on banks.

It is a pity that the FT article skates over the fact that securities loans are over-collateralised and margined, and that lenders are very counterparty-sensitive, which means there is typically little risk to lenders. And then there is the visceral reaction to short-selling. This can be destructive but generally it plays a very desirable role in cooling over-valued assets and puncturing price bubbles.

Finally, there is the attack on tax arbitrage. Has this actually been all so evil? Of course, some tax arbitrage was and is unethical. But what is so fair about punitive tax charges on cross-border investors? This was why there have been the “single market rulings to eliminate cross-border withholding taxes” mentioned by Jenkins. It could be argued that markets, once again, played a key role in mitigating unfair and inefficient burdens imposed by protectionist and discriminatory governments until the politicians were forced to catch up.