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Originally Posted by Lars Millberg

A Swedish daily magazine (IDG.se - Strst p IT, dagliga IT-nyheter, tester, forum, guider och nyhetsbrev mm) wrote the first article about the Benche in Sweden and are now doing a follow-up interview. They want to know about our experiences and how the Benche have developed since launch. In order to bring more "meat" to the interview would we really appreciate to get some direct feedback from the members. Please post your experience and/or comment in this thread.

What is good?
What is missing?
What can we do better?


With anticipation
Lars Millberg

Many sellers using letters of credit (L/C) as a payment instrument have often faced that presented documents are not L/C compliant. It has been estimated that almost 70% of all L/C documents globally presented are not compliant at their first presentation. As a result issuing banks are not obliged to pay and ultimately it is ony the buyer, that is the applicant, who can accept documents with discrepancies and as such enabling the issuing bank to pay.

Discrepancies, more or less spurious, threaten to undermine the value of the L/C as a secure payment instrument. It takes a high level of expertise to deal with all the parties involved in a L/C scenario - buyers, banks and carriers - who may have differing priorities, requirements and stipulations. Furthermore, each party may have preferences or suggestions on how L/C documents should be prepared, which can leave the seller even more confused.

Some sellers may decide not to accept L/C because they do not have the expertise, the time or the employees necessary to deal with the process. However, this translates into lost business opportunities, which most firms cannot ignore without possible economic consequences. Other sellers, unwilling to let a business opportunity slip by, agree to use L/C, accepting the time consuming task of compliance and negotiation as part of the deal.

Until now, sellers have been faced with these two alternatives: passing up business or attempting to coordinate the document preparation with the various parties, accepting the fact that they are getting further behind in receivables as cash flow turns into a trickle.

Outsourcing, if made available by the banking industry, provides a way out of the document dilemma for sellers. It allows professionals with particular expertise to prepare the documents exactly as per L/C requirements. The use of a third-party, professional documentation preparation service can help to reduce multiple bank fees, expedite documentation processing and accelerate cash flow. The benefits of outsourcing document preparation include:

• Better working capital management and prudent risk management due to higher accuracy and cost savings. Accelerated days sales outstanding, reduced from several weeks, possibly even months, to days, because discrepancies are reduced or removed and time spent on document handling is minimized.
• Offers the sellers to change L/C document processing costs from fixed to variable one, as FTE’s can be released at the seller’s end.
• Pre-checking of L/C to ensure compliance is possible before shipment. Some exporters accept L/C without realizing that some of the conditions may be impossible or not beneficial to comply with.

As a natural conclusion – who else is better in providing the above service than banks handling L/C on daily basis with decades of experience? To give full consideration, I would appreciate if you could share with me your expectations/comments you have on the above topic.

Sven Kööp

Algorithmics, which ekes out a living by being a provider of risk solutions, has issued a warning that proprietary trading desks face tougher future as standalone entities under Dodd Frank.

Algorithmics says it is receiving increasing numbers of enquiries from proprietary trading desks that are being spun out from their bank owners as a result of the Volker Rule within the Dodd Frank Act. The much heralded Volker Rule, of course, prohibits banks from proprietary trading while also significantly restricting their ability to invest in a hedge fund or private equity vehicle.

Dr Andrew Aziz, the company’s executive vice president of risk solutions, commented: “These groups have long been accustomed to 100% asset class coverage for valuations and the luxury of significant IT support. As they establish themselves as standalone firms, we anticipate that the adjustment to ‘business as usual’ will be a challenge for many, especially if they want to replicate the level of support infrastructure they have been used to.”

Algorithmics says it expects the trend to spin out of major banks to intensify as the July 2012 deadline imposed by the Dodd Frank Act approaches. This trend is occurring at just the same time as greater risk scrutiny is being demanded of hedge funds in general.

Dr Andrew Aziz continued: “As independent hedge funds, they face a number of challenges. First, they will be subject to more regulatory oversight than they have been used to as the hedge fund industry becomes subject to the new requirements of UCITS IV, AIFMD and Dodd Frank. Second, in addition to providing position-level reports to regulators, they will also face the growing demands of their investors for greater risk transparency. Finally, they will need to attract capital without a track record as independent funds. These are all fundamental requirements for entry into this market. In our view, if new funds can demonstrate that they have put in place best practice risk management then they will be in a stronger position to meet these regulatory and investor requirements and build credibility with potential investors.”

For further insight into the Dodd Frank Act, particularly the Volker Rule, the Algorithmics white paper ‘Dodd-Frank Wall Street Reform and Consumer Protection Act: Business Model Implications’ can be found at: http://www.algorithmics.com/EN/media...Dodd-Frank.pdf

Jaded industry veterans tend to have a default setting for the receipt of news about ‘awards’. Lips curl and sneers begin to form, especially when it is the recipient of the ‘award’ which is trumpeting the achievement.

Some will say that ‘awards’ are nothing more than a marketing exercise devised to raise the profile of the body issuing the awards. State Street’s very prestigious annual institutional press awards, for instance, are reported to have been created purely to attract the attention of the relevant members of the press. What better way to ensure that a room will be full of your target press audience than to let as many as possible know they are in with a chance of winning an award?

I should add that I am an extremely proud winner of one of these awards, which have grown in importance and esteem every year since their launch. I do, though, like Julius Caesar is reputed to have done, employ someone specifically to remind me regularly that I am but mortal, and that all things must pass. Did you know, incidentally, that Bode Miller, the US Alpine skier and Olympic champion, reputedly employs someone whose sole function is to shout: Go, Bode!, as he launches himself out of the starting gate, even during practice? Listen out for it next time you sit down to watch downhill racing coverage.

My own direct experience of issuing ‘awards’ comes from filling the long defunct post of editor of the very late FT Mergers + Acquisitions International magazine. An integral part of the job was compiling league tables showing which investment banks were most active in doling out M&A advice.

Competition was fierce to get in the original industry-defining table. Standards were high. Interest in the outcome was enormous. So the tables grew like Topsy. I inherited no fewer than six league tables which had to be produced quarterly, by hand. And gradually discovered a truth: the tables generated something for everyone. All had prizes, of one kind or another, at different times. And the magazine itself, for two or three days every quarter, was at the centre of its universe.

That didn’t save it in the end, though, as fundamentals hit home, and the circulation slid as its core audience continually merged and acquired and shrank. Ownership of the magazine was transferred to Investor Dealers’ Digest in the autumn of 1992. I wrote a poignant farewell to my loyal readers. My publisher, terrified that I might write something inappropriate, ordered the printer to remove the farewell. I only discovered this after publication.

With that in mind, let us celebrate with Broadridge Financial Solutions, which reports that its Securities Processing Solutions, International (SPSI) business won two awards at the annual Systems in the City Awards ceremony, held in London on May. Broadridge won the award for Most Effective STP Solution, as well as the award for CEO of the Year. The company adds that this is the sixth consecutive year that its international capabilities have been recognised at this event.

It says that the award for Most Effective STP Solution recognised the continued extension of Broadridge's SPSI business beyond its core back office solution heritage, through the introduction of new complementary solutions for reconciliation and process control offered via its PROactive solution range to all financial sectors.

The award for CEO of the Year, to Tom Carey, president of Broadridge's SPSI business, was made in recognition of his leadership, citing the expansion of Broadridge's international services through the acquisition of reconciliation and operational risk management solution vendor City Networks, the recent acquisition of a solution that advances Broadridge's fixed income solution in Japan, and Broadridge's impressive international growth over this period.

The Systems in the City Awards were introduced in 1999 by Goodacre, a specialist consultancy firm, to recognise companies and individuals that provide services to the securities industry. The award winners are decided by an independent panel of judges based on their performance over the preceding 12 months.

Stephen Pinner, managing director of Goodacre, the firm that hosts and organises the awards ceremony, presumably charging a pretty sum for attendance and sponsorship, said,:"I congratulate Broadridge on their achievement as a double award winner. Against the backdrop of an industry emerging from recession, they have remained steadfastly committed to their ethos of investing in their portfolio of solutions and services, while increasing their relevance by adding further value to a broadening global client base."

Doesn’t it warm the very cockles of your heart? If you have any thoughts on awards and their relative merits, do let us know.

Some might say that it beggars belief that a 21-year veteran of the structured products industry has never heard of the expressions ‘fee-gouging’ and ‘stuffing’. The bemusement in the voice of the specialist in question sounded genuine, even pained. As his career has been spent constructing products rather than distributing and stuffing (the latter functions more appropriately being left to client managers) he must surely enjoy the benefit of the doubt.

Others are less coy about practices whose goal is to extract the maximum profit from investor clients by charging excessive commissions and selling as many self-manufactured products as possible without any concern for the investor’s actual needs. They will readily agree that pre-crisis, some private banks were notoriously keen on stuffing clients’ portfolios with structured products manufactured by the investment banking division of the group.

There are two principal ways of gouging - product complexity and predatory pricing - explains Yoshiki Ohmura, chief executive officer, Conquest Financial Partners, just outside Zurich.

“Pre-crisis, for instance, structured products were becoming more and more complex; increasing the number of underlying assets, adding exotic features and currencies, making it harder for investors to compare and understand the pricing, thus allowing providers to embed higher fees. Another trend one saw was that providers with weak credit used structured products as a source to fund their balance sheet. The professional market knew that issuers like Lehmans or the Icelandic banks were highly leveraged, and that they would have to pay substantial spreads for interbank, commercial paper or institutional funding. But retail clients generally did not distinguish between the credit quality of the structured products issuers. They saw only the high coupon or participation rate, not the associated credit risk. Banks like Lehmans wanted cheap funding and investors gave them it. Also pre-crisis, one hedge fund group was structuring 10 to 15-year notes, not for the good of clients but to pay its distributors up to 10% commission up front. Investment banks should be pushing the innovation envelope to differentiate themselves in a competitive market, not just to make more money for themselves.”

Has the practice resumed as confidence begins to recover, though? Or are banks more circumspect in their behaviour? If the latter, is it because leopards have changed their spots or is there some other reason? “Providers might have reined themselves in a bit, but it’s not necessarily because they have reinvented themselves; it’s because clients are better educated and looking for less complex products,” says Mr Ohmura.

For Luigi Vignola, head of tailored solutions at Bank Julius Baer, the answer can be traced back to the collapse of Lehman Brothers. He believes that the industry has experienced a sea change in terms of the perception of credit risk as a result of that event. “Pre-Lehman, we didn’t consider structured products to have credit risks, but post-Lehman we see them all too clearly,” he says. “Any reasonable investment bank has learnt the lesson that they can’t just stuff investor portfolios and create huge concentration risk. We are seeing more and more investment advisory services to help investors decide which products they want and which they don’t want. This is leading to a more conscious approach to putting structured products rather than just flog them mercilessly. If traditional funds represented the first generation of mass investment, structured products are the second generation.”

The customisation of advice and execution is increasing, agrees Chris Taylor, managing director at Incapital Europe. He believes, however, that the underlying driver for change sits on the buy-side of the equation rather than on the sell-side. “In the last 10-15 years, for institutions, including retail and private banks, that have proprietary distribution, ie they ‘own’ customers , the name of the game has increasingly been ‘products and sales’, with a propensity towards internally manufactured product, potentially with high margin’’ he observes. “However, a significant trend in the wealth management arena currently is that of high net worth investors waking up to this transactional and commoditised approach, and we are seeing a migration of investors from private banks to specialist independent wealth managers, where the focus is very much ‘service plus genuinely bespoke solutions. We have been very active in supporting high end wealth management firms, including smaller private banks, family offices and leading IFAs, compete against larger private banks, using independently manufactured structured investments to de-risk portfolios, re-calibrate returns and importantly diversify credit risk, to meet precise individual investor interest and need.”

The traditional asset management industry struggles to understand structured products, states David Stuff, director, structured products, at RBS Global Banking & Markets. “Derivatives enable us to meet investor demand for greater certainty on the return of capital, equity upside, dividend income, or a combination of all three,” he says. “But there is only ever room for one pint in a pint pot. If investors want more of one, they have to accept that there will be less of another.” Proving extremely popular with buyers across Europe, he adds, is the Mongolian index offered by RBS, demonstrating continuing demand for exotic thematic investment even in difficult times.

Barbara Mullaney, head of EMEA and Americas at Citi’s Cross-Asset Group, sounds ever so slightly defensive when advancing her point of view, which suggests that some investors may misperceive how banks manage these products. If a client loses on an investment, the bank is not necessarily winning, she says. “We want clients to earn a coupon or receive the yield that they seek as part of their portfolio investment goal. We fully understand that if they don’t achieve this, they have other investment options. Structured products allow clients to take a view on the markets, and investment banks manage the risk to facilitate the client’s view.”

In recent years, she goes on, investment banks (the manufacturers) and wealth managers (the distributors) have worked more closely with their internal product approval committees to increase the focus on risk/return, suitability, disclosure and risk diversification for asset classes and credit. “Many distributors also practice open architecture to add an element of credit diversification for the client,” she says. “U.S. regulators continue to review structured products - how they are manufactured, sold and used. We continuously work with regulators on education and product disclosure.”

If she is correct in her assessment of market prospects, the traffic is going one way: up. While growth of the structured products market slowed during the global crisis, and there was a lack of investor confidence in the markets generally, the business continued. In 2010, she notes that Citi sold over $4.15bn notes, certificates, deposits, OTC derivatives and funds to onshore and offshore investors across the Americas region. She estimates Citi’s structured products sales growth to be approximately 50% for the Americas in 2011.

A version of this article appeared in the Financial Times FTfm supplement on May 9 2011. The headline was written by the sub-editor there, but it's so unusually strong for an FT headline that I felt I couldn't better it.