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Colombia: Trying to push forward the bond futures market

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CLEARBANK® MAKES UK BANKING HISTORY – FIRST NEW CLEARING BANK IN OVER 250 YEARS

CamiloAlarcón, Fixed Income Trading Senior Associate of Credicorp Capital Colombia

Fintech evangelists claim that in the next 10 years, financial industry will be nowhere close to what we know today in terms of speed, efficiency and process optimization. What does that say about a country that is lagging the last 20 years of financial developments?

Technology is essential for traders and portfolio managers, if they want to be able to incorporate the cutting edge in financial instruments into their repertoire without compromising their ability to respond and execute said instruments in changing market conditions.  In a world where multiple asset classes and products interplay in real time, analytical tools are paramount for efficient and agile decision making. Nevertheless, if having the required technological infrastructure seems necessary, a regulatory framework that accommodates such changes and the basic knowledge among market participants to enact them is essential.

For Colombia, the case is not one of incorporating the latest financial innovations in to the market, conversely, is that of it being incipient despite currently passing the 10-year-old mark.Particularly, the futures market is in stagnation, with low trading volumes and few active participants. Most market agents agree that the explanation for this is twofold: technology (both in the back and front offices) and education.

Colombia’s most liquid market is the local sovereign bonds (COLTES), with 1.5 billion dollars of average daily traded volume, multiple investors (local and off shore) anda competitive market making scheme that provides sufficient liquidity to investors at a competitive cost.  However, the bond futures market remains illiquid with one twentieth of the cash’s market daily traded volume (73 million dollars) and few participants willing to intervene. Why?

For market making institutions and dealers, the reason appears to be that the operational capacity of their front office is unable to fulfill its duties in both cash (which is fiercely competitive) and futures markets. The prevailing argument is that given their current capital (both human and technological),these institutions don’t have the capacity to actively participate in both markets and quote prices in changing market conditions. Moreover, most instruments for risk management and trade analytics must be developed and funded in house, rising costs for trading desks and ultimately delaying the implementation of the necessary technological infrastructure many traders need to be active participants.

This problem has been solved to some degree by some banks and brokers, with intensive investment in developing proprietary tools and human talent. However, not all market participants have the know-how and budget to develop such instruments, and those institutions that have the capabilities to participate are too few to generate liquidity amongst themselves.

In a futures market with low volatility, where capturing the bid-ask spread is scarce, incurring in such costs is not an attractive investment for most participants and futures market making remains overly manual task prone to operational risk. The effect on the market is clear: the capacity of many agents to participate in the futures exchange is very limited, decreasing the competitiveness of quotes (in both bid ask spread and size), operated volume and volatility, making the market making business unprofitable. Clearly there’s a vicious circle in this dynamic.

Considering this situation, the local exchange has taken steps towards improving their technological infrastructure with the development of a new and consolidated platform. Whereas before traders had to place orders for bonds and futures in two separate systems, this platform will enable them to place orders in both cash and derivatives markets using only one system, improving their capabilities to hedge their positions with ease. Additionally, it will provide basic risk analytics such as bond sensitivities and derivates greeks; it will have improved connectivity with MS Excel for trading algorithms; and the matching engine will permit high frequency trading.

The main objectives are that market participants can have all the information they need to manage and execute their trades efficiently through a single platform and that the system engine will be able to handle new developments in proprietary algorithms and trading bots. Although these improvements will certainly enhance the capabilities of all participants, they are only part of the solution. Education is crucial to develop the necessary user base for new products. Colombia remains a market where most investors have developed an expertise mainly in the cash market and derivatives instruments are seldom incorporated into trading and portfolio strategies.

On the other hand, some buy side institutions remain inactive because their back-office software doesn’t have the capacity to liquidate the daily P&L of their futures positions and manage the required margins.  This task in some cases is done manually at the end of trading hours by their back office and is obviously prone to human error, discouraging portfolio managers to actively trade in the futures exchange. Some agents have proposed that this process is outsourced to a liquidating agent or a custodian that has the necessary infrastructure to handle such tasks, but the current regulatory framework doesn’t allow them to do so. Currently, only FIC’s (mutual funds) are required to outsource all their back-office activities to custodians, but it’s not unreasonable to expect that pension funds and other institutions will follow suit, given the operational limitations they currently face.

Regulation should promote and enforce the necessary changes to allow for more operational efficiency and increase investor’s capacity to incorporate futures into their portfolios. Urgency, however, doesn’t appear to be on the table, as most investors haven’t found a real need to hedge their portfolios in a decade of complacent local rates that have only moved downwards. The rates market may not be so complacent in the future.

There is a lot to be done if Colombia is to bridge the fintech gap. Although recent developments may hint that technology is pushing forward in some respects, both regulation and education need to catch up before any traction is gained. There is no need to argue how necessary the derivatives market is for both traders and investors.

Investing

Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations

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Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?

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How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds

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Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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