WHAT FINK MIGHT DO WITH BGI - FTSE

CAN THE US SAVE IT’S AUTO SECTOR? 

I S S U E 3 6 • S E P T E M B E R 2 0 0 9 

The rise of the 

collateral manager 

The new gold bug 

Trading: the impact 

of fragmentation 

Spotlight on DTCC 

WHAT FINK 

MIGHT DO 

WITH BGI 

ROUNDTABLE: DEFINING A NEW ASSET SERVICING MODEL

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F T S E G L O B A L M A R K E T S • S E P T E M B E R 2 0 0 9 

Outlook 

IT WAS INEVITABLE that in a protracted recessionary period there would 

be a tussle for supremacy between asset owners, fund managers and asset 

servicing providers in dictating terms of business. Right now there are 

conflicting signs as to who is winning this particular scrap. 

In the asset servicing segment, there are signs that providers are playing 

hardball. That’s because in the days before Lehman Brothers et al crashed and 

burned into crispy cinders, business was about volume and rarely about value. 

In a substantive turnaround, asset service providers are now more concerned 

about profit than rankings in an assets under custody league table. In 

consequence, their business approach has altered significantly. BNP Paribas for 

one has taken a blunt view: encouraging prospective clients to either put all their 

business through them or think again. Clients are feeling a tight pinch as a 

result: hence Paul Nathan, chief operating officer at Omam’s cri de cour in this 

issue’s asset servicing roundtable that many a firm’s star has waned in the eyes 

of their asset services providers just as rapidly as the net asset values of firms’ 

investment holdings have shrunk in recent months. It is a common complaint. 

Equally, transition managers report that among some asset owners, 

particularly sovereign and quasi sovereign wealth funds, the rapidity with 

which underperforming asset managers are dispensed with these days means 

that oft times transition managers are required to temporarily house large pools 

of capital and provide a return to their client, until a new asset manager is 

selected. It’s an ill wind, say the ancients, and so some transition teams have 

developed some rather innovative structures for these clients to benefit from. 

Among these various slings, private equity principals have also been punctured 

by flying arrows. Witness the pain of buyout firm Nordwind Capital, which was 

prevented from investing in Global Fertility AG, a start up in the German fertility 

business, by a group of limited partners including the Harvard and Yale 

endowments. With some brio the limited partners pushed back against a deal by 

the Munich-based private equity group which had raised a €300m ($423m) debut 

fund back in 2004. The deal fell through after Nordwind tried to draw down funds 

from its investors. Some had objected to the deal because of its heavy investment 

in US clinics did not match Nordwind’s strategy of investing in German, Swiss and 

Austrian turnarounds. Others because they did not want to invest in the segment. 

In the end Nordwind took the costly but honourable course of backing out of the 

deal, so as not to technically put its investors into default. 

While market uncertainties continue, this unedifying scrabble looks likely to ebb 

and flow. However, underpinning this froth is the damned reality of continued 

substantial declines in asset values in key investment institutions. Look what has 

happened at two of America’s largest pension pots. CalSTRS is likely to report a 

drop in the value of its asset by as much as 25% in the fiscal year ending June 30, 

2009, with its market value of assets now worth $118.8bn. That much-vaunted 

bellwether, the California Public Employees' Retirement System (CalPERS) has 

reported a decline of roughly 23% for its latest fiscal year, the worst return in 

decades for the largest public pension fund in the US. The decline is equivalent to 

the loss of about $55bn in assets and while returns have improved somewhat since 

March, its assets remain buffeted by continued stock market turbulence, moribund 

credit markets and shrinking real-estate values. CalPERS is exposed to all those 

asset types, a fact which could ultimately impact on the firm’s credit rating. 

Francesca Carnevale, 

Editorial Director 

August 2009 

Cover photo: Laurence Fink, chairman and chief executive of global asset gatherer 

and manager BlackRock. Photograph kindly supplied by BlackRock, August 2009. 

1

2 

Contents 

COVER STORY 

DEPARTMENTS 

MARKET LEADER 

INDEX REVIEW 

IN THE MARKETS 

REGIONAL REVIEW 

FACE TO FACE 

COMMODITY REPORT 

SIBOS REPORT 

DATA PAGES 

THE IMPORTANCE OF BEING BGI ..............................................................................Page 67 

Laurence Fink, chairman and chief executive of BlackRock, long coveted Barclays Global 

Investors and its iShares family of electronically-traded funds. Now he looks to have 

secured it. After the deal closes later this year, BlackRock will become the world’s largest 

manager of investment assets. Art Detman describes why BlackRock will likely grow and 

thrive, and how this acquisition may affect the money-management business. 

CAN THE US REALLY SAVE ITS AUTO SECTOR? ..................................Page 6 

Ian Williams surveys the status of the US automotive landscape. 

TURNING JAPANESE ......................................................................................................Page 12 

Simon Denham, managing director, Capital Spreads, takes the bearish long view 

ASIAN INDEX DREAMS ................................................................................Page 14 

FTSE Group’s tie-in with MCX-SX and the implications for Indian investors 

FAST AND LOOSE WITH PRIVATE EQUITY......................................Page 16 

Private equity looks set to make a comeback – albeit a slow one. Neil O’Hara reports. 

INTEREST RATES MAKE THE RUNNING ............................................Page 24 

David Simons on the vagaries of interest rate management in a potentially deflationary arena 

RISK MANAGEMENT IN HIGH-FREQUENCY TRADING ........Page 28 

Dan Hubscher of Progress Apama looks at real-time risk management 

NORTHERN LIGHTS: THE NORDIC WAY FORWARD ..............Page 32 

Why Nordic markets are worth another look 

NEW APPROACHES TO OLD PROBLEMS ................................................Page 40 

Tarek Anwar, Standard Chartered, explains the new business dynamics 

THAT DUBAI FACTOR..................................................................................................Page 42 

Jeff Singer, CEO of NASDAQ Dubai, on the promise of the near east. 

THE GOLD BUG ................................................................................................................Page 70 

Vanya Dragomanovich meets Aram Shishmanian, the new CEO of the World Gold Council 

NEW APPROACHES TO CASH MANAGEMENT ................................Page 75 

Lynn Strongin Dodds reports on new approaches to money market funds 

THE RISE OF THE COLLATERAL MANAGER ..........................................Page 78 

Neil O’Hara on the rising stars in collateral management following Lehman’s demise 

DTCC HARNESSES A NEW WAVE OF BUSINESS ..............................Page 82 

David Simons reviews the DTCC’s new wave of business in clearing and settlement 

ASIAN DREAMS ................................................................................................................Page 86 

Lynn Strongin Dodds on the potential for a cross-Asian clearing and settlement platform 

Fidessa Fragmentation Index ......................................................................................Page 90 

Market Reports by FTSE Research ..............................................................................Page 92 

Index Calendar ..............................................................................................................Page 96 

S E P T E M B E R 2 0 0 9 • F T S E G L O B A L M A R K E T S

4 

Contents 

FEATURES 

REAL ESTATE 

AIN’T NOTHING GOING DOWN BUT THE RENT ....................Page 35 

The real estate market is braced for a second wave of bad news as falling occupancy and 

rental levels replace the capital value crisis and real economy woes begin to bite. Much 

of the shock generated by price falls has been absorbed but now the pressure is on lease 

renewals, with tenants failing, downsizing or renegotiating terms as their leases expire. 

Direct investment has become a case of tactical chess between buyers and sellers while 

diversified vehicles are finding some favour. However, as Mark Faithfull reports, new 

breeds of investment platforms and investors are emerging to tackle the risk conundrum 

TRADING REPORT 

THE RISE OF TRADING SUPERMARKETS..............................................Page 44 

The divine right of stock exchanges to “own” the trading in their own country’s stocks is 

going to be a thing of the past, according to Steve Grob, director of strategy, Fidessa. 

“Fragmentation is on an inexorable rise,” he says. “One of the assumptions in the early 

post-MiFID days was that fragmentation would reach a certain level and then stabilise, 

but every week we are seeing more fragmentation and no signs yet of consolidation of 

venues.” Ruth Hughes Liley reports. 

THE VALUE OF AGGRESSIVE PRICING....................................................Page 48 

LIQUIDITY ISN’T WHAT IT USED TO BE ................................................Page 50 

IS CONSOLIDATION THE ONLY ANSWER?..........................................Page 53 

Promising and offering lower latency and in some instances even free transactions, 

MTFs such as BATS Europe, an offspring of Kansas City-based BATS, Turquoise, a 

consortium-backed London-based venue and Nasdaq OMX Europe, all of which 

emerged one year ago, are still in business. Yet the talk of the demise of established 

exchanges such as the London Stock Exchange (LSE) and Frankfurt’s Deutsche Börse, 

has subsided with the all but near collapse of global financial markets. What role will 

technology play in determining the winners and the losers in the fragmented trading 

landscape? Dawn Kissi reports. 

ASSET SERVICING 

TOWARDS A NEW ASSET SERVICING MODEL ........................Page 57 

According to Luc Leclercq, operations and IT director at Foreign & Colonial: “The 

landscape has certainly changed over the last 18 months, due in large part to changes in 

the segments of credit, counterparties, clients, regulators, cost, trustees, and control. 

Additionally, clients are becoming much more concerned about a relative performance 

into an absolute world, given the fact that last year we have seen quite a lot of people 

who lost money. The resulting paradigm shift has been quite enormous: moving from a 

relative world into an absolute world; from what was understood to be safe to what is 

not. Certainly, nothing will be taken at face value any more.” What now then for asset 

service providers? Our roundtable discussion gives some important pointers 

DEBT REPORT 

CORPORATE DEBT: AN OPTIMISTIC OUTLOOK? ....................Page 73 

While credit fundamentals remain challenging for companies looking to crawl out from 

under the leverage wreckage, a mid-summer string of positive earnings reports has 

helped buoy the corporate bond markets, which have achieved a level of normalcy not 

seen since the pre-Lehman days. Dave Simons reports from Boston 


US AUTO SECTOR: CAN IT BE SAVED? 

6 

Market Leader 

Chrysler, Ford and General 

Motors, the iconic Big Three 

automakers, account for just 

over half of all light vehicle 

production and slightly less 

than half of all light vehicle 

sales in the United States. Even 

so, they are in dire straits. The 

rest of the US auto industry— 

which includes Honda, Toyota, 

Nissan, Hyundai, BMW, and 

other foreign nameplate 

producers—have been making 

more products that Americans 

want to buy and will endure 

this recession without 

subsidies because they have 

more efficient cost structures. 

So why is the US government 

so intent on ploughing $25bn 

into the US auto majors? Ian 

Williams reports. 

CLUNKING SUBSIDIES 

MANY PEOPLE REMEMBER 

US president George HW 

Bush being sick over the leg of 

the Japanese premier Kiichi Miyazawa. 

Few, however, recall the occasion. 

President Bush was in Tokyo with the 

chiefs of the BigThree US automakers to 

plead for self-restraint from the 

Japanese auto manufacturers, which 

were roundly beating Detroit on its 

home turf. Robert Monks, of Lens 

Governance Advisors, a long-time 

scourge of auto executives, sees it as an 

iconic incident; the writing on the wall 

for potential investors in the Big Three: 

“There still isn’t full appreciation of how 

the Big Three have been subsidised and 

protected by the Federal political 

establishment—in both parties.” 

Monks points to Congressman John 

Dingell, the dean of the House of 

Representatives, who, he claims, has 

United States Department of Energy Secretary Steven Chu (right) talks with Ford Motor 

Company chief executive officer Alan Mulally during a news conference in Dearborn, Michigan, 

on Tuesday, 23rd June 2009. Chu announced the Energy Department will lend $5.9bn to Ford 

and provide about $2.1bn in loans to Nissan Motor Company and Tesla Motors Inc., making 

the three automakers the first beneficiaries of a $25bn fund to develop fuel-efficient vehicles. 

Photograph by Paul Sancya for Associated Press, supplied by PA Photos, August 2009. 

helped at every stage to perpetuate US 

automakers’ inefficiencies, “whether it 

was stalling fuel efficiency measures or 

emission reduction rules”. Monks adds: 

“For years, almost the only people who 

bought American cars were the 

government and rental agencies— 

which were owned by the makers.Then 

they had to sell the car-hire companies 

and so people rented Toyotas. In the 

end they were destroyed by incest, as 

their ultra-cosy relationship with 

government protected their 

inefficiency. Talk about unions, legacy 

costs? It was just a fig leaf to cover bad 

managing and bad engineering.” 

It was far easier to hire lobbyists in 

Washington than to engineer lower 

emissions or more fuel efficiency. For 

decades, industry lobbyists 

successfully resisted stiffer Corporate 

Average Fuel Economy (CAFE) 

standards for sedans and managed a 

complete runaround them anyway by 

getting tax breaks and complete 

exemptions for the SUV (Sport Utility 

Vehicles)—which are essentially 

heavy, lumbering trucks disguised as 

passenger vehicles. Detroit made 

much more money on the latter until 

rising oil prices brought them down to 

earth with a thump as heavy as the 

lead which, incidentally, they had also 

resisted removing from fuel. 

Consequently, in 2008 the Big Three 

fell below 50% market share for the 

first time in living memory, to 47.4%, 

losing primacy to imports and foreign 

transplants. Moreover, for the first 

time in almost a decade,“light truck” 

sales last year fell below the sales of 

higher miles per gallon (mpg) sedans, 

on which the US industry had all but 

given up. The credit crunch caused US 

sales to drop from 15 million vehicles 

a year to 9.5 million as the financial 

crisis dried up liquidity for consumers 

and companies alike. 



8 

Market Leader 

As July drew to a close,Washington had 

to add another $2bn to the oversubscribed 

billion dollar“Cash for Clunkers”scheme 

that had offered $4,500 for Americans 

trading in their old gas-guzzlers for more 

efficient models. It was small beer in 

proportion to the $80bn industry rescue 

package, though perhaps symbolic that 

the scheme appears to benefit the 

environment more than Detroit. 

As consumers traded in old, mostly 

US-made gas-guzzlers for new efficient 

cars, foreign companies (notably 

Hyundai) were major beneficiaries of 

the programme along with Ford, which 

recorded its first increase in sales in two 

years. Hyundai this July reported record 

quarterly profits. 

Long-time industry consultant 

Professor Barry Bluestone at Boston’s 

Northeastern University last year 

pointed out the stark realities in a 

memo to Representative Barney Frank, 

a key legislator in the Federal rescue 

programme for the industry. Using the 

oft-cited but, in Detroit, much-ignored 

market to make his case, he invokes the 

second-hand value of comparable 2003 

model cars. “In late 2008, the Toyota 

Camry V6 had a Vehix.com value of 

$11,150 while a comparably-powered 

Honda Accord V6 is slightly higher at 

$11,225. In contrast, the trade-in values 

of the Chevrolet Impala V6 was only 

$6,850; the Chrysler Stratus $6,200, and 

the Ford Taurus $5,000.” 

Bluestone cites similar devastating 

figures from Consumer Reports for 

2008 that show Big Three brands came 

in below 50 on the 0-100 satisfaction 

scale while the equivalent “import 

brand” models, as Detroit labels even 

US-built vehicles by foreign companies, 

won scores of 70s and even 80s. He 

concludes: “Automakers that provide 

their customers with quality that lasts, 

with a satisfying driving experience and 

a vehicle that meets their driving 

expectations, will make a profit and will 

not need Federal support.” 

Bluestone recalls other missed 

opportunities. Around the time that 

Bush Senior was recycling his dinner 

menu in Japan, General Motors had 

tried to move forward with the Saturn, 

using the techniques that were 

propelling Japanese success. However, 

the good efforts came to little. 

No one now pretends that what’s 

good for General Motors is good for 

America. The contumely that greeted 

the Big Three executives in 

Washington when they turned up last 

year (cap in hand and on executive 

jets) marked the end of an era. 

Political shift 

There has also been a political shift. As 

the Republican Party has become 

more intensely ideological, Detroit, 

with unions and workers“pampered” 

with health insurance, lay-off pay and 

pensions, looked dangerously 

“socialist” (an almost insulting jibe in 

US political circles) compared with the 

foreign transplants that had taken 

root in the Republican-voting 

Southern states with laws hostile to 

unionisation. That allowed the 

discussion to become obsessed and 

obscured by Monks’ “fig leaf,” the 

costs of union labour. In fact, there 

already was a convergence between 

labour costs in the old United Auto 

Workers (UAW) plants and the 

transplants, which suggests that it was 

not so much the cost of labour but, 

according to some analysts, the low 

quality of management and design 

that wasted the skills of the workforce. 

In fact, Professor Bluestone points out 

that many of the “import brand” 

transplants have had very successful 

union working agreements, and cites 

the Modern Operating Agreement of 

the Mazda plant in Michigan, theToyota 

plant in California—and, significantly, 

the Ford plant in Cleveland, significant 

because, of all the US companies, Ford 

has weathered the crisis best. 

In the face of Republican 

indifference and taxpayer revolt in the 

aftermath of banking bailouts, Detroit 

had to suffer tough love from 

Washington legislators who had 

previously been the political 

equivalent of a pushover. Congress 

forced it to commit to all the steps 

that it had helped them avert for all 

those decades. 

Washington acted quickly, allowing 

accelerated bankruptcy proceedings, 

helping shed many liabilities while 

backing-up corporate guarantees on 

vehicles, thus stopping even more 

precipitous erosion of the consumer 

base. Additionally, the industry had 

accelerated its long-procrastinated 

reforms with mandated cuts in staff, 

plants, marques, dealerships 

remuneration, an end to dividends, 

and with directives to invest in newer, 

more efficient models. 

Notably missing from the dole queue 

was Ford, which, Jack Plunkett of the 

annual Plunkett’s Automobile Industry 

Almanac points out, had “brought in a 

brilliant outsider”, former Boeing 

Commercial president Allan Mulally, to 

be president and chief executive officer, 

and so was in the right position to meet 

the crisis, amassing huge amounts of 

cash, creating efficiencies across the 

board, standardising designs and 

components across the product range. 

It had negotiated new union 

contracts, which reduced the labour 

force and cut wages and benefits for 

new employees. It cut its 97 marques to 

a manageable 20 or less. As a result, 

Ford could refuse offers of government 

money but did ask for a line of credit 

guarantee to maintain sales. In contrast 

with its beleaguered compatriot firms, 

it recorded a second-quarter $2.3bn 

net profit. However, even if Ford was 

prepared to bounce off the rocks that 

almost crushed GM and Chrysler, it is 

still in a hard place: the faltering global 

and US economy. 


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10 

Market Leader 

Plunkett commiserates that the 

“global auto industry has been 

evolving out of control, with massive 

overcapacity, but in the European 

Union and US it hasn’t really evolved 

to take advantage of the market. 

Toyota has been able to give the 

customers an SUV with low petrol 

consumption as the US carried on 

making the big Chevrolet Tahoe and 

Hummer, while Hyundai’s quality is 

outstanding.”He concludes that “even 

if the financial crisis had not 

happened, there was still an auto crisis 

in the making”. 

So is there any light at the end of 

this very gloomy tunnel for US 

automakers in a world with global 

overcapacity, a credit squeeze, rising 

unemployment—and more efficient 

competition at home and abroad? 

Actually, there is. Professor John Paul 

MacDuffie and his colleagues at the 

International Motor Vehicle Program 

(IMVP) argue that demand will return 

to near-complete levels in the 

developed world and in particular in 

the US, and even without “Cash for 

Clunkers” four million more cars a 

year hit the scrapheap than are being 

sold, so upwards is the only way. 

The $64,000 question is: how many 

of those vehicles will Detroit make? 

The answer is, almost inevitably, many 

fewer. Slimmed down as they will be, 

with fewer models, many fewer dealers 

and without the credit to offer the cutthroat 

incentives and discounts they 

have used to maintain sales, there are 

few grounds for great expectations. It 

will take time for them to tool up to 

build their new, efficient models with 

their new, cheaper workforce. 

Indeed, their fire sale of overseas 

assets may be assisting yet another 

rival just over the horizon. Chinese 

companies are hovering around and 

make little secret that they want the 

technology as much as the physical 

assets. Ironically, GM is very 

successful in China, but Plunkett 

points out: “The Chinese are 

developing some impressive 

technologies, and as soon as 

American consumers decide they trust 

the quality and like the styling of 

Chinese models (which is based on 

US cars anyway) they will buy.” 

There is only a narrow window of 

opportunity for the US companies to 

turn themselves around before 

taxpayer indulgence attenuates, the 

market revives and their rivals move 

into the vacuum the Big Three’s nearcollapse 

created. The one step 

Congress could take that would 

allow—or rather force—the US 

industry to compete, Plunkett 

suggests, is what Big Three executives 

also seem to favour: that is to 

incrementally increase fuel prices to 

developed world levels to force 

efficiencies and confirm a market for 

the low-emission, high efficiency 

vehicles they are now committed to 

build as a condition for the Federal 

aid. He points out: “The CAFE fleet 

standards are just absurd, an evadable 

abyss of regulation. The intelligent 

way to control fuel use is price: I wish 

Congress were that smart.” 

Massive savings 

Sadly, Capitol Hill, which only 

occasionally exhibits courage, is 

unlikely to increase the cost of fuel in 

the face of combined consumer and 

oil company resistance which may 

thwart the industry’s belatedly 

adopted reforms. Detroit’s reforms 

were predicted to offer massive 

savings (in 2010). Already, for 

example, GM’s hourly manufacturing 

costs have dropped from $18.4bn in 

2003 to an estimated $8.1bn in 2008, 

somewhere around 10% of the cost 

per car. 

The IMVP echoes Bluestone that all 

three US automakers now have some 

sites that are “true knowledge-driven 

workplaces, delivering world-class 

performance on safety, quality, cost, 

and other indicators,” while Ford’s 

resilience and those Modern 

Operating Agreement plants shows 

what can be done. The question is 

whether those examples can be 

replicated at GM and Chrysler and 

whether managerial conservatism and 

the credit squeeze will allow 

investment in new, and sellable, 

technologies. 

The dangers are that they only learn 

half the model. While Toyota, for 

example, is keeping redundant 

workers on the books of its California 

truck plant to maintain their skill base 

for the upturn, Detroit’s rush to shed 

workers on the older union contracts 

to hire novices may be pithing its 

technological abilities. Professor 

James Jacobs of Macomb College in 

Michigan points out: “Any future of 

the auto industry rests upon highlyskilled 

workers willing to be flexible. 

But will such workers be attracted to 

the auto industry when wages are 

being lowered? Currently, nursing 

assistants get $9 to $50 per hour, while 

starting wages in auto-unionised jobs 

are not much more at $14 to $50.” 

Similar traditional short-termism 

may inhibit the industry’s preparation 

for an upturn. Indeed, the crisis effect 

on industry liquidity has already 

postponed the launch of several fuelefficient 

vehicles such as GM’sVolt and 

Cruze, while US carmakers have been 

reluctant to adapt clean-diesel 

engines, which account for half of 

sales in Europe. In the end, there is a 

real-time experiment. The transplant 

companies have shown there is 

nothing inherently untenable about 

making desirable and profitable 

vehicles in the US, even in unionised 

plants. In the wake of the crisis, 

Detroit’s management has no more 

excuses left. It would be a bold investor 

though who bought stock in them. 


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AVOIDING THE WORST EFFECTS OF DEFLATION 

12 

Index Review 

The summer is drawing to a close and markets have continued to 

be reasonably friendly with the FTSE nestling comfortably 

around 4700 and the various economic data releases giving hope 

that the worst of the current downturn might now be over. The 

fact that the German and French economies grew in the second 

quarter came as something of a surprise to the markets, though 

this might have more to do with the very high levels of personal 

state aid available in both nations than with an actual 

turnaround in the economy. Simon Denham, managing director 

of spread betting firm Capital Spreads, calls the odds. 

IN THE UNITED Kingdom the vast 

sums added via banking support, 

quantitative easing and general 

state spending seem to be holding 

back the worst (for the time being) but 

it must be admitted that the general 

outlook once the purse strings start to 

be tightened is rather harder to 

estimate. Economists seem to fall into 

two camps, with the apocalyptic 

grabbing the headlines and the more 

generally neutral bringing up the rear; 

after all, middle of the road forecasts 

do not make for good copy. Inflation 

in the US and Europe, or rather 

deflation, is causing considerable 

concerns, especially as the massive 

increase in money supply would 

normally have been expected to have 

the opposite effect—especially across 

the Atlantic. One wonders what the 

CPI number in the States (currently 

-2.1%) would have been had the Fed 

not spent the trillion plus dollars on 

its various policy initiatives over the 

last year. 

Europe meanwhile (when 

compared to the UK and US) has, in 

the main, kept its powder dry. The 

economies are not so heavily 

weighted towards the service sector 

and levels of personal debt are way 

below those prevalent in the Anglo 

Saxon economies. Their capacity to 

maintain domestic demand levels 

without state aid has therefore been 

that much greater. If growth in the 

West flags once again eyes will be 

turned rather more aggressively on 

the Northern European Bloc to open 

the floodgates to aid expansion. 

Above everything is the fear of the 

“ghost at the feast”. Japan’s lost 

decade (actually nearer two decades 

now) is a spectre that nobody wants to 

contemplate, though for high inflation, 

high personal expenditure, nations 

such as the UK it has always seemed 

most unlikely. Even with the vast sums 

being expended, the sad fact is that the 

money supply data is still falling (M4 

growth in the UK is now dipping 

sharply) as banks retrench into their 

domestic economies. 

Japan has shown that even extreme 

levels of state funding can have little 

impact once the effects of deflation 

become endemic. Japan’s public debt 

is now 200% of GDP but nobody 

seriously expects hyper-inflation to 

rear its head in the land of the rising 

sun. In fact the deflationary aspect of 

Japan’s economy means the real value 

of its debt keeps increasing year on 

year. In Europe we have become used 

to governments inflating their way out 

of a poor debt situation (if inflation is 

5% then the absolute value of 

Simon Denham, managing director of spread 

betting firm, Capital Spreads, October 2008. 

TURNING JAPANESE? 

£1,000,000 debt is just £950,000 next 

year, £902,500 the next, etc). Imagine 

the effect of consumer confidence and 

expenditure if personal debts 

(mortgages, credit cards, etc) were 

greater in terms of salary and income 

next year even though they had not 

increased at all. Actually we do not 

need to imagine as we have the case 

study of the effect in Japan to show us. 

The weak pound means inflation 

has continued in positive territory in 

the UK but the recent strength of 

sterling means that this effect is being 

whittled away. By mid-October, if the 

pound remains where it is now, 

inflationary impulses will have largely 

worked its way through the system. 

Compounding this export growth has 

been in fact export contraction and the 

trade balance has fallen as import 

levels have reduced even further. 

If entrenched deflation takes a hand, 

investors will experience the Japanese 

effect of waning stock valuations. 

However, if inflation spirals out of 

control, rates will have to be hiked and 

money and bonds may well regain 

their attraction over equities. A 

continuation of the current equity rally 

will rely on reasonable, noninflationary 

growth, but this is a rather 

narrow path to tread. As ever ladies 

and gentlemen, place your bets. 


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FTSE GROUP TIE UP WITH MCX-SX 

14 

Index Review 

Index provider FTSE Group is developing and refining its 

approaches to emerging markets investing through innovative 

agreements with established and emerging stock exchanges and 

trading venues in a move to create both investible products and 

investment benchmarks in selected countries. Following on from its 

extensive agreements and ventures with the JSE in South Africa, 

FTSE Group has tied up with India’s MCX Stock Exchange (MCX-SX), 

to create new investment products for investors in the Indian subcontinent, 

which are based around indices and investment 

benchmarks and which will be listed and traded on the Indian 

exchange. FTSE will also extend co-operation to MCX-SX parent 

Financial Technologies Group’s exchange network in India, 

Singapore and Bahrain, and facilitate creation of international 

investment products to be listed on the MCX Stock Exchange. 

DEEPENING THE 

INVESTMENT MIX 

UP TO NOW, the Bombay Stock 

Exchange’s (BSE’s) Sensex and 

the National Stock Exchange 

(NSE) Nifty indices have dominated 

the Indian domestic equity markets. 

Global index provider FTSE Group 

instead chose to work with MCX-SX, 

a relatively new six-year-old exchange 

active in currency trading. Under the 

terms of the agreement, MCX-SX and 

FTSE will work together to create new 

domestic index products for India, as 

well as bring a set of international 

FTSE indices to MCX-SX, which will 

facilitate the creation of international 

investment products, including index 

futures, exchange traded funds and 

cash-based products, to be listed on 

the MCX-SX in India, after 

completion of regulatory compliances. 

By combining FTSE’s indexing 

heritage with MCX-SX’s deep local 

knowledge, both organisations are 

confident. “We can add value to 

international and domestic investors 

seeking to capture the investment 

opportunities in India’s markets,” says 

Donald Keith, FTSE Group’s deputy 

chief executive. “Our interest in India 

goes back some years, though we 

realised that to gain meaningful access 

and build a position in the market we 

needed a partner. MCX-SX think there 

is room to compete with both the BSE 

and NSE and I think they are right. 

India is still relatively underdeveloped 

from an index point of view.” The 

venture will begin market research to 

conduct a wide market consultation 

over the requirements for a new 

domestic index, says Keith, “and we 

hope to have something ready for 

investors by the end of this year”. 

According to Joseph Massey, 

managing director and chief executive 

officer of MCX-SX, the partners will 

“jointly design and introduce a range 

of indices which will meet the needs of 

the market participants. These indices 

will allow the market participants to 

take a view on global growth, manage 

sectoral as well as global risks. We are 

delighted to be working with FTSE on 

this important development. Through 

our deep domain knowledge of Indian 

financial markets and FTSE’s expertise 

Donald Keith, deputy chief executive, FTSE 

Group. Photograph kindly supplied by FTSE 

Group, August 2009. 

in creating global indices, we aim to 

help Indian investors make informed 

decisions through efficient and global 

benchmarked products.” 

The venture’s goal is to bring a broad 

range of domestic and international 

index products to the Indian financial 

services sector, which can then be used 

as performance benchmarks and as a 

basis for financial products such as 

institutional and retail funds, exchange 

traded funds, and derivative contracts. 

Going forward, FTSE and MCX-SX will 

agree to create a set of FTSE global 

indices which will be licensed to become 

the basis for futures contracts on MCX- 

SX in India subject to regulatory 

clearances. The partnership will also 

create a new jointly developed index 

series which will offer domestic as well 

as global investors new opportunities to 

“track, analyse and invest in India’s 

dynamic financial markets,”says Keith. 

MCX-SX already provides a highliquidity 

platform for hedging against 

the effects of unfavourable fluctuations 

in foreign exchange rates. Banks, 

importers, exporters and corporates can 

hedge on MCX-SX at low entry and exit 

costs. The exchange is now awaiting 

regulatory approval to commence equity 

trading. According to Keith:“MCX-SX is 

the right partner. The exchange has a 

long-term strategy, good technology 

and is poised for better growth. Today’s 


co-operation announcement 

marks an important step towards 

establishing FTSE in India, the 

world’s fastest-growing market, 

after China.” 

MCX-SX is a subsidiary of Multi 

Commodity Exchange of India Ltd 

(MCX), part of the Financial 

Technologies Group owned by 

Jignesh Shah, and operates under 

the regulatory framework of the 

Securities and Exchange Board of 

India (SEBI) and Reserve Bank of 

India (RBI). MCX-SX was 

inaugurated on 6th October 2008 

and went live the next day. 

According to Keith, MCX ranked 

among the world top 10 

commodity futures exchange in 

2007 and ranks number one in 

silver, number two in natural gas, 

and three in gold, crude oil and 

copper futures trading globally. 

MCX has helped redefine the 

Indian commodity market and is 

among the fastest growing 

exchanges in the world, boasting 

strategic alliances with NYMEX, the 

London Metals Exchange, 

TOCOM, NYSE Euronext, CCX, 

SHFE, and others. 

As a 51% stakeholder in MCX- 

SX, MCX will add value to the 

business of MCX-SX by bringing in 

the actual users of commodities to 

hedge their currency exposure on 

MCX-SX’s nationwide electronic 

trading platform. For its part, 

Financial Technologies Group is the 

promoter of nine other commodity 

and financial exchanges—six in 

India including Multi Commodity 

Exchange of India and three outside 

India, including the Dubai Gold 

and Commodities Exchange, The 

Singapore Mercantile Exchange 

and the Global Board of Trade, 

Mauritius and Bourse Africa. 

The venture builds on FTSE’s 

experience in partnering with 


stock exchanges globally to 

design and calculate a range of 

domestic, as well as global, 

indices.These exchanges include 

Singapore, Malaysia, Thailand, 

Johannesburg, Italy and 

London. Equally, the index 

provider is keen to get a foothold 

into the relatively prosperous 

Indian market. According to last 

year’s International Monetary 

Fund (IMF) economic outlook, 

the Indian economy, though 

stymied by the global financial 

crisis, is still expected to put in 

growth by some 6.9% this year, 

though it is still down on the 

peak of 9.3% registered in 2007. 

“There are limits, however, on 

how much Indian investors can 

invest overseas. That is why part 

of the plan is to bring a range of 

products to the Indian market, 

listed in India and based on 

FTSE Indices created globally, 

thereby precluding Indian 

investors of the need to go 

overseas,”explains Keith. 

FTSE is also expanding its 

products and partnerships in the 

wider Australasian region to 

include the FTSE Australia Index 

Series—designed to address 

Australia’s unique tax application. 

Other recent initiatives include a 

new FTSE Currency Forward Rate 

Bias Index Series as well as the 

FTSE Environmental Markets 

Classification System and the 

extension to the FTSE 

Environmental Opportunities 

Index Series. However, the Asian 

continent remains key for FTSE 

Group, acknowledges Keith, who 

points to a number of new index 

based initiatives, with the Bursa 

Malaysia and the Singapore Stock 

Exchange which have involved 

upgrades to each market’s 

respective benchmark indices. 

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15

PRIVATE EQUITY: IMPROVING OUTLOOK 

16 

In the Markets 

EVERY WHICH 

WAY BUT LOOSE 

Undoubtedly private equity is a tough place to be these days. 

However, despite the current difficulties, most private equity 

professionals expect conditions to improve towards the end of 

2010. According to Brian Livingston, head of private equity at 

Smith & Williamson, the accountancy and financial services firm in 

the United Kingdom: “The debt-fuelled frenzy is over, and financial 

engineering can no longer be relied on to generate equity returns. 

Private equity will have to go back to fundamentals— 

concentrating on old fashioned, solid businesses with strong 

management in attractive sectors. With returns based on business, 

rather than banking, we see a further move to more realistic 

pricing … Some have claimed that the private equity market is 

dead. The love affair with debt may be over but private equity will 

survive and adapt—this is the age of equity investment.” Is 

Livingstone right? Neil O’Hara assesses the industry outlook. 

Photograph supplied by 

istockphotos.com, supplied 

August 2009. 

PRIVATE EQUITY INVESTORS 

worldwide expect 10% of 

limited partners to default on 

their capital commitments in the next 

two years, according to a summer 

2009 survey conducted by Coller 

Capital, a boutique securities house 

based in London that specialises in 

secondary transactions in private 

equity interests. Investors in the 

United States are even more 

pessimistic: they expect a 13% default 

rate. The potential shortfall exceeds 

$80bn in the US alone, where private 

equity firms raised an aggregate 

$630bn in 2007 and 2008. Although 

many investors ended up overexposed 

to private equity after the market 

meltdown (which played havoc with 

target asset allocations) they haven’t 

yet defaulted in droves—and may 

never do so. 



18 


Christian Oberbeck, a founding partner of Saratoga Partners, a New York-based private equity 

firm that manages $250m. Oberbeck says: “All of a sudden you stop getting liquidity flows 

from prior investments …You have to tap into other investments in the rest of the portfolio to 

fund the call.” Photograph kindly supplied by Saratoga Partners, August 2009. 

Serial investors in private equity 

have undrawn commitments to newer 

funds while older ones throw off cash 

as the sponsor liquidates successful 

investments; in effect, returns from 

older funds provide a significant 

portion of the cash needed to finance 

future commitments. The amount 

invested at any one time may be no 

more than 50%-60% of the nominal 

exposure, so investors often sign up 

for higher commitments to keep the 

average amount invested close to their 

goal. The market crash eliminated the 

customary exit strategies for fund 

sponsors. However, it decimated 

merger activity, undermined the 

economics of recapitalisations and 

shut down initial public offerings 

altogether. Investors who have no 

cash coming in but still have to fund 

capital calls are now struggling to 

meet their obligations. “All of a 

sudden you stop getting liquidity 

flows from prior investments,” says 

Christian Oberbeck, a founding 

partner of Saratoga Partners, a New 

York-based private equity firm that 

manages $250m.“You have to tap into 

other investments in the rest of the 

portfolio to fund the call.” 

Suppose a $1bn pension fund had 

10% committed to private equity 

before the crash; if the portfolio also 

included $500m in equities whose 

value tumbled 50%, it became a $750m 

fund—and the $100m in private equity 

represents 13.3%, way above target. 

For high net worth individuals who 

used leverage to fund their private 

equity commitments, allocations got 

even more out of whack. 

Relations between private equity 

firms and their investors could turn 

ugly if limited partners do start to 

default. In early March, CapGen, a 

New York-based private equity shop, 

filed a complaint in Delaware 

` 

Relations between 

private equity firms and 

their investors could turn 

ugly if limited partners do 

start to default. In early 

March, CapGen, a New 

York-based private equity 

shop, filed a complaint in 

Delaware Chancery Court 

against two of its limited 

partners whom it claimed 

had defaulted on capital 

calls due on 31st 

December, 2008. 

Chancery Court against two of its 

limited partners whom it claimed had 

defaulted on capital calls due on 31st 

December, 2008. CapGen’s funds had 

$500m committed in total but the 

alleged defaulters were bit players: 

Chalice Fund was on the hook for 

$3.5m and WK GG Investment for 

$1m—and the missed call was for less 

than 25% of those amounts. 

Frank Morgan, president of Coller 

Capital in the US, points out that 

partnership documents typically 

permit the general partner to call on 

other limited partners to make up any 

defaulted amount, but CapGen chose 

to take legal action against two high 

net worth individuals instead. “It was 

a warning to other larger investors not 

to try this,” he says, “I do not think a 

lot of defaults have occurred.” 

In a slow deal market, Morgan says 

private equity firms haven’t been 

making many capital calls except for 

follow-on commitments to existing 

investments anyway. At some point 

that will change—probably sooner 

rather than later. Private equity funds 

have “use it or lose it” provisions that 


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20 


require general partners to cancel 

commitments if the money is not 

invested within the investment period, 

which is typically five years. The clock 

is ticking, and firms don’t want to lose 

the management fees they charge 

even on uninvested funds.“If there are 

still economic pressures when activity 

picks up, you will start to see defaults 

or more product trading in the 

secondary market,”says Morgan. 

Investors in private equity funds make 

firm capital commitments at the outset, 

but the sponsor does not draw money 

down until needed to finance a particular 

investment. For their own protection in 

this deferred funding model, general 

partners have long insisted on draconian 

penalties to discourage limited partner 

default. Paul Ellis, a partner in the 

restructuring and recovery services 

practice at PricewaterhouseCoopers, says 

every fund is different, but limited 

partners in default always lose their 

voting rights and typically forfeit 25%- 

50% of future fund distributions. They 

may be liable for future management 

fees on the amount of their original 

commitment (including the defaulted 

amount), too.“Those penalties are pretty 

significant and they affect the reputation 

of the investor,”says Ellis.“We have not 

seen any significant volume of 

threatened or actual defaults.” 

Saratoga’s Oberbeck points out that 

the severity of the penalties depends on 

where the fund is in its lifecycle and 

how the early investments have 

performed. Investors will be loath to 

give up future gains from a successful 

fund, but if a fund made its initial 

investments in 2006 or the first half of 

2007 it may well be under water.“If you 

have invested $40m out of $100m but 

you think that $40m is worth zero, what 

do you lose by walking away?” asks 

Oberbeck. “Do you want to be in the 

back end of a fund that has lost money? 

The carried interest incentives for the 

fund manager are not there either.” 

Saratoga has not experienced any 

limited partner defaults itself although 

Oberbeck has heard talk of the 

phenomenon. Like Ellis, he suggests 

that investors and private equity firms 

are talking to each other to work out a 

solution acceptable to both. General 

partners have to be careful, however; 

whatever they do to accommodate 

one limited partner will set a 

precedent other investors may try to 

follow. Notwithstanding the CapGen 

case, Oberbeck doesn’t expect 

sponsors to resort to litigation. “You 

don’t bite the hand that feeds you,“ he 

says. “If you sue an endowment or a 

pension fund it will be all over the 

press. It doesn’t look good.” 

Ellis says private equity firms have 

become more willing to exchange 

information with limited partners, 

particularly about valuations and 

potential changes to the general 

partner’s investment strategy. For 

example, in the current environment 

many sponsors see opportunities to buy 

companies out of bankruptcy, which 

may not have been contemplated when 

a fund was first launched. “The 

underlying concept is understated 

value. It happens to reside in the 

bankruptcy world at the moment,”says 

Ellis. “Limited partners who have not 

been involved before are concerned 

enough to ask more questions about 

why sponsors are doing this and what 

the implications are.” 

While Ellis acknowledges that 

general partners may shy away from 

capital calls if they believe limited 

partners will default, he has not 

encountered any reticence among his 

clients. Quite the opposite, in fact: 

limited partners are pressing sponsors 

to deploy money—they don’t like to 

pay fees on unfunded capital 

commitments. Nevertheless, sponsors 

won’t go out of their way to 

antagonise limited partners by 

investing in troubled industries such 

Frank Morgan, president of Coller Capital in 

the US, points out that partnership 

documents typically permit the general 

partner to call on other limited partners to 

make up any defaulted amount, but CapGen 

chose to take legal action against two high 

net worth individuals instead.“It was a 

warning to other larger investors not to try 

this,” he says,“I don’t think a lot of defaults 

have occurred.” Photograph kindly provided 

by Coller Capital, August 2009. 

Paul Ellis, a partner in the restructuring and 

recovery services practice at 

PricewaterhouseCoopers, says every fund is 

different, but limited partners in default 

always lose their voting rights and typically 

forfeit 25%-50% of future fund distributions. 

Photograph kindly supplied by 

PricewaterhouseCoopers, August 2009. 


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22 


as auto parts, for example. “It would 

be reasonable to expect general 

partner reluctance to call capital 

without a significant amount of 

limited partner support,” says Ellis. 

“[However,] we are not seeing 

defaults or threats of default.” 

Kathy Jeramaz-Larson, executive 

director of the Institutional Limited 

Partners Association, a Toronto-based 

association dedicated to private equity 

investors around the globe, wonders 

whether the talk of limited partner 

default is real or if it is simply an urban 

legend.“I have not heard from either 

limited partners or general partners of 

any limited partner defaults,”she says. 

“That’s not to say they aren’t 

happening—it’s just that I am not 

aware of any specific instances.” 

Jeramaz-Larson has heard of 

situations where investors have made 

hard decisions not to reinvest in the next 

fund offered by a particular sponsor, 

however. That’s consistent with Coller 

Capital’s finding that 31% of limited 

partners plan to reduce the number of 

general partner relationships they have, 

and that 20% intend to cut their 

allocation to private equity in the next 

two years. Investors also expect that 

25% of private equity sponsors will be 

unable to raise new funds, effectively 

putting those firms out of business 

when their existing funds liquidate. If 

investors can afford to wait, a 

combination of future distributions 

and passing up opportunities to 

reinvest with some managers will get 

their allocation back on target. The 

secondary market is always an option 

for those under immediate pressure, 

too. “Not only do they get some 

consideration for what they invested 

in the fund but they get relieved of the 

ongoing commitment,” says Coller 

Capital’s Morgan. “I expect people to 

find that attractive.”For most investors 

under pressure from excess exposure 

to private equity, default on capital 

calls is likely to be a last resort. 

UK SURVEY CHARTS UPS & 

DOWNS OF PRIVATE EQUITY 

The number of private equity houses is expected 

to fall significantly over the next 24 months, 

according to a recent survey carried out by the 

UK accounting and financial services firm Smith & 

Williamson. The survey of 136 private equity senior 

executives was conducted between 10th June and 

3rd July 2009. Some 75 different mid-market 

(£5m-£50m) PE houses responded, between them 

representing more than two-thirds of all UK 

mid-market PE transactions. 

According to Brian Livingston, head of private 

equity at the firm, some two-thirds of the 136 senior 

private equity executives across the 75 firms polled 

shared the gloomy prediction for the industry. 

“Recent poor performance has meant many private 

equity houses are being squeezed: they cannot raise 

new equity funds and cannot raise bank finance 

either, since the banks are increasingly focusing on 

investors’ track records before committing finance for 

deals. As a result, many firms are effectively unable 

to make investments and may have little choice but 

to merge or shut down,” notes Livingston. 

While respondents overwhelmingly stated that 

entry multiples on new investments have fallen since 

2007, so far lower prices have not resulted in more 

deals. Some 82% of the survey respondents agreed 

that over the last two years it has become much 

harder for companies to raise finance from private 

equity investors. Moreover, 93% believe that more 

private equity-backed businesses will breach banking 

covenants in the year ahead. The private equity 

community does not expect to get much help from 

the government either. Only 12% believe government 

policies will help to ease problems in the private 

equity industry. 

Livingston adds: “Even with lower entry multiples, 

the lack of bank funding makes it difficult to 

structure deals in a way which will generate 

satisfactory returns. Instead, we are seeing more 

and more private equity houses shifting their focus 

from making new investments to preserving the value 

of their existing portfolios.” 

However, the outlook is brighter. Some 68% of 

survey respondents think investor confidence will 

begin to return, while half believe bank finance will 

become more readily available in coming months 

and 57% expect the current recession in the UK to 

end by 2010. 


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INTEREST RATE OUTLOOK: STEADY AS SHE GOES 

24 


Dollar Down 

But Not Out 

In an effort to keep the economic recovery on 

track, the Federal Reserve Board has made clear 

its intention to hold rates at their current 

bottom-scrapping levels well into next year. 

Meanwhile, the dollar, having closed the gap 

against numerous international currencies 

during the first part of the year, is once again 

back down—but not out, according to most 

observers. From Boston, David Simons reports. 

IN ITS MOST recent monetary 

policy statement issued in late 

June, the Federal Open Market 

Committee indicated a willingness to 

maintain a target range of 0%-0.25% 

for Federal funds as part of the overall 

effort to “employ all available tools to 

promote economic recovery and to 

preserve price stability”. With rates 

skimming zero, the Fed’s focus in 2009 

has shifted to quantitative easing 

measures to help stimulate the 

economy and the functioning of 

financial markets, including 

substantial purchases of Treasuries and 

mortgage securities, says John Beggs, 

chief economist, AIB Global Treasury. 

“Given the very weak economic 

conditions, with the unemployment 

rate set to soon breach 10%, as well as 

very subdued inflation, the current 

exceptionally low level of the Fed 

funds rate can be expected to remain 

in place well into 2010 at least.” 

Richard B Hoey, chief economist for 

Dreyfus Funds, believes that 

policymakers have correctly diagnosed 

the current financial and economic risks 

and have taken the proper steps to keep 

the situation under control. Along with 

a gradual recuperation of the financial 

sector as it moves from “semi-orderly 

deleveraging to orderly deleveraging,” 

Hoey also sees the continuation of 

extremely low interest rates worldwide 

for an extended period. 

Of course, it wasn’t all that long 

ago that the Federal Reserve Board 

went on a similar rate-slashing 

campaign, chopping the Federal 

funds rate from 6.5% to 1% during 

2001-2003. Many observers still 

believe that the Fed’s subsequent 

about face, which took the rate from 

1% to 5.25% during 2004-06, 

effectively punched a hole in the realestate 

bubble the Fed helped create. 

Technology solutions 

Conditions are markedly different this 

time around, however, and strategists 

such as Nick Colas, chief market 

strategist for New York-based 

ConvergEx Group, an institutional 

agency brokerage and investment 

technology solutions provider, aren’t 

concerned about a repeat scenario 

based on current monetary policy. 

Still, the quantitative easing trend 

does bear watching, he says. “For 

instance, our offshore trading partners 

worry that we are basically monetising 

Photograph supplied by istockphotos.com, August 2009. 

the debt, and the Fed is just printing 

money to buy treasuries, which may 

be perceived as a breach between the 

separation of the central banks and 

fiscal policy. The Chinese in particular 

are concerned about the notion of 

quantitative easing as a way of 

monetising debt, because obviously if 

this really were the case, the dollar 

would weaken considerably—and 

that would be a major problem.” 

Hans Redeker, global head of 

foreign exchange strategy at BNP 

Paribas, says that the worldwide belief 

the worst is over has furthered 

optimism over the recovery process, 

which in turn has provided support 

for asset markets, as well as allowing 

currencies to extend their rebound 

against the dollar and yen. Indeed, the 

perception that the market has 

bottomed has negatively impacted the 

dollar, as investors abandon cash 

positions in favour of higher yielding 

instruments. After staging a powerful 

rally during the mass flight to quality 

beginning late last year, the dollar has 

since given back a good portion of its 

gains. The British pound, which hit a 

seven-year low of $1.35 against the 

dollar in March, vaulted ahead of the 


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26 


greenback some 25% by midsummer. 

Meanwhile, a string of 

better-than-expected earnings reports 

by US companies helped drop the 

dollar to its lowest level against the 

euro since early June. By August, the 

euro had risen above the $1.40 mark, 

its highest position this year. 

Speaking on behalf of Dreyfus, 

Hoey said that it was not surprising 

that the dollar would hit a wall once 

the financial crisis began showing 

signs of improvement. Contrary to 

some opinions, Hoey doesn’t believe 

the dollar is overvalued in comparison 

to other industrial currencies. Relative 

short-term interest rate spreads 

shifted against the dollar as countries 

such as Japan had less room to reduce 

their rates, or, in the case of Europe, 

refrained from lowering their policy 

rates to the same degree. “However, 

the effect of the more aggressive 

stimulus in the US is that the 

[domestic] economic recovery is likely 

to lead the European recovery and 

economic activity is likely to remain at 

a less depressed level in the US than 

in Japan.” 

Sterling may also endure periods of 

turbulence over the near term. In a 

recent report, the International 

Monetary Fund (IMF) inferred that 

additional injections of capital may be 

required in the UK due to the 

continuation of challenging economic 

conditions, stating: “Substantial 

further writedowns would result in an 

erosion of capital buffers and might 

lead to renewed doubts about the 

capital adequacy of individual banks.” 

The UK is expected to round out 2009 

with a negative growth rate of -4.2%, 

improving to near 0.2% next year. 

Despite some improvement of late, 

the world’s leading economies still find 

themselves combating a slew of 

negatives, not the least of which is the 

continuation of extremely tight credit 

conditions. In its recent Global Credit 

Market Outlook, State Street Global 

Advisors suggested that a global 

recovery“ seems to be dependent upon 

a genuine improvement in the US, and 

this, in turn, depends critically upon 

effective economic policy”. On that 

point, SSgA expects global growth to 

reach -1.1% this year (from 3.2% in 

2008), reflecting both a lock-step 

contraction of the advanced economies 

as well as a slowing of growth within 

emerging markets. While growth is 

expected to reach positive territory in 

the coming year, it will more than likely 

track at the recession-level rate of less 

than 2.5%. Economic sluggishness will 

all but ensure a continuation of slack 

monetary policy, says SSgA. “Renormalisation 

of policy rates is not 

likely to begin anywhere until late 2010 

and in most places not until 2011.” 

Positive indicator 

Though on the one hand the 

greenback pullback may be viewed as 

a positive indicator—i.e., increased 

global investor risk tolerance—some 

are worried about its impact on the 

US economic recovery. “The central 

issue is that crude oil is 

predominantly priced in dollars, so a 

softer dollar increases energy prices, 

such as what Americans pay for 

gasoline,” notes Colas. “The average 

household buys some 100 gallons a 

month, so as gasoline prices rise, their 

overall discretionary income falls. 

That makes a consumer-led recovery 

much more difficult.” 

At the same, says Colas, fears of 

inflation are unwarranted. “Capacity 

utilisation is still so slack, and 

unemployment is still rising, that it just 

doesn’t seem there is any kind of 

inflationary risk for at least the next 12 

months,” says Colas.“There have been 

worries over this raw flood of money 

that has just been issued because to 

many people it seems inflationary. The 

reality is that people don’t have the 

means to go hog-wild on spending, 

and from a producer standpoint, why 

would you try to raise prices when 

you’re just happy to have the capacity?” 

Comments made by Fed chairman 

Ben Bernanke have underscored the 

uneasiness many feel over the ability of 

the Fed to take action without any kind 

of third-party oversight.“Inadvertently, 

quantitative easing has become a 

lightning rod in terms of what the role 

of the Fed should be during this time,” 

says Colas. In a recent market 

commentary, Colas suggested that 

efforts to “intrude on the Fed’s 

independence will likely accelerate”the 

longer the US and global economies 

remain under pressure. Colas believes 

the Fed has done a good job under 

difficult conditions, and therefore “any 

successful effort to undermine its 

independence will only exacerbate 

weakness in the dollar and prolong 

domestic economic underperformance. 

“Hopefully the political rankling 

that we’ve seen is nothing more than 

theatre, but there are still a lot of 

people who legitimately believe that 

the Fed has too much power. I do not 

believe efforts to change that 

independence are constructive at all.” 

The great irony, says Colas, is that 

the US, the country that started the 

implosion, should be considered the 

safest haven in the midst of the 

implosion.“Fair or not, that is exactly 

what has happened, and I don’t 

anticipate that changing to any great 

degree. We might continue to see 

some devaluing of the dollar as money 

moves into more speculative 

investments, but in general, I think 

everyone is looking at the US 

economy as the place that has to start 

picking up steam in order for the rest 

of the world to move forward. If that is 

the case, why wouldn’t you want to be 

involved in US securities? So for that 

reason alone I believe the dollar is safe 

for the time being.” 



26 


greenback some 25% by midsummer. 

Meanwhile, a string of 

better-than-expected earnings reports 

by US companies helped drop the 

dollar to its lowest level against the 

euro since early June. By August, the 

euro had risen above the $1.40 mark, 

its highest position this year. 

Speaking on behalf of Dreyfus, 

Hoey said that it was not surprising 

that the dollar would hit a wall once 

the financial crisis began showing 

signs of improvement. Contrary to 

some opinions, Hoey doesn’t believe 

the dollar is overvalued in comparison 

to other industrial currencies. Relative 

short-term interest rate spreads 

shifted against the dollar as countries 

such as Japan had less room to reduce 

their rates, or, in the case of Europe, 

refrained from lowering their policy 

rates to the same degree. “However, 

the effect of the more aggressive 

stimulus in the US is that the 

[domestic] economic recovery is likely 

to lead the European recovery and 

economic activity is likely to remain at 

a less depressed level in the US than 

in Japan.” 

Sterling may also endure periods of 

turbulence over the near term. In a 

recent report, the International 

Monetary Fund (IMF) inferred that 

additional injections of capital may be 

required in the UK due to the 

continuation of challenging economic 

conditions, stating: “Substantial 

further writedowns would result in an 

erosion of capital buffers and might 

lead to renewed doubts about the 

capital adequacy of individual banks.” 

The UK is expected to round out 2009 

with a negative growth rate of -4.2%, 

improving to near 0.2% next year. 

Despite some improvement of late, 

the world’s leading economies still find 

themselves combating a slew of 

negatives, not the least of which is the 

continuation of extremely tight credit 

conditions. In its recent Global Credit 

Market Outlook, State Street Global 

Advisors suggested that a global 

recovery“ seems to be dependent upon 

a genuine improvement in the US, and 

this, in turn, depends critically upon 

effective economic policy”. On that 

point, SSgA expects global growth to 

reach -1.1% this year (from 3.2% in 

2008), reflecting both a lock-step 

contraction of the advanced economies 

as well as a slowing of growth within 

emerging markets. While growth is 

expected to reach positive territory in 

the coming year, it will more than likely 

track at the recession-level rate of less 

than 2.5%. Economic sluggishness will 

all but ensure a continuation of slack 

monetary policy, says SSgA. “Renormalisation 

of policy rates is not 

likely to begin anywhere until late 2010 

and in most places not until 2011.” 

Positive indicator 

Though on the one hand the 

greenback pullback may be viewed as 

a positive indicator—i.e., increased 

global investor risk tolerance—some 

are worried about its impact on the 

US economic recovery. “The central 

issue is that crude oil is 

predominantly priced in dollars, so a 

softer dollar increases energy prices, 

such as what Americans pay for 

gasoline,” notes Colas. “The average 

household buys some 100 gallons a 

month, so as gasoline prices rise, their 

overall discretionary income falls. 

That makes a consumer-led recovery 

much more difficult.” 

At the same, says Colas, fears of 

inflation are unwarranted. “Capacity 

utilisation is still so slack, and 

unemployment is still rising, that it just 

doesn’t seem there is any kind of 

inflationary risk for at least the next 12 

months,” says Colas.“There have been 

worries over this raw flood of money 

that has just been issued because to 

many people it seems inflationary. The 

reality is that people don’t have the 

means to go hog-wild on spending, 

and from a producer standpoint, why 

would you try to raise prices when 

you’re just happy to have the capacity?” 

Comments made by Fed chairman 

Ben Bernanke have underscored the 

uneasiness many feel over the ability of 

the Fed to take action without any kind 

of third-party oversight.“Inadvertently, 

quantitative easing has become a 

lightning rod in terms of what the role 

of the Fed should be during this time,” 

says Colas. In a recent market 

commentary, Colas suggested that 

efforts to “intrude on the Fed’s 

independence will likely accelerate”the 

longer the US and global economies 

remain under pressure. Colas believes 

the Fed has done a good job under 

difficult conditions, and therefore “any 

successful effort to undermine its 

independence will only exacerbate 

weakness in the dollar and prolong 

domestic economic underperformance. 

“Hopefully the political rankling 

that we’ve seen is nothing more than 

theatre, but there are still a lot of 

people who legitimately believe that 

the Fed has too much power. I do not 

believe efforts to change that 

independence are constructive at all.” 

The great irony, says Colas, is that 

the US, the country that started the 

implosion, should be considered the 

safest haven in the midst of the 

implosion.“Fair or not, that is exactly 

what has happened, and I don’t 

anticipate that changing to any great 

degree. We might continue to see 

some devaluing of the dollar as money 

moves into more speculative 

investments, but in general, I think 

everyone is looking at the US 

economy as the place that has to start 

picking up steam in order for the rest 

of the world to move forward. If that is 

the case, why wouldn’t you want to be 

involved in US securities? So for that 

reason alone I believe the dollar is safe 

for the time being.” 


RISK MANAGEMENT IN HIGH-FREQUENCY TRADING 

28 


What you 

see is what 

you risk 

HIGH-FREQUENCY TRADING 

these days is a serious market 

tool and risk management in 

trading is now more important than 

ever. Managing risk is not just about 

preventing loss; it is also about making 

money. It is about knowing, across 

traders, desks and asset classes, what 

the entire firm’s exposure is, at any point 

in time. It is also being able to do 

something about it (automatically) in 

real time. With the confidence to sense 

and respond immediately, it is about 

trading responsibly and without fear. 

With both trade generation and 

execution growing ever faster and 

more automated, an awareness of risk 

is also growing. There has been an 

increase in the requirement for the 

real-time risk management aspects of 

algorithmic trading as people learn to 

use algorithms to capitalise on 

opportunities faster than they 

Photograph © Irina 

Petrenko/Fotolia.com, 

supplied August 

2009. 

The past 12 months have changed the game for how risk is viewed 

and managed. Such has been the extreme level of volatility at 

times that only the most highly equipped firms have felt safe they 

can avoid sudden losses. In the face of such extreme conditions, 

the parameters for “conventional” risk management, 

understandably, have also had to change. Companies need much 

better access to information in real time if they are to stand a 

chance of coping under a new financial landscape. Dan Hubscher 

of Progress Apama looks at real-time risk management in the 

context of high-frequency trading and aggressive algos. 

otherwise could manually. In the past, 

some firms have been relatively relaxed 

about the risks, arguing that if they had 

one bad trading day, the profits from 

the rest of the year would make up for 

it. In this recessionary climate, that 

attitude has changed significantly. 

Now everybody is interested in what 

their level of exposure is at any given 

point in time, all the time, and what the 

safeguards are. This is a major focus. 

Many are finding that as trading 

velocity increases, it is no longer 

acceptable to assess risk at the end of 

the day. 

In these straightened times, highfrequency 

trading is an essential tool for 

traders seeking liquidity. Moreover, the 

growth in electronic communication 

networks (ECNs), FIX adoption, direct 

market access (DMA) and the increase 

in electronic trading tools have created 

a fertile environment for the 

exponential growth of the highfrequency 

trading community. 

High-frequency players have 

undoubtedly increased volume on 

markets. The effect of such trading 

strategies is improved market quality, 

but market participants have also had 

to increase their IT spend and improve 

in-house systems to cope with rising 

trading volume. While these are 

necessary advancements and mark a 

natural evolutionary step within 

capital markets, the key trend is to 

turn real-time risk management from 

the exception to the norm. 

Pre-trade checks are one way of 

offering this real-time risk protection. 

Broker-dealers often wrestle with how 

to offer it, particularly within the context 

of providing DMA. Generally you see it 

in the form of a sponsored-access 

service through which the broker lends 

its clients its identification to access 

securities exchanges directly. While 

realising the benefits of giving its clients 

direct access, brokers are keenly aware 

of the risks associated with this practice. 

Ultimately, many have taken the view— 

most notably and recently Goldman 

Sachs—that there is a need for pretrade 

checks before orders are placed. 

Real-time view 

Futures clearing firms equally demand 

a view of the risk stemming from 

proprietary trading desks’ order flow 

to access futures markets via DMA. 

This requires a real-time view on the 

desks’ positions and the ability to 

place and enforce limits on that order 

flow. This practice is becoming 

increasing popular (particularly in the 

current climate of high-frequency 

trading) as a safeguard against 

technology failures, oversized orders 

and other situations where there is a 

potential for systematic market 

impact. Drop-copies from the 

exchanges are no longer seen as an 

acceptable or quick enough method. 


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RISK MANAGEMENT IN HIGH-FREQUENCY TRADING 

30 


One sector of the market that really 

needs to wake up to the issue of realtime 

risk management is the hedge fund 

community. The Obama administration 

has already begun to take steps by 

reforming the regulatory environment in 

the United States. The government in 

the United Kingdom has announced, 

meantime, its intent to effect sweeping 

reforms of the Financial Services 

Authority. While it might not be crystal 

clear how these reforms are going to 

affect hedge funds, what is clear is that 

(like it or not) hedge funds will be next in 

the line of fire for regulators. 

There is a groundswell of opinion 

that an essential task for the regulation 

of hedge funds is to source and 

aggregate data on leverage and 

positions. For the regulation of hedge 

funds to stand a chance of being 

successful, regulators will need to be 

able to track the concentration of hedge 

funds by assets and by strategies, and to 

understand how the failure of one firm 

might affect others. Real-time risk 

management through the pre-trade 

checking therefore is critical. 

Even so, there are a number of issues 

to consider for hedge funds and 

institutions. Pre-trade risk management 

is perceived to add latency to the 

process. Moreover, the issue of how a 

broker’s handling of buyside order flow 

impacts anonymity also has to be 

tackled. Having visibility into the fund’s 

trading patterns could potentially 

provide the broker the ability to frontrun 

the orders and reverse-engineer the 

algorithms, among other things. So how 

do you solve the latency and anonymity 

problems and still control the risk? 

Some look to broker neutral real-time 

systems, while others employ the trick 

of abstracting the positions/exposure in 

real-time from the details of the order 

flow that pushed the exposure to that 

level in the first place. Either way, it is 

important to note that minimising the 

latency impact of pre-trade risk 

checking is not only essential, but also 

achievable through event driven, realtime 

approaches, as compared to the 

other traditional methods of checking 

trades before being placed. 

In addition, real-time risk 

management does not have to impact 

anonymity if handled well. It’s generally 

accepted that the buyside’s way around 

this issue is via the DMA route.The best 

systems for doing this are those that have 

no knowledge of the trading algorithm 

and do not deduce the algorithm from 

seeing the order flow; they only care 

about issues such as instantaneous perorder 

risks or total position/exposure 

over time, regardless of how it got there. 

Impact of algorithms 

The advantages of real-time risk 

management are crystal clear. It allows 

traders to benefit from more aggressive 

limits, which safely increases trading 

volumes and thereby increases 

profitably from high-frequency trading 

strategies. It preserves the 

buyside/sellside relationship when used 

in conjunction with DMA or any other 

instance where the broker must 

otherwise either overly constrain or 

blindly trust the trading activities of its 

client.Another plus point for the buyside 

is that direct adoption empowers it to be 

more broker-neutral and, as many will 

find out, hold off the regulators if 

implemented widely enough. 

Within all this talk of real-time risk 

management and high-frequency 

trading, it is critical not to forget the role 

and impact of algorithms. While the 

earthquake that shook the markets last 

year undoubtedly drove computerorientated 

investors temporarily back to 

more traditional methods and trading 

styles, many brokers expect the growth 

curve in electronic trading to continue. 

To this end, there is still a strong appetite 

for algorithms which aggressively 

complete transactions with as little 

latency and as unobtrusively as possible. 

According to Sang Lee, a managing 

partner at Aite Group, the first 

iteration of aggressive algorithms 

were more about looking for liquidity 

in the displayed market, but now 

algorithms have evolved to the point 

where aggressive algorithms seeking 

liquidity can operate simultaneously 

in both dark and displayed venues, 

allowing for greater efficiency and 

speed of execution. Aite Group 

research has also highlighted the fact 

that leading algorithms in the 

“aggressive-algo” category have 

grown significantly in the past year. 

Those trading in foreign exchange 

can testify to this trend. Despite the 

downturn in equities, many brokers 

trading FX benefited as long as the 

algorithms they used could 

accommodate attendant larger spreads 

and higher volatility. Some had to 

customise their algorithms to do so; but 

once done, the new algorithms worked 

well and to quote a trader were“making 

money hand over fist”.There have been 

cases of buyside firms trading primarily 

in equities prior to the market 

meltdown at the end of 2008 that then 

wanted to start trading foreign 

exchange with algorithms as quickly as 

possible because of the opportunities to 

capture gains on new volatility, which 

was not expected to last very long. 

Ultimately all this points to a shift in 

the landscape bought about by 

volatility, regulation and competition. 

Traders and investors are constantly 

looking at ways to forge ahead of 

competitors while trying to not to fall 

foul of the regulator and an industry 

stung by events of the last year. Traders 

eventually and often reluctantly adhere 

to the old saying in racing: “Never drive 

faster than your guardian angel can fly.” 

Adopting real-time risk management is 

a step in the right direction, helping the 

guardian angel fly at the speed the 

traders need to drive in order to win 

their race in high-frequency trading. 


THE FTSE 

IWANT A 

LOW CARBON 

WORLD 

INDEX 

FTSE. It’s how the world says index. 

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investors who want to be at the forefront of environmental markets. With the 

inclusion of renewable & alternative energy, energy efficiency, water technology 

and waste & pollution control companies, the FTSE Environmental Markets Index 

Series focuses on the companies that are shaping our future. 

www.ftse.com/environment 

© FTSE International Limited (‘FTSE’) 2009. All rights reserved. FTSE ® is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE under licence.

NORDIC ZONE MOVES TO UPGRADE PAYMENTS INFRASTRUCTURE 

32 

Regional Review 

SWEDISH PSD LEGISLATION 

is expected to be ready during the 

spring of 2010, though 

Skandinaviska Enskilda Banken AB 

(SEB) says its adherence to the directive 

will be ready from November 1. David 

Teare, global head of customer 

relationship management at the bank, 

says:“For clients, the PSD will entail two 

major changes in terms of payments. 

Transferred amounts shall reach the 

receiver intact; no deductions may be 

made from the payment amounts, as 

previously occurred. Instead, any fees 

must be reported separately. In addition, 

the amount will be available to the 

recipient the same day as the receiving 

bank is credited.” 

PSD is an important building block 

in creating a single European payment 

market and aims to equalise legal 

conditions governing payment services 

SWEDEN’S CENTRAL BANK in 

June noted that loan losses this 

year and next among the country’s 

leading banks could reach as much as 

$23bn, as the economies of Latvia, 

Lithuania and Estonia continue to 

contract at double-digit rates this year. 

The situation is not helped by the fact 

that the Baltic countries are hanging on 

to their currency pegs, thereby making 

EUROPEAN PAYMENTS SYSTEMS 

UPGRADED IN NORDIC ZONE 

The Payment Services Directive (PSD) aims to make payments 

within the European market easier and more cost efficient. All 

European banks in the European Union group and within the 

wider European Economic Area (EEA) countries must comply by 

the beginning of November this year. 

throughout Europe for both individuals 

and enterprises. PSD also creates the 

necessary legal platform for the Single 

Euro Payments Area (SEPA). Together, 

the PSD and SEPA will reduce national 

divergences and harmonise payment 

instruments, technical standards and 

information on payments. 

JP Morgan’s Treasury Services 

business, full-service providers of cash 

management, trade finance and 

treasury solutions, recently announced 

its new payables and receivables 

capabilities in the Baltic and Nordic 

regions through both urgent payments 

and non-urgent local automated 

clearing house (ACH) channels. 

Corporates with customers or suppliers 

in these markets can now initiate and 

receive payments in seven additional 

countries. The move brings the total 

number of European countries in 

recovery a lot more difficult. Although 

the temptation and encouragement for 

the Baltic states to devalue is rising, it 

would have the double whammy of 

stymieing their desire to be part of the 

EU currency union, and also spiral more 

borrowers into default. Either scenario 

does not bode well for the Nordic banks. 

Nordea Bank AB and Svenska 

Handelsbanken AB, two of the region’s 

which JP Morgan clients can transact in 

the domestic clearing to 20, in addition 

to SEPA and multi-currency 

transaction services. Alex Caviezel, 

head of Treasury Services in Europe, 

Middle East and Africa, explains: “The 

model is ideal for larger organisations 

based outside the Baltics or Nordics 

which actively trade there.The solution 

simplifies the task of managing 

multiple bank accounts and bank 

relationships, enabling clients to 

manage their funds conveniently on a 

London-based account.” 

Additionally, Caviezel says that the 

bank continues to invest in its global 

payments platform, “enhancing local 

payments and receivables services in 

Italy, Switzerland and the UK”. He 

adds: “These enhancements include 

improved reporting, later cut-off times 

and enhanced local ACH connectivity.” 

TESTING TIMES FOR NORDIC BANKS 

Nordic banks have substantial exposure in the Baltic region after 

lending heavily in Latvia, Lithuania and Estonia during several years 

of booming growth. As the Baltics continue to exert a drag effect in 

the Nordic markets, foreign banks are looking at the potential to 

expand their business lines. 

larger banks, have reported forecastbeating 

second-quarter earnings after 

taking much smaller provisions than 

rivals for potential losses on bad loans. 

However, Nordea and Svenska 

Handelsbanken may be the exceptions 

that prove the rule, as Swedbank AB 

and Skandinaviska Enskilda Banken 

AB, which have expanded aggressively 

into the Baltic countries, will impact on 


Global solutions, delivered locally 

For two decades, J.P. Morgan’s mission has been to serve as a trusted partner for our 

clients in the Nordic region. Our locally based experts, backed by our global team, are 

ready to discuss an array of securities services and related solutions with you. We are 

committed to helping you and your clients achieve future success. 

To learn more about how J.P. Morgan can help your company succeed, please contact: 

Copenhagen 

Allan Nedergaard +45-3344-9200 

Helsinki 

Jyrki Partanen +358-20-7909-400 

Oslo 

Peder Sunde +47-22-00-30-00 

Stockholm 

Bo Thulin +46-8-402-06-00 

©2009 JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Issued and approved for distribution in the United Kingdom and the European Economic Area by J.P. Morgan 

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NORDIC ZONE MOVES TO UPGRADE PAYMENTS INFRASTRUCTURE 

34 

Regional Review 

earnings. Nordea’s exposure to the 

Baltics is relatively small (accounting 

for only 3% of total lending) while 

Handelsbanken has been reticent 

about the opportunities provided by its 

near neighbours and reports no 

exposure to the economy-torn states. 

Swedbank and SEB, meantime, report 

exposure totalling 17% and 13% of 

their total lending in the Baltics 

respectively, with related net losses of 

SKR2.01bn ($280m) for Swedbank and 

losses of SKR193m for SEB. 

The biggest Nordic banking group 

had $10.4bn of loans to the region by 

the end of this year, of which the 

biggest portion (around a third), was in 

WITH THE ADDITION 

of Equiduct, KAS BANK is 

currently linked to seven 

Multi-Trading Facilities (MTFs). In total, 

18 regulated exchanges and these seven 

MTF’s are directly connected to the 

Single Platform of KAS BANK in 

Amsterdam.This platform processes our 

client transactions in a uniform manner, 

with a single collateral and margin 

arrangement for all markets. 

Equiduct Trading provides a 

Markets in Financial Instruments 

Directive (MiFID) compliant, 

integrated pan-European single point 

of connectivity for trading services in 

most liquid equity instruments listed 

on the European Economic Area 

Regulated Markets through the 

Regulated Market operated by Börse 

Berlin in Germany. Equiduct’s market 

is divided into several geographical 

segments, each following the trading 

schedule and characteristics of their 

Latvia and the rest evenly split 

between Estonia and Lithuania. 

Norway’s top bank, DnB NOR, has a 

Baltic exposure through its DnB NORD 

unit headquartered in Copenhagen, a 

joint venture with Norddeutsche 

Landesbank. DnB NORD operates in 

Estonia, Latvia, Lithuania, Denmark, 

Finland and Poland. 

Nordea expects that rising 

bankruptcies in the Nordic countries will 

continue to exert pressure on the 

balance sheets of local banks for some 

time. Nordea’s second-quarter 2009 (Q2 

2009) net profit fell 11% to €616m from 

€692m over the same period last year, 

beating analyst expectations. Nordea 

home market. For the settlement of 

transactions in securities listed on the 

NYSE Euronext markets and the 

London Stock Exchange (LSE)— 

including SIX Swiss Exchange’s Swiss 

Blue Chip Segment markets— 

LCH.Clearnet will provide its central 

counterparty services. 

KAS BANK will provide clearing and 

settlement services to its clients for 

their transactions through Equiduct in 

its capacity as General Clearing 

Member of LCH.Clearnet SA (NYSE 

Euronext) and LCH.Clearnet (LSE, 

including SIX Swiss Exchange Swiss 

Blue-Chip Segment). 

KAS BANK already provides 

clearing and settlement services to 

NYSE Arca Europe and SmartPool, 

moves finalised in March this year. 

Most recently, the bank has extended 

its reach to offer integrated clearing, 

settlement and custody services for 

transactions executed on NASDAQ 

chief executive Christian Clausen 

maintains that the region’s banks have 

yet to reach the bottom of their bad-debt 

problems. He notes that Nordea’s loan 

losses swelled for the sixth consecutive 

quarter to €425m in the quarter ending 

June 30th, well up on Q2 2008, when the 

bank’s loan losses touched €36m. 

Handelsbanken meantime reported net 

profit of SKR2.53bn, up 2% on the same 

quarter in 2008, but also reported a 64% 

increase in loan losses to SKR939m over 

the same period, with the lion’s share 

originating in export-dependent 

Sweden. The losses were offset by a 

stronger-than-expected 25% jump in 

net interest income to SKR5.64bn. 

KAS BANK UPGRADES POST 

TRADE SERVICES 

Nordic custody major KAS BANK has added the alternative trading 

platform Equiduct to its European network of direct exchange links. 

Adding Equiduct means KAS BANK is currently linked to 25 

regulated and alternative markets across Europe. 

OMX and relevant MTFs. With the 

addition of the Nordic Exchanges, KAS 

BANK strengthens its European 

strategy and offers its post-trade 

securities services and solutions linked 

to 22 regulated exchanges and seven 

MTFs in the European market place. 

The bank’s Single Processing 

Platform processes clients’ 

transactions in a uniform way, with a 

single collateral and margin 

arrangement for all markets, through 

expert management and mitigation of 

relevant risks on behalf of Trading 

Member Firms, creating a unified 

market for its clients. 

According to Albert Röell, chairman 

of the managing board of KAS BANK: 

“In line with our European strategy, 

KAS BANK’s commitment to the 

Nordic region is very strong. Our 

highly-sophisticated equities platform 

will be directly connected to the 

Nordic infrastructure. 


Real Estate Report 

Richard Holberton, director, EMEA research at agent CBRE, 

supports the view that more buyers are beginning to circle and 

points out: “The downturn in real estate values across Europe 

has so far been predominantly driven by increases in yields. 

However, we have now clearly entered a period in which rents 

are the driving force behind the property value corrections. 

While investment turnover remains relatively low, there 

appears to be growing interest in several areas of the market, 

supported by the re-pricing that has already taken place.” 

Photograph kindly supplied by CBRE, August 2009. 

AIN’T NOTHING 

GOING DOWN 

BUT THE RENT 


The real estate market is 

braced for a second wave of 

bad news as falling occupancy 

and rental levels replace the 

capital value crisis and real 

economy woes begin to bite. 

Much of the shock generated 

by price falls has been 

absorbed but now the pressure 

is on lease renewals, with 

tenants failing, downsizing or 

renegotiating terms as their 

leases expire. Direct 

investment has become a case 

of tactical chess between 

buyers and sellers while 

diversified vehicles are finding 

some favour. However, as Mark 

Faithfull reports, new breeds 

of investment platforms and 

investors are emerging to 

tackle the risk conundrum. 

THE PAST 18 months could not 

have been much tougher for 

European real estate and with 

rental income streams in decline as 

leases come up for renegotiation, 

combined with further falls in capital 

values, 2010 promises another rocky 

ride. Some of those at the heart of the 

current malaise—notably investment 

and retail banks—remain in the 

process of dismantling much of their 

exposure to a real estate industry still 

damaged by the mega-deals they 

helped finance. The impact, especially 

in transactional volumes, is there for 

all to see. Direct investment in 

commercial real estate in Europe 

stood at just €24bn in the first half of 

2009 according to agent Jones Lang 

LaSalle (JLL), down 42% on the 

second half of 2008 (€41.5bn). With 

restrictive new lending conditions 

during the second quarter, there were 

few transactions over €100m, with the 

majority of trading in lot sizes 

between €20-50m. 

35 

REAL ESTATE: NEW INVESTMENT PLATFORMS

REAL ESTATE: NEW INVESTMENT PLATFORMS 

36 


However, Tony Horrell, head of 

European capital markets at JLL, 

believes volumes may have 

bottomed out: “We believe that the 

European market has now reached a 

floor in transaction volumes. Prime 

office yields were largely stable in 

Q2 for the first time since mid-2007. 

Volumes have remained low because 

the bid offer spread remains wide in 

some markets. At the same time, 

falls in capital values have made 

pricing attractive for those investors 

with equity or buyers who are not 

highly leveraged.” 

That makes the market interesting 

for those in a position to buy, reckons 

Nigel Roberts, chairman of European 

research at JLL.“Attractive investment 

opportunities—often assets which 

rarely come to the market—have 

appeared,”he reflects. 

Richard Holberton, director, EMEA 

research at agent CBRE, supports the 

view that more buyers are beginning 

to circle and points out: “The 

downturn in real estate values across 

Europe has so far been predominantly 

driven by increases in yields. 

However, we have now clearly 

entered a period in which rents are the 

driving force behind the property 

value corrections. While investment 

turnover remains relatively low, there 

appears to be growing interest in 

several areas of the market, supported 

by the re-pricing that has already 

taken place.” 

Glimmers of hope 

That does not hide the fact that while 

there may be glimmers of hope, 

transaction volumes have fallen off a 

cliff since their peak. With direct 

investment opportunities either rare or 

perceived as high risk, investors have 

instead been reconsidering the 

vehicles to market and with that there 

are changes afoot, says Roger Cooke, 

chairman of the EMEA capital markets 

board, managing partner Spain, 

Cushman & Wakefield. He says: “The 

dominance of the real estate private 

equity closed-end funds model is 

likely to see a reduced appeal, while 

we may see the increasing importance 

of public markets in real estate— 

specialised REITs—as well as joint 

ventures with a small number of 

institutions with operating partner 

management in a form of privatelyheld 

operating company. 

“Investors are likely to be either 

more sector or geographic specific 

when selecting vehicles and more 

general platforms will not be so 

attractive,” Cooke notes. “While there 

is a clear role for REIT-type vehicles, 

they should not be viewed as tax 

efficient vehicles for bundling 

together toxic assets.” 

There is a subtle shift back to 

institutional investment. Cooke says: 

“We foresee a steady return to real 

estate through 2010—mainly focused 

SIX TO WATCH IN EUROPE IN 2010 

THIBAULT DE VALENCE, executive managing director, CBRE Investors 

Established in 1972, CBRE Investors has £21bn in assets under management, with the UK as the hub of its 

European operations. A penchant for long-term relationships means CBRE Investors has developed a strategy to 

match long-term, sustainable growth objectives. Valence is presiding over continental Europe. 

BILL BENJAMIN, managing partner, Europe, AREA Property Partners 

AREA Property Partners—formerly Apollo Real Estate Advisors—closed out a $1.4bn 

European fund in 2008, some of which has been spent on stakes in Capital & Regional’s 

German and UK operations and on the £600m joint-venture acquisition of Dawnay Day’s 

portfolio. Bill Benjamin is widening the opportunity search to countries such as Turkey and 

Ukraine and to Africa. 

GUILLAUME POITRINAL, chairman and chief executive officer, 

Unibail-Rodamco 

Unibail and Rodamco were already massive players in the European retail and office real estate 

markets before they merged in 2007. Since then the company has been rebalancing its 

€26.1bn European portfolio, selling €741m of Dutch high street property and buying retail 

centres in Austria and Spain. Poitrinal is keen to bolster its position as a retail powerhouse. 


on more core markets and better 

quality product. At the moment, the 

lack of institutional interest has 

created an opening for opportunity 

funds. However, they will need to be 

careful that their pricing requirements 

do not lead to deals escaping them 

before they have established 

significant positions.” 

David Hutchings, head of research, 

EMEA at Cushman Wakefield, reflects: 

“For many investors in the market, 

collective vehicles must be the way 

forward since this spreads risk, 

delivers diversification and accesses 

the market for a smaller cost. It may 

also fit more generally in a market 

with lower gearing, meaning the 

financial reach of each investor is 

lower than it was. A number of facets 

of existing collective routes have, 

however, been discredited or called 

into question in the downturn: 

namely fee levels, liquidity, 

management expertise, alignment of 


interests (with general partner and coinvestors) 

and, of course, gearing. To 

get round this, new vehicle structures 

may be needed plus refinement of 

existing ones. 

“To raise finance for larger schemes, 

we may see a vehicle to allow more 

building specific securitisations 

coming forward, possibly on the 

public market. We may also see more 

interest in strata-title type deals 

allowing smaller investors or 

occupiers a stake in larger buildings.” 

Indeed, there is a perceptible shift 

towards “club style” investment 

schemes as disenchantment about 

fund performance intensifies in the 

wake of a long series of loss-making 

quarters. For example, Goldman 

Sachs was heavily criticised recently 

for its dual role in property 

transactions and debt renegotiation in 

deals where different arms of the 

investment bank had a stake in both 

positions, leading Nori Gerardo Lietz, 

chief investment strategist for real 

estate for Swiss investment firm 

Partners Group, to declare: “The 

investment banking model is broken 

in real estate private equity.” 

Lietz was referencing “Whitehall” 

funds such as Whitehall Street Global 

Real Estate Limited Partnership 2007, 

which despite losing billions still 

made Goldman Sachs millions in 

transaction advisory and management 

fees. Having a foot in both camps is 

becoming increasingly contentious for 

investors burnt by capital value falls. 

EU regulations threat 

Meanwhile, real estate investment 

funds could be caught out by 

prospective European Union 

investment regulations designed to 

curb the activities of hedge funds. The 

European Parliament is discussing 

changes to the Directive on Alternative 

Investment Fund Managers, which 

could be implemented as early as 

ERIC SASSON, managing director, Carlyle Group 

If real estate investment is out of favour then clearly someone forgot to tell Carlyle Group. The 

giant American private equity house raised $3.4bn with its third European-focused fund in the 

middle of 2008 and has set about spending that money pretty quickly, with Portugal Sasson’s 

latest target. 

CHAD PIKE and JONATHAN GRAY, senior managing 

directors and co-heads, real estate, Blackstone 

It’s hard to argue with a business which has just raised €2.5bn in this market, 

and this US colossus is determined to make sure that size matters. It is using 

debt purchase as one of its big gateway strategies but its Blackstone Real Estate 

Partners Europe III fund will be spent “cautiously”, say co-heads Pike and Gray. 

MARK HUTCHINSON, president, GE Capital Real Estate 

With more than $81bn in assets and a presence in 31 countries, the company has made a 

speciality of buying pan-European loan books from the likes of Bradford & Bingley, Capmark 

Europe and Credit Suisse. Hutchinson, appointed president in 2008, is focusing activity on 

more debt business and increased exposure to Asia. 

37

REAL ESTATE: NEW INVESTMENT PLATFORMS 

38 


2011. It aims to standardise investment 

products to make it easier to market 

them throughout the EU and to 

tighten regulations. 

The directive applies to all 

alternative investment fund managers 

managing more than €100m in assets, 

or €500m where they do not use 

leverage and have a lock-in period of 

five years or more. The aim of the 

legislation is to standardise fund 

products to make it easier to market 

them to professional investors 

throughout Europe. 

The European Commission also 

proposes to centralise regulation 

within the EU with the establishment 

of the European Systemic Risk 

Council and the European System of 

Financial Supervisors, which were 

announced in May and for which 

consultation ended in July. 

The Directive on Alternative 

Investment Fund Managers is further 

down the line. Nevertheless, critics 

say regulating property funds in the 

same way as hedge funds and private 

equity would make property fund 

management more difficult. 

Industry bodies are being 

galvanised into response. The 

European Association for Investors in 

Non-listed Real Estate Vehicles 

(INREV) convened a meeting with 

members in London to discuss the 

impact of the directive and the 

Investment Property Forum is also 

looking at its response. 

John Forbes, EMEA real estate 

industry leader at Pricewaterhouse- 

Coopers, suggests EU property funds 

could also lose out because the draft 

directive suggests that insurance 

companies and sovereign wealth 

vehicles would be exempt, even if they 

were managing funds. 

Forbes believes the effect of the 

regulation will be to make every EU 

country heavily regulated—currently, 

investors can choose lightly-regulated 

` 

“The expectation of 

large sales of distress 

real estate has proved 

wrong and banks 

generally seem to be 

holding on. That means 

distress sales are still 

‘situational’; specific to a 

certain building 

or portfolio.” 

markets, such as the UK, or heavily 

regulated environments, such as 

France or Germany. 

With so many cul-de-sacs for 

investors, alternative means of 

accessing the real estate market have 

begun to emerge and, in what could 

be a prelude to greater consolidation, 

BlackRock recently confirmed it was 

buying Barclays Global Investors, 

notably including its iShares exchange 

traded fund (ETF) business, for 

$13.5bn.The transaction is expected to 

close in the fourth quarter. 

BlackRock chief executive Laurence 

Fink expects a wave of consolidation to 

sharpen the split between large and 

small asset management firms and the 

distinction to harden between giant 

and boutique firms. He says:“I believe 

we’ll wind up with a basket of small 

managers and a basket of big ones.” 

For property, ETFs are one means of 

investing in real estate investment 

trusts (REITs)—the much heralded 

but spectacularly under-performing 

tax efficient models under which 

many of Europe’s biggest property 

developers and owners trade. 

ETFs should offer a counterbalanced 

risk profile for investors and 

could become a route into a REIT 

market some analysts believe may be 

bottoming out. However, weak 

economic fundamentals are likely to 

hamper REIT performance and most 

still have massive amounts of debt 

they need to roll over or refinance 

looming. That said, it is possible an 

acquisition boom in REITs may 

materialise, similar to what happened 

in the US in the 1990s. Investors will 

be looking for any news on the 

deleveraging process and economic 

trends when REITs begin reporting 

second-quarter results. 

Whatever investment platform an 

investor chooses, general economic 

woes are likely to challenge returns, 

adds Van Stults, a founding partner 

and managing director of Orion 

Capital Managers. “We are moving 

from problem banks to problem 

borrowers. The financial crisis that has 

gripped us from 2007 is now shifting 

to the real economy and how that 

affects buildings, declining rents and 

less tenants,” he says. “On today’s 

terms, just about everything has to be 

considered over-rented so we’re not 

talking about loan-to-value issues, or 

anything like that, we’re talking about 

the danger of companies running out 

of cash.” 

In response, he believes there will 

be a shift away from financial 

mechanics towards operational 

expertise and investment with 

experienced real estate management 

teams, with good buildings and good 

tenants. “This will overlay financial 

sophistication. Before, it was perhaps 

the other way round,”he reflects. 

“The expectation of large sales of 

distress real estate has proved wrong 

and banks generally seem to be 

holding on. That means distress sales 

are still ‘situational’; specific to a 

certain building or portfolio. People 

ask: ‘Will it be like France in 1995 or 

the US in 1990?’ I think not because 

this time the situation is too big for 

companies to sell out of it. Besides, 

even if they do, where do they put 

their money?” 


THE FTSE 

HOW DO 

IGETINTO 

REAL ESTATE 

INDEX 

FTSE. It’s how the world says index. 

Real estate has outperformed both equities and bonds over the last 10 years. But getting into 

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helping you measure the performance of global real estate markets and invest more easily. 

www.ftse.com/invest_real_estate 

© FTSE International Limited (‘FTSE’) 2009. All rights reserved. FTSE ® is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE under licence.

TAREK ANWAR, GLOBAL HEAD OF SALES, TRANSACTION BANKING, STANDARD CHARTERED 

40 

Face to Face 

TRANSACTION BANKING IS 

coming into its own, holds Tarek 

Anwar, global head of sales, 

Transaction Banking at Standard 

Chartered in Singapore. It is not just 

Anwar’s view. The quality of 

transaction banking delivery is 

playing a greater role than ever in 

determining which banks are chosen 

by corporates as their primary 

relationship banker, according to new 

research from banking analyst firm 

Tarek Anwar, global head 

of sales, Transaction 

Banking, Standard 

Chartered. Photograph 

kindly supplied by 

Standard Chartered. 

August 2009. 

THE PRIME OF 

TRANSACTION 

BANKING 

East & Partners. In the East & 

Partners May 2009 survey of Asia’s 

top 1,000 institutions, Standard 

Chartered garnered one of the biggest 

gains in primary and secondary 

transaction bank recognition, rising 

from 31% from 28.5%. 

Anwar professes no surprise at the 

surge of interest by banks in the 

segment “as it encompasses the 

backbone of institutional and corporate 

banking relationships. It is important 

Standard Chartered continues 

to refine its Transaction 

Banking business to better 

align the bank with its 

intention of becoming a global 

leader in cross-border as well 

as domestic transaction 

banking. As the bank's 

ambitious transformation 

continues, it could become the 

dominant emerging market 

bank for years to come, 

believes Tarek Anwar, global 

head of sales for transacton 

banking at the bank. 

to define what might be the future of 

the transaction banking industry and 

refine the industry outlook”. He adds: 

“There is no doubt that transaction 

banking is growing, but is this growth 

straightforward and all-round? Or are 

we responding adequately to the 

currents in the market?” 

According to Anwar, the market has 

already undergone substantive 

change since the pre-September 2008 

period. Despite interest margin 

compression and some US 

competitors dumping pricing, clients 

are showing a strong preference to 

transaction banks that help them 

create value. Moreover, he explains, 

change in the way they view 

counterparty demonstrates that 

corporations and institutional 

investors have sought fewer solid but 

more comprehensive relationships 

with their bankers. At the same time, 

he notes the barriers to entry in the 

business have meant that long-term 

providers, “who have shown 

commitment to regional markets, 

have seen a gravitation of business 

towards them. Commitment is key 

and clients recognise that”. 

Anwar says there are three main 

drivers of the business: “Getting 

deeper with the clients, creating a 


igger wallet and improved crossselling. 

That in a nutshell is the 

overarching tactics with the overall 

strategy of being the leading bank in 

the segment.” In addition, he stresses 

the following qualifiers: “Balance the 

dash for growth with vigilance on risk 

and ensuring the quality of operations 

matches the quality of service that is 

offered to clients. 

“Transaction banking—defined as 

cash management, trade finance, 

clearing and securities services—makes 

up over 45% of client revenue globally,” 

says Anwar. “We have a lot of 

momentum in this business and we are 

positioned in those areas of the world 

with fastest growth. Our aspiration is to 

become a top provider of transaction 

banking services in all the key countries 

of our regions.” For banks that can 

succeed in growing and retaining 

market share, transaction banking is a 

very attractive business. It attracts 

liabilities, has low capital usage, 

earnings stability and return on 

equity—all valuable characteristics for 

banks today that are refocusing on more 

stable business areas to deal with the 

current downturn in the financial 

industry, highlights Anwar. For him, the 

business“is about evolutionary patterns, 

among industries and among regions. It 

has become a cultural interaction, as we 

are dealing with people influenced by 

their corporate culture and their 

demands are similar around the world, 

irrespective of their market.” 

Even so, the emerging markets 

bank differs in many ways, different 

from its European or American peers. 

Standard Chartered derives over 90% 

of its profits from Asia, Africa and the 

Middle East. Serving both consumer 

and wholesale banking customers, the 

bank combines deep local knowledge 

with global capability to offer a wide 

range of financial products and service 

solutions. Anwar explains that 

Standard Chartered had been focused 


on building the franchise for at least 

150 years, and, for transaction 

banking, can now leverage extensive 

networks with deep expertise and 

capabilities in Asia, Africa and the 

Middle East. “We have witnessed a 

substantive evolution as corporates 

expand their geographic spread. Take 

a large Chinese corporate: they are as 

concerned with supply chain issues, 

working capital, risk and the 

introduction of efficiencies as any 

large corporation.” Moreover, he 

states:“The supply chain and working 

capital finance is the backbone of a 

company. So any changes you make 

can easily enhance the performance of 

the company. It creates a completely 

different level of relationship with a 

bank, one of a partner and adviser.” 

Responsibility 

Anwar works out of the bank’s 

Singapore office and reports directly to 

Karen Fawcett, Standard Chartered’s 

Singapore-based group head of 

transaction banking. Since arriving at 

Standard Chartered three years ago, 

Anwar has had responsibility for the 

bank’s cash management, trade, 

clearing and securities services sales 

globally. All of Standard Chartered’s 

regional transaction banking heads, 

located throughout its network in 

Asia, Africa and the Middle East, 

report directly into him. 

Throughout his 28-year career, 

Anwar has worked with clients across 

all aspects of clearing, cash, trade and 

treasury management, including reengineering 

projects, treasury 

centralisation programmes and shared 

services centres. 

His experience also extends to 

advising on change management, 

complex implementations and project 

management, skills he has 

subsequently brought to bear in his 

current role. The impact has been 

substantive. He notes: “We are much 

more client centric today. We no longer 

work in product or geographic silos, a 

malaise some competitors suffer from. 

We aggressively encourage leveraging 

of the bank’s extensive network. We no 

longer measure people by revenue 

generated just in their own country. 

Our sales teams follow an origination 

model tagged to their clients, 

irrespective of where they act, and this 

works really well for our clients as we 

help them grow cross-border.” 

In addition to Asia, Anwar stresses 

the equal importance of the Middle 

East and Africa region to Standard 

Chartered’s recent and future growth. 

He says: “The focus for the bank is on 

maximising its network, focusing on its 

people and products and services to 

create value, and also focusing on 

segmenting services for specific 

industries and clients in different stages 

of evolution.” Anwar adds: “For 

example, small and mid-market 

companies are no longer just locally 

focused, but the local banks can’t truly 

help them with their new international 

opportunities or cross-border suppliers 

or buyers. The local banks don’t have 

the same ‘reach’ power of a bank like 

Standard Chartered.” 

Anwar thinks that the financial 

crisis has created a new mood of 

realism in the markets:“The few banks 

like us that continued to be ‘open for 

business’ during the crisis, were able 

to have positive dialogue with clients 

about balancing the risk and the nonrisk 

business. People are much clearer 

these days about what is key.” 

“Part of it is that people are 

reviewing the basics more frequently 

these days. But some part of it is also a 

greater realism on what can be done 

by the bank to help create value. It is 

safe to say though that paramount in 

all this, the equation still tends 

towards the client and we tell our 

teams: ‘Don’t compete on price, 

compete on value.’” 

41

THE NASDAQ DUBAI EXCHANGE: AIMING FOR EXPANSION 

42 

Innovators 

Jeff Singer, chief executive, 

NASDAQ Dubai. 

Photograph kindly supplied 

by NASDAQ Dubai, 

August 2009 

GREAT 

EXPECTATIONS 

IN LATE NOVEMBER last year, the 

Dubai International Financial 

Exchange (DIFX) was rebranded as 

NASDAQ Dubai. The exchange has 

close links to The NASDAQ OMX 

Group, which stakes a claim to being 

the world’s largest exchange company. 

NASDAQ OMX had acquired a onethird 

stake in NASDAQ Dubai in 

February 2008. The other two-thirds 

shareholding continues to be owned 

by holding company Borse Dubai, 

which also runs the Dubai Financial 

Market. At the time, Soud Ba’alawy, 

chairman of NASDAQ Dubai and a 

Director of The NASDAQ OMX 

Group, noted that the exchange’s 

“growing ties to NASDAQ OMX 

exchanges in the US and Europe in 

listings, marketing, technology and 

management expertise will support its 

continuing expansion”. 

According to Jeff Singer, chief 

executive of NASDAQ Dubai: “The 

exchange moved quickly once the new 

branding was implemented, taking 

active steps to further develop its 

market, such as extending opening 

hours, including opening on Sundays, 

and allowing listings in UAE dirhams. 

We will continue to develop new asset 

classes as well as seek further primary 

and secondary equity listings.” 

“The opportunities for Borse Dubai 

and NASDAQ OMX to further develop 

and link mature and emerging markets 

through our new combination remains 

significant,” adds Singer, who stresses 

continued interconnectivity in the 

global markets. His own exchange, he 

concedes, has not been immune from 

the global downturn. “There is no 

question what happened in the US and 

elsewhere impacted on the United Arab 

Emirates (UAE).” Singer expresses 

surprise at the degree of 

interconnectivity and the extent of the 

exposure in the region to toxic assets: 

“Many of the funds carried these assets 

in their books.” The region was also 

The NASDAQ Dubai exchange’s 

home region includes the 

United Arab Emirates and the 

rest of the Gulf Cooperation 

Council (GCC) countries, the 

wider Middle East and North 

Africa. Armed with a broad 

hinterland, the exchange has 

great expectations. Can chief 

executive officer Jeff Singer 

lead it to a bright future? 

adversely impacted in August last year 

by the movement of “hot money”, 

which, says Singer, “panicked local 

investors as well”. 

It is a sensitive time for the 

exchange. Dubai itself is anxious to 

establish its credentials as a stable and 

substantive regional financing hub, 

with the Dubai International Finance 

Centre (DIFC), a huge development in 

the centre of Dubai with its own 

independent legal regulatory system, 

and NASDAQ OMX as cornerstones 

of this strategy. Dubai’s strategy has 

been all encompassing, as it has 

involved a stake in the London Stock 

Exchange (LSE) as well as in Deutsche 

Bank, HSBC and Standard Chartered 

Bank. The link-up between NASDAQ 

OMX and Dubai was meant to secure 

Dubai as a sustainable force in global 

finance. Not only that, the link-up 

means that Dubai benefits from the 

operating technology available at 

NASDAQ OMX, which puts it on a 

level playing field with some 60 or so 

global exchanges. Finally, despite 

moves within the GCC countries to 

achieve harmonisation across the 

financial and currency markets, the 

reality is that Dubai is working hard to 

compete with much naturally-richer 

Emirates, such as Qatar, which are 

racing ahead with financial market 

initiatives of their own. 

The DIFX had been slow to get off 

the ground, mainly because its huge 

launch ambitions were immediately 


frustrated by the collapse of share 

prices on the local Dubai Financial 

Market (DFM) exchange, which is also 

suffering in the current global 

economic downturn, and Singer 

realises the fine balance between 

opportunity and the realities of current 

market limitations. 

Key to the realisation of these goals 

is the deepening of the exchange’s 

products and listings and efforts to 

promote stability. In terms of new 

product diversification, Singer points 

to a number of business drivers. The 

first is to expand the exchange’s 

derivatives offerings. NASDAQ Dubai 

is the only United Arab Emirates 

exchange that trades equity 

derivatives. It launched the market in 

November 2008 by listing futures on 

the broadly based FTSE NASDAQ 

Dubai UAE 20 index and on 20 

individual stocks listed on NASDAQ 

Dubai, the Dubai Financial Market and 

the Abu Dhabi Securities Exchange. 

The index calculated by FTSE Group is 

the only one of its kind within the UAE 

providing stocks listed on all three 

exchanges which allows investors to 

benefit from the optimum investment 

opportunity across the Emirates. In 

April 2009, NASDAQ Dubai added an 

equity options service. Members are 

now able to report, trade and clear 

user-defined option contracts on 

NASDAQ Dubai, with the price and 

expiry date agreed by the parties to the 

contracts. Singer says: “Trading in 

equity derivatives increased rapidly 

soon after inception. In January, equity 

futures contracts traded, rising to 6,816 

in March and 8,945 in July. However, 

while we are pleased with the growth 

to date, we need to increase volume 

dramatically. Derivatives trading 

provides investors with price insurance 

and creates liquidity and stability in 

the underlying shares; an important 

attribute in volatile markets,” The 

exchange plans to expand its 


derivatives market in due course by 

listing options on equity indices and 

individual equities. 

The exchange also plans to clearly 

define its remit. “If you are a local 

investor, you look at locally-based 

exchanges including NASDAQ 

Dubai,” says Singer. “If on the other 

hand you are a global or regional 

player, then it is NASDAQ Dubai that 

is the obvious market. That is for many 

reasons, not least the quality of the 

investible products on offer, technology 

and infrastructure, regulatory 

excellence and relationships with 

leading brokers.” He adds that 

NASDAQ Dubai offers unique 

advantages to issuers both from the 

region and outside it. These include 

bookbuild IPOs, which allow issuers to 

receive the market value of their 

shares, while other regional exchanges 

tend to require a lower issue price. 

Another advantage is over the counter 

(OTC) trading, which other UAE 

exchanges do not allow. 

A third point is fixed income. 

NASDAQ Dubai has a higher value of 

listed Sukuk (Sharia-compliant bonds) 

than any other exchange in the world, 

with listings worth a total of $16.4bn. 

“We naturally want to expand that 

track record and encourage further 

listings of corporate and other debt 

issues and other fixed income 

products,”says Singer. 

In terms of innovation, Singer points 

to the success of the exchange’s Dubai 

Gold Securities (DGS), which are 

designed to track the spot price of gold. 

The DGS listing was the first listing on 

any stock exchange in the GCC in the 

first quarter of 2009; breaking a 

psychological barrier of sorts. DGS is an 

initiative of the World Gold Council 

(WGC) and the Dubai Multi 

Commodities Centre. Similar gold 

securities have been listed through 

WGC initiatives on 12 other 

international exchanges, with gold in 

trust exceeding 1,200 tonnes. DGS has 

the only ones listed in the Middle East to 

have been declared Sharia-compliant. 

Says Singer:“As a traditional trading hub 

for gold in the Middle East, Dubai is a 

natural venue for listing innovative 

Sharia-compliant gold products. DGS 

offers investors an alternative to physical 

gold and gold futures.” He adds that 

NASDAQ Dubai is keen to encourage 

listings of other innovative products 

such as exchange traded funds. 

In a move that underscores Singer’s 

commitment to good market practice 

and market stability, NASDAQ Dubai 

and the Middle East Investor Relations 

Society signed a memorandum of 

understanding in July to work together 

to provide educational seminars and 

initiatives for issuers, potential issuers 

and their advisers, as well as enhance 

understanding of how listed 

companies can communicate most 

effectively with the public. 

Singer states: “Transparency and 

timely delivery of accurate information 

are key to promoting investor 

confidence in listed companies.” 

Singer now has great expectations for 

his exchange. “We are well positioned 

both geographically and in terms of 

product and ideas to take us forward. 

Moreover, we have an excellent 

regulatory environment that has a 

common denominator with other 

leading markets. Best practice is the 

basic standard that we adhere to and we 

have an excellent ownership structure 

that we can leverage to best effect for 

our stakeholders and investors.” 

The road ahead is not easy, he 

acknowledges. “There are 18 other 

exchanges in the Middle East and we 

are number 19. Unless we distinguish 

ourselves, we will face rising 

competition. However, I believe that 

fundamentally we have a strong 

market and a strong infrastructure 

and we are we placed to leverage 

these as financial markets recover.” 

43

WHAT FINK MIGHT DO WITH BGI - FTSE

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