FinMetrics' blog

EMIR urgency > mapping of UTIs

2014-02-05T07:41:00.000+01:00

If you are still struggling with EMIR technical issues, FinMetrics can provide you with a pragmatic, quick, easy to deploy and inexpensive solution.

For instance, we have recently helped clients to map the UTIs (unique trade identifiers) of their banking counterparts with the ones of their own TMS or back-office at short notice, in time for the deadline of February 12th, allowing them to meet this deadline without having to incur costly and lengthy upgrade costs of their main systems. We delivered the solution in record time, for all their outstanding trades.

About FinMetrics: with a 15-year experience in Treasury data management and Treasury Risk Management, we have rapid and pragmatic solutions adapted to your size and real needs, from an Excel add-in to FinBoard, a robust dashboarding platform. Our suite of solutions allows you to improve the performance and functionality of your legacy main back/mid-office systems.

FinMetrics' EMIR practice.

THE 3 WAYS WE CAN HELP YOU WITH EMIR

2014-02-03T07:28:00.000+01:00

The next EMIR deadline is here. Complying with EMIR means in particular:

Having the Group Treasurer as a good project leader, knowledgeable on trading regulations and the group exposures, and organising/compiling updates on the regulation(s). This is real project management and continuous monitoring of the evolving obligations and actors.
Adapt docs
Notify the top instances of the group (CFO, Compliance/Audit)
Adapt terms (ISDA, and other counterparty docs)
Request an LEI for each trading legal entity
Organise the processing
Identify the trade repository and reconciliation routes, meaning...

Identify the solution to communicate your transactions to the trade registrar
Match UTIs with your internal IDs (until automatic inclusion of IDs in your systems in the future)
Perform this also for your backlog (an entire project)
...

Among these, FinMetrics can help you with the following:

Accompanying you in terms of project management, identifying potential loopholes and keeping you updated, to let you continue focusing on your day-to-day tasks with the mind-freeness you need.
Organise the transaction reporting filing in a way that does not require to revamp your whole TMS or depend on your TMS provider's queuing list.
Provide you with a pragmatic solution for the "UTI-TMS id" match and organizing the backlog project, keeping in mind that the UTI will be automatically provided in the future through your transactional systems, once in "cruising-speed" mode.

Ask for a fruitful and reassuring discussion at hpirotte[at]finmetrics.com...

Risk Management and BI

2013-10-24T11:41:00.002+02:00

Yesterday, ATEL and ALRiM held a conference in Luxembourg that was very interesting in terms of how far we should be more concerned about risk management being a management science first and not just a reporting hassle driven by the multi-layered regulation.

It is true that corporate treasurers are facing an evolving amount of regulations, where those were aimed at financial institutions only in the past. Some of these regulations target markets and transactions and it is not yet even clear which authority will be responsible for their follow-up in each country. In one of them (EMIR), companies are asked to get a Legal Entity Identifier (LEI) and we are still guessing who we should address for that respect, at the time being.

So, yes, it is easy to create some vent of fear towards professionals for the need to comply with those new rules, that are not yet written in the cement. And some actors in the market are clearly helping in spreading the fear. An old well-known consequence of asymmetry of information...

But the key attitude to have is to try to use these to foster better risk awareness for decision-making. The efforts deployed to gather together trading information, counterpart information, cash flow forecasts, results from simulations and tests should be put at use for the management. Otherwise, we are just producing the groceries list for the supermarket without exactly knowing what kind of dishes we will be able to prepare out of it. Risk reporting alone might seem a drudgery. Risk management is more than that. It is an attitude more than a list of tasks.

Corporate treasurers are in an excellent place to be the promoters of good risk management practices. First, at the treasury level, everything is reduced to a timeline of cash flows with an attached probability of occurrence (mainly: certain, estimated, expected, unexpected). And finance is about cash flows after all. For example, that avoids to give too much weight to the name of products instead of focusing on the payoff profile they represent for the firm. Second, in a multinational, the group treasurer is already responsible of a certain synthesis of the myriad of operations whilst in charge of checking the payment stream, in and out.Thus, we might see some EMIR rules as a good catalyst for the treasury center to be the ultimate recipient of the information.

We saw yesterday an excellent presentation by Nils Hallerstrom of PK Air Finance. It was excellent in the sense that it was showing (1) that some people really use these tools for better decision-making, and (2) that there is always a way to make numbers tell you a story beyond the numbers themselves. That story is the one managers need to fix prices & terms during a negotiation, understand their exposures and how much they can try to limit them, and overall, what is the risk-reward relationship that you are facing, accepting or at least dealing with.

The rest is just administrative constraints which cost can be alleviated if the firm gets a real added value from the process.

Day-Seminar on Rating Agencies (Brussels, March 26th)

2012-03-06T13:07:00.001+01:00

A number of partners have joined their efforts to bring you a wonderful panel of specialists on the theme of rating agencies.This event brings together key experts from Law, Philosophy and Finance, including among others Mathias Dewatripont (director at the National Bank of Belgium), Bruno Colmant (former CEO of NYSE Euronext Brussels and partner at Roland Berger), Xavier Dieux (Willkie, Farr & Gallagher). The intention is to provide an enlightened debate on the role of ratings and the institutions providing them and the philosophical approach of allowing norms to be defined by the industry and supported by the financial regulation.

The seminar will be held in French.

For more information, please look at the following leaflet (high quality).

Details:

To register, please use the following link: http://www.thefinanceclubofbrussels.eu/ratings
Access is limited to the persons invited personally, or who are members of the Finance Club of Brussels or its sponsors.
Where? at the Palais des Academies, Rue Ducale 1, B-1000 Brussels
When? March 26, 2012.
- 14h30: Welcome to the two afternoon sessions
- 18h30: Welcome to the evening conference
- 20h30: Walking dinner

Research paper presented at the Midwest Finance Association (New Orleans, Feb 24)

2012-02-24T17:45:00.000+01:00

This Friday 24th, the paper "Assessing the Performance of Funds of Hedge Funds" was presented at the Annual Conference organised by the Midwest Finance Association in New Orleans (LA, USA). This paper was co-wrriten by Hugues Pirotte, Head of Research at FinMetrics, together with B. Dewaele (ULB), N. Tuchschmid (Tages Capital, London) and E. Wallerstein (Credit Suisse, Zürich). It looks at the computed alphas, t-stats and p-values, using random botstrapping and FDR (False Discoveries) technologies to assess the real net performance of FoHFs.

The results of this paper have attracted public's attention through an article in the Financial Times on October 16, 2011, entitled "Few FoHFs yield value, report says". In particular, we show that after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices.

During the conference, we had the pleasure to meet Professor Don Chance...in a live session of "Capital Gains", the band he is leading when he is not teaching!

The Conference has given us the opportunity to visit Manhattan, make sure that the bull has not been replaced by a bear, and witness the impressive evolution of the new buildings.

Risk Management for Quants? No! For Managers!

2009-07-31T23:10:00.000+02:00

Over the last years, it has been impressive to see the amount of garbage one can read. Articles on the responsibility of quantitative finance, on the compensation bonuses, on hedge funds’ guilt, .... It just shows that we are always trying to blame someone and to focus attention on a scapegoat. But the overall sector shares responsibility. A crisis never occurs based on 1 ingredient but on a conjunction of ingredients. Let’s take some examples and show the trade-off behind them:

Hedge funds’ responsibility: well, remember, it is a market with sellers of nice stories which means they are also buyers of nice stories... And many investors including funds, pension funds, have been investing in hedge funds. Nice to blame some of them now but either some knew about the lack of transparency of those, their sensitivity to illiquidity and regulatory arbitrage, either they were ignorant. So, some were too much cold-blood and others were ignorant. Ignorants should not be allowed to represent savers' interests and we should find ways to make cold-blood people more responsible.
Quantitative Finance (QF) . A wide area of debate. Nice and easy to blame, but do you know how much has been developed thanks to QF? Blaming QF alone is the analogy of blaming a 4*4 with summer tires for sliding on snow. We still have to admit that we developed some pedantry here. On one side, we had quants that sometimes went too far out in complex developments and making them impenetrable to the management. Their typical attitude was: “managers cannot understand what we are doing and what we are developing is a true science (We invite you to read the "Modeller's Manifesto" and "The Use, Misuse and Abuse of Mathematics in Finance" in that respect). We are the fancy people, the smart guys.” On the other side, we had managers extremely skeptical at QF and taking as an excuse that this was too complex to be understood by normal people. In the meantime, mayn of them were recruiting these rocket-scientists to build up returns.
On our side, we advocate a better awareness, with the use of managerial dashboards that conduct quantitative analysis but with a purpose for the business. Otherwise, it is like managing a nuclear plant and saying “well, we don’t have all the key indicators yet, but let’s start it!” But sometimes, our pedantry has made financial literacy impermeable to managers. Why risk management systems have to be so complex? Why couldn’t we have differentiated risk management systems depending on their use? Why should they be only for quants?
We MUST break the myth that risk management is for risk quants only. Today still, risk management reports are mainly produced for auditing, in case of. Would you assume that auditors are closer to risk quants than managers? We really need to answer: for whom is the damn report? Who should use that information? For which purpose? What is a good risk management framework? Am I conducting real risk management or are we just measuring risk.
Compensation bonuses and management misbehavior. Well. Without much risk, we can say that we all agree that some bonus policies were completely indecent. What’s a “guaranteed bonus”? But “guaranteed bonuses” was a well known practice in the market. Again, it is a governance problem. We all knew that these practices existed. Nobody really cared. Now, we blame them. We have to be careful with regulation and with maintaining a market freedom. We can insert some principles, we have to make information about the incentive schemes better disclosed and then allow investors to make their own judgment: “Do I want to invest in a firm where the CEO can mismanage, fire 1’000 employees and get for sure a golden parachute?” We have to be careful about what is of the responsibility of the public sector and what should be enforced by law or through market regulation. Many problems we have today exist not because of “market problems” but because some people were fooling an asymmetrically-informed market. We should work towards transparency, rather than bonus cap regulations that will surely result in new financial-engineering schemes and ultimately in higher costs to everybody.
Rating agencies. Of course it is amazing to see that some rating agencies were having some problems with their Excel spreadsheets and did not communicate this information during one year (well, the good news is that they are at least using Excel spreadsheets as anyone). But at some stage, we have to ask ourselves if that is a problem of rating agencies or a problem of the system. The system allowed rating agencies to become THE reference. The Basel Accord wanted to increase the sensitivity of managers, their responsibility. Philosophically, we were letting more and more an anglo-saxon perception to flow in our system of values: less based on prevention, more freedom but also more sanction and the identification of the guilty one that will face all the charge in case of problems. Pushing too much responsibility may well produce a deny of responsibility, i.e. you prefer to pay the services of a rating agency and to have somebody to blame in case of, than trying to develop your own internal assessment. So yes, very cynically, we can blame rating agencies … because we were paying them for that.
Regulatory arbitrage. Well, there were/are many of them. Hedge funds and rating agencies were somehow part of a regulatory arbitrage. You want to take more risks? Transfer them to a hedge fund. The Basel Accord implementation is a threat? Don’t worry, pay a rating agency and blame it thereafter for rating AAAs’ synthetic vehicles that you knew were not at all comparable with industrial tangible AAAs.

In summary, disclosure of information in an aggregative system that allows a drill-down to the sources of exposures and which allows managers to have an overview on the key risk indicators is paramount. Such a technology requires two levels of systems:

A detailed, stable and complete data warehouse system that makes sure the information is entirely available and verified.
A managerial dashboard that digest this information and allows the management to have a clear view with drill-down capabilities on the exposures and key-risk indicators.
And some key actions, workflows, procedures, ready to be triggered depending on the information shed by the dashboard.

Treasurers: the credit risk component is back in the equation!

2009-05-31T23:05:00.000+02:00

Hedge effectiveness implementation will be harder this year given the evolution of the credit spread and its size for most companies. CFOs and Treasurers will have to handle this problem and solutions are to be provided.
Let’s take a simple interest-rate hedge. A FRN hedged by a swap. Since it is the same structure of interest rates that underlies both instruments, it is still quite easy to provide a clear hedge and the hedge effectiveness report will therefore be quite affordable. Now, if the credit spread increases and becomes substantial while at the same time being more volatile, it means that you have a material second source of risk that enters in the equation. Moreover, the magnitude of this materiality is such that the 80-125% band can be clearly violated, which would mean that you are not complying anymore with IAS39’s rule.

Now, you have two choices: (i) explain it to your auditor to try to lower his/her worries. Well, many of you did that at the end of 2008 and the circumstances were helping. But your auditor will ask for more transparency about identifying the reason of the gap. (ii) try to provide a report where both risks are differentiated.
Thus the conclusion is that, would we like it or not, you will have to handle this issue before your next audit.
There are also two potential ways to handle it:

re-include credit risk in models,
try to separate the effects and to show the interest-rate hedge effectiveness apart.

Here are some additional thoughts to answer that:

If we have a problem of hedge effectiveness due to credit risk, it is because the perceptions of credit risk on the FRN side and on the swap side are not equivalent.
Moreover or more theoretically, the effect of credit risk on derivatives as swaps (called “vulnerable derivatives”) is not linear as with the underlying instruments. If you are a swap payer and the floating interest stands above the fixed rate, your counterpart will not face a direct loss (maybe still an indirect one) if you default.
We must have in mind that IAS39 is not really for “precise computations” but for accuracy of the information and the willingness to hedge. Therefore, if there is a willingness to hedge the interest-rate risk but that risk is polluted by another one in the derivative (that were supposed originally to isolate one risk at a time), we could still try to separate both effects and to show that, on the interest-rate side, the motivation of hedging is confirmed by the results. The credit risk mismatch is just another opportunity cost due to the elimination of the first risk.