Tuesday 06 March 2018 FT FINANCIAL TIMES C002D5556 BUSINESS DAY A1 World Business Newspaper Shadow banking grows to more than $45tn assets globally Financial Stability Board data include China and Luxembourg assets for first time CAROLINE BINHAM Negotiations cut short after Washington offers worse package than EU The US is offering Britain a worse “Open Skies” deal after Brexit than it had as an EU member, in a negotiating stance that would badly hit the transatlantic operating rights of British Airways and Virgin Atlantic. British and American negotiators secretly met in January for the first formal talks on a new air services deal, aiming to fill the gap created when Britain falls out of the EU-US open skies treaty after Brexit, according to people familiar with talks. In a sign of the battle Britain faces to replicate its existing rights, the talks were cut short after US negotiators offered standard bilateral conditions that would reduce access and in effect exclude all main UK-based carriers because they would not meet the criteria for ownership and control. Replacing Libor proves harder in practice after scandal trol over the sector. But defining shadow banking can be a slippery business. The FSB’s exercise starts with looking at the assets of anything that is not a bank, including pension funds, insurers, and “other financial institutions”, or OFIs. That wider ecosystem accounts for $160tn assets worldwide, compared with $340tn total financial assets globally. Meanwhile, OFIs grew by 8 per cent to $99tn; a faster level than banks, insurers and pension funds. OFIs now account for 30 per cent of the entire financial system’s assets; the highest level since 2002. From OFIs, the FSB then drills down further to its “narrow” definition of shadow banking, which this year included granular data from China for the first time. Luxembourg hosts collective investment vehicles, which the FSB underscored as being susceptible to runs by investors. In early 2017, it put out measures that G20 countries should adopt to mitigate runs — including “gates” to stop investors getting immediate access to their cash in exceptional circumstances. Such collective investment schemes account for 72 per cent of the FSB’s narrow definition of shadow banking. Meanwhile, in China, the growth of trust companies was particularly striking. They grew 47 per cent in 2016; a faster rate than the average 33 per cent growth rate seen between 2011 to 2015, the FSB said. The assets of Chinese trust companies — which conduct asset-management business for investors — totalled $3.4tn in 2016. That equated to 6 per cent of domestic Chinese assets and 3.4 per cent of the OFI category’s total. UK-US Open Skies talks hit Brexit turbulence KATRINA MANSON, ALEX BARKER AND TANYA POWLEY Page A3 One person attending the London meetings to “put Humpty Dumpty back together” said: “You can’t just scratch out ‘EU’ and put in ‘UK’.” A British official said it showed “the squeeze” London will face as it tries to reconstruct its international agreements after Brexit, even with close allies such as Washington. Negotiators are confident of an eventual agreement to keep open the busy UK-US routes, which account for more than a third of current transatlantic flight traffic. But there are legal and political obstacles that could impede the two sides from reaching a deal in time to give legal certainty to airlines booking flights a year in advance. “We have every confidence that the US and UK will sign a deal that is in everyone’s interests and that IAG will comply with the EU and UK own- Continues on page A2 Trump tax cuts herald $1tn bonanza for US investors Growth in stock buybacks outstrips investment in capex, R&D and employees US companies are on track this year to return a record $1tn to shareholders, as Donald Trump’s tax cuts prompt boards to boost buybacks and dividends at a faster rate than their capital expenditure, research and development budgets or wage bills. The expected surge in returns to shareholders is based on forecasts that a lower corporate tax rate, incentives to repatriate overseas cash and strong earnings will supercharge growth in share repurchases by S&P 500 companies. Goldman Sachs estimated in February that buybacks would jump by 23 per cent to $650m this year, while JPMorgan predicted on Friday that they would rocket by as much as 50 per cent to $800bn. The 11 per cent rise in capital expenditure and 10 per cent increase in R&D Goldman expects for the year would exceed anything seen in the past Noble co-CEO paid $20m in 2017 despite record $5bn loss DAVID SHEPPARD AND NEIL HUM The departing co-chief executive Noble Group was paid more than $20m in 2017 as the troubled commodity trader slumped to a record $5bn loss and headed for a restructuring that will all but wipe out shareholders and some bondholders. Jeff Frase, who ran the oil and gas businesses at Singapore-listed Noble, took home $3.4m in sharebased payments and almost $17m in other so-called emoluments, as part of a package to keep him on until the operations he oversaw were sold. The bumper pay package was more than what the rest of Noble’s executive directors received combined last year and is $5m more than what perpetual bond holders stand to receive under a proposed debt-for-equity swap, on which the company’s survival now hinges. The restructuring has faced sharp criticism from some share How the Middle East is sowing seeds of a second Arab spring Mark Carney, governor of the Bank of England who also chairs the FSB, said it was ‘vital’ that resilience of the shadow banking sector was maintained © PA ANDREW EDGECLIFFE- JOHNSON Page A4 three years, but is likely to be dwarfed by the growth in shareholder returns, as the bank also sees dividends expanding by 12 per cent to $515m. President Trump and other Republicans have hailed the expected boost to companies’ investment plans from the tax bill that was signed into law in December. Treasury Secretary Steven Mnuchin said 70 per cent of the benefits would flow to employees while Democrats countered that the surge in buyback spending showed investors, big corporations and top executives will benefit far more than their staff. Nancy Pelosi, the House minority leader, said in January that the bonuses several companies promised employees were insignificant “crumbs” by comparison with their spending on buybacks and dividends. Just Capital, a non-profit with a focus on social justice, estimates just 6 per cent of the tax windfall will go to workers. Companies have discretion over when to execute the buyback programmes they have announced, Shadow banking” grew by nearly 8 per cent globally to more than $45tn on a conservative measure after international rulemakers were able to include detailed data from China and Luxembourg for the first time. Shadow banking — the parts of the financial system that perform banklike functions such as lending but do not have the same safeguards — accounted for 13 per cent of total global financial assets, according to the Financial Stability Board, the international group of policymakers and regulators that makes recommendations to the G20. The data form part of the FSB’s annual monitoring exercise of shadow banking, which it says is necessary in order to calibrate policy responses. The inclusion of China and Luxembourg — home to a large part of the world’s investment funds — makes this year’s monitoring report the most detailed yet. The report covers 2016 figures. But since then China has launched a continuing crackdown on its shadow-banking sector. China contributed $7tn, or 15.5 per cent, of the $45tn assets comprising the FSB’s conservative definition of shadow banking, while Luxembourg contributed $3.2tn, or 7.2 per cent. The data come after the FSB said last summer that it had “tamed” the most toxic parts of the shadowbanking industry, which was widely blamed for exacerbating the financial crisis a decade ago. Since then, reform has been under way led by the FSB to try to exercise more conand bondholders who have claimed Noble is giving a better deal to senior creditors and management ahead of the interests of other stakeholders. Senior bondholders will get 70 per cent of the restructured company and management, including Will Randall, the remaining chief executive, will control up to 20 per cent of the restructured business. The payment to Mr Frase, which was revealed in a supplementary filing to the annual results last week, came after the former JPMorgan and Goldman Sachs oil trader agreed to remain at the helm of the North America energy business, which was split up and sold to Vitol and Mercuria last year. Mr Frase resigned from the company after the sale of the oil business to Vitol in November to pursue “other interests” the company said at the time. Included in the $20m total was a $5m loan to Mr Frase from the company that was written off at the end of the year. People familiar with the payments say most of the remaining making estimates of full-year figures uncertain. However, Chris Costelloe of Birinyi Associates, an equity research group, said: “We are expecting a larger amount of buyback announcements and executions than we’ve seen in previous years.” US companies have announced a record $187bn in new buyback plans so far this year, according to Birinyi. Cisco and Wells Fargo lead the list, with plans to repurchase $25bn and $20bn respectively. Boards’ willingness to tap their record cash reserves has been bolstered by a strong fourth-quarter earnings season that outstripped analysts’ forecasts for both profits and — more unusually — revenues. Thomson Reuters estimates earnings grew by 15.2 per cent in the quarter on an 8.2 per cent jump in revenues. Howard Silverblatt, senior index analyst at S&P Dow Jones, said expectations of a robust year for earnings, coupled with the acceleration in buyback announcements, had supported US equities. $12m was related to an arrangement, demand by the company’s key lenders, to keep Mr Frase in position until the oil business was sold. The supplementary figures also revealed that Richard Elman, the British-born trader who founded the company over 30 years ago, is still paid as an executive director. He became ‘chairman emeritus’ of the company in May after restructuring expert Paul Brough was appointed to oversee the company’s debt restructuring talks. His daughter and son were also shown in the filing to be on the company’s payroll, earning S$150,000 to S$200,000, and S$50,000 to S$100,000 respectively. Mr Frase, who was hired by Mr Elman to build the company into a global force in oil trading, has not yet revealed his future plans. On his LinkedIn profile he has updated his position to ‘Chief Relaxation Officer’ of Frase & Co. Noble declined to comment. Mr Frase was not immediately available to comment on Monday.
A2 BUSINESS DAY C002D5556 Tuesday 06 March 2018 FT NATIONAL NEWS US national security regulator delays Qualcomm vote ARASH MASSOUDI AND ROCHELLE TOPLENSKY The US government has ordered chipmaker Qualcomm to delay an upcoming shareholder meeting by a month, as it investigates whether a proposed takeover by a Singapore-based rival would put national security at risk. The intervention comes as the US company’s shareholders were set to vote on whether to replace six of its directors on Tuesday with candidates put forward by Broadcom, which is seeking to force through a $142bn takeover of the company. The US Treasury department, which leads an inter-agency regulator called the Committee on Foreign Investment in the United States, said in a statement that a 30-day delay of the vote “will afford Cfius the ability to investigate fully Broadcom’s proposed acquisition of Qualcomm”. Broadcom responded by saying it was “disappointed” by the decision. It added: “Broadcom was informed on Sunday night that on January 29, 2018, Qualcomm secretly filed a voluntary request with Cfius to initiate an investigation, resulting in a delay of Qualcomm’s annual meeting 48 hours before it was to take place. “This was a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom’s independent director nominees.” Qualcomm did not comment. The delay is the latest escalation in a tensely fought hostile takeover battle, as Qualcomm’s management look to maintain the company’s independence. In recent weeks, US lawmakers have become more vocal with their concerns about any potential takeover. Some have urged the Trump administration to open an investigation into the bid, arguing it would be “deeply concerning” if a foreign company took control of a US group through a proxy fight without first gaining the approval of the Cfius. Broadcom was previously a USbased company but it redomiciled to Singapore to gain tax benefits following a takeover in 2015. The company’s chief executive Hock Tan went to the White House in early November to publicly declare in front of President Donald Trump its plans to move back to the US. The move came just a day before its plans to bid for Qualcomm, in what would be the largest tech deal ever, were revealed. “It should be clear to everyone that this is part of an unprecedented effort by Qualcomm to disenfranchise its own stockholders,” Broadcom said. UK-US Open Skies talks hit Brexit turbulence... Continued from page A1 ership and control regulations post Brexit,” said International Airlines Group, which owns British Airways. Virgin Atlantic said it remained “assured that a new liberal agreement will be reached, allowing us to keep flying to all of our destinations in North America”. Chris Grayling, UK transport secretary, declared in October that he was making “rapid progress” in reaching ambitious new airline agreements with the US and other international partners. According to FT estimates, the UK must renegotiate and replace about 65 international transport agreements after Brexit. In its opening stance the US side rolled back valuable elements of the US-EU agreement, the most liberal open skies deal ever agreed by Washington. Its post-Brexit offer to the UK did not include membership of a joint committee on regulatory co-operation or special access to the Fly America programme, which allocates tickets for US government employees. Washington also asked for improved flying rights for US courier services such as FedEx. The UK has also yet to formally offer the US access to overseas territories such as the British Virgin Islands and Cayman Islands, which were not included as part of the original US-EU deal, according to people familiar with the talks. There are also potential issues over the continuation of antitrust exemptions, permitted by the US-EU open skies agreement, which allow airline alliances to set fares and share revenue, according to people familiar with talks. The biggest sticking-point is a standard ownership clause in Washington’s bilateral aviation agreements that would exclude airlines from the deal if “substantial ownership and effective control” does not rest with US or UK nationals respectively. In effect it requires majority ownership by one of the two sides if an airline is to benefit. London asked the US to adjust its long-held policy since it would exclude the three main British-based transatlantic carriers, which all fall short of the eligibility criteria. These are IAG, the owner of British Airways and Iberia; Virgin Atlantic; and Norwegian UK. Sir Richard Branson owns 51 per cent of Virgin, making it majority UKowned. But he is in the process of selling 31 per cent to Air France-KLM, which could complicate Virgin’s access rights to the US. US airline Delta owns the remaining stake. The challenge is most acute for Willie Walsh, IAG chief executive, whose group must also clear the EU’s 50 per cent ownership threshold to avoid losing his European operating rights after Brexit, when UK nationals are no longer counted. Theresa May and Michel Barnier: the standard line in Brussels is that the UK is still trying to leave the bloc while retaining many of the benefits of membership Europe’s strategic choices on Brexit The EU is a legal order, but it can be flexible when it wants to be GIDEON RACHMAN Talk to EU policymakers and you will be told that Britain has yet to make the hard choices on Brexit. The standard line is that Theresa May’s government is still trying to “have its cake and eat it” — leaving the EU, but retaining many of the benefits of membership. Britain must drop this “magical thinking” and make some crucial decisions. Once that is done, the structure of the future EU-UK relationship will be dictated by law and precedent. That argument has some truth to it. But what it misses is that the EU also has important choices to make. By treating Brexit as, above all, a legal process, the EU is largely ignoring the political and strategic implications of Britain leaving the EU. That is an intellectual failure that could have dangerous consequences for all sides. It is clearly true that the EU is a legal order. But it is also a political organisation. The EU is perfectly capable of creating new laws — or interpreting current ones with extreme flexibility — China’s dominant social media platform WeChat has reached 1bn accounts worldwide, highlighting how the pervasive service that is used for everything from communication to shopping is continuing to extend its reach. Pony Ma, chief executive of Tencent, the country’s most valuable listed company which owns WeChat, said the platform had hit the landmark figure during last month’s lunar new year festival. He made the remarks on the sidelines of the opening of China’s rubber-stamp parliament on Monday, to which he is a delegate. when it is politically necessary. There are many examples of this flexibility in action. France and Germany broke the EU’s Stability and Growth pact — rather than accept legally mandated fines for breaking its budget-deficit rules. There was a “no bailout” clause for the euro, but Greece was bailed out. Now the European Commission is pursuing Poland for breaching the rule of law, but ignoring equally egregious breaches in Hungary. So the EU can cherry-pick the law, when it is politically convenient. It can therefore make strategic and political choices on Brexit. And, broadly speaking, it has three options. Staying tough means sticking with the current line. Britain has chosen to be a third country. There can be no special deals — no “cherry-picking” in the EU’s favoured jargon. There are only two viable models for a “third country”: Norway (which involves membership of the single market) or Canada (which is a pure free trade agreement). Britain must pick one and then accept the consequences. Although Mr Ma referred to “users”, a company spokesperson clarified that this meant “user accounts”, not individuals. Tencent often refers to “MAUs” in its quarterly reports, a term that typically means monthly active users and is used by Silicon Valley companies to highlight their popularity and reach. But the Chinese company is referring to accounts rather than individuals. WeChat users sometimes register multiple accounts, for example, one for work and another for personal use. The company reported annual growth in WeChat user accounts of 15.8 per cent last September. Market research firm eMarketer has estimated that WeChat had The arguments for this purist stance are that it protects the integrity of the EU’s single market. If Britain keeps some benefits of EU membership, while ditching many of its obligations, then all 27 members of the EU might seek special deals, and the single market could unravel. By contrast, if Britain suffers economically from Brexit, that could actually benefit the EU. It would underline the negative consequences of leaving the organisation and undermine Eurosceptic parties across the continent. And jobs and tax revenues could migrate from Britain to the EU. Compromise on Brexit, the second option, would mean embracing the idea that there should be special arrangements between Britain and the EU. Britain is not any old third country. It has been crucial to the European balance of power for centuries. It has been a member of the EU for decades. And it is currently a major trading partner and military ally for most EU countries. So it sounds unrealistic to say that the UK must be treated exactly like Norway or Canada. China’s WeChat hits 1bn user accounts worldwide Social media app that dominates home market continues to extend reach YUAN YANG 494.3m individual users in China last year. The service dominates China’s app market. It is used as a social messaging app that has largely displaced work emails, but also as a platform for mobile payments, e-commerce, train bookings and blogs, as well as being host to a universe of other apps. Chinese users often jokingly call WeChat a public utility. “Much of the growth in [accounts] is likely to have come from overseas, in south-east Asia, Europe and the US,” said Matthew Brennan, founder of WeChat-focused consultancy ChinaChannel. Chinese migrants abroad use it to keep in touch with those at home. FT top MBAs for women ranking 2018 From career progression to gender pay gap, here’s why we created a new ranking An MBA is a fast ticket to the big time. On average, those who complete a course with a top school can expect to earn six-figure salaries three years after graduation. But despite generous scholarships and campaigns to encourage them to apply, women are a minority on prestigious business school courses. Four in 10 applicants on two-year, full-time MBAs in 2017 were women, compared with 33 per cent in 2013, according to the Graduate Management Admission Council. But women’s growing interest in business education has not led to more diverse MBA cohorts. Five years ago, women accounted for a third of students on the top 100 MBA programmes ranked by the Financial Times. Today, the figure has barely budged. The average cost of an MBA is $100,000 plus an average opportunity cost, or the income lost from not working, of $103,000, FT data show. Given that women’s salaries on average were 91 per cent of their male peers before joining MBA programmes ranked by outcomes for women, saving up the cost of such personal investment is a greater sacrifice for women. And there is evidence to suggest that an MBA exaggerates the gender pay gap: three years after graduation women on average made 86 per cent of their male peers’ pay, the data reveal. Women receive a lower return on investment, says Elissa Ellis Sangster, executive director of Forté Foundation, a consortium of business schools and companies trying to improve women’s access to business education. But, she adds, “the return will still be high”. Either way, women need to know that their investment is going to pay off. That means taking into account which MBA will help them counter future pay discrimination, and which schools are best at teaching and developing their female graduates while promoting them to employers. The FT’s Global MBA ranking, published in January, does not capture whether women do as well as their male peers on graduation. That is why, for the first time, the FT has ranked business schools according to their outcomes for women — and the results are significantly different. The top MBAs for women ranking tells us at which schools women perform best, and where there seems to be a gap between the outcomes of male and female graduates. Some schools that rank in the midrange of the Global MBA ranking shoot to the top in this new ranking. Most of those are based in China, including Shanghai Jiao Tong: Antai, which tops the list. Emily Jin graduates from Antai’s part-time MBA programme in May. She says Chinese women’s interest in business education is growing as they get richer. “Especially in Shanghai, women are more and more independent and decide to spend their own money to develop themselves,” says Ms Jin.