Thursday, December 20, 2012

Random Walkers January

Singapore's first Quant Finance Social event for 2013, Thursday 3rd January 2013

I am not sure if we will have much of a crowd due to the holidays! but if you are still on the island then come on down, there will be a few of us there to ring in the New Year.

We will return to the Bull & Bear on Far East Square where Su will once again give us a special offer including promotional prices on selected drinks and complimentary bar snacks while stocks last.

Bull and Bear
33 Pekin Street, Singapore 048671
+65 6557 0879

Monday, December 3, 2012

Controlling Conflicts of Interest

Two of the leading regulators’, the SEC and FSA, have voiced concerns about conflicts of interest.

The SEC took a broad look at conflicts of interest in all sectors of the financial industry with particular focus on broker dealers and financial advisors. Conflicts of interest arise in a broad variety and potentially cause big damage. The SEC therefore includes them in their key risk analysis. Financial intermediaries are called upon to constantly identify conflicts of interest, establish compliance and ethics programs and integrate them in the overall risk management framework. Effective policies and procedures must cover a wide range of topics like staff education and training, incentives, persistent identification of conflicts of interests, senior management commitment, monitoring and auditing, as well as enforcement.
The FSA researched the management of conflicts of interest of asset managers. It identified good and bad practices in the purchase of research and trade execution services, gifts and entertainment, access to investment opportunities, employee trading for personal accounts, and the allocation of cost of errors. The FSA concluded that a firm’s culture makes the crucial difference. Senior management must constantly demonstrate its commitment. And business and compliance functions must work together in monitoring and mitigating conflicts of interest to achieve best results.
The FSA found a number of shortfalls in the current management of conflicts of interest and has announced follow-up measures. Other regulators might follow this initiative of the FSA and the SEC for the proper management of conflicts of interest. It is certainly worth reviewing respective practices now.
SEC: 'Conflicts of Interest and Risk Governance', speech by Carlo V. di Florio (
FSA: 'Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks (

Random Walkers December

Singapore and Southeast Asia's only Quant Finance Social event is back for December.

This month we will return to the Bull & Bear on Far East Square where Su will once again give us a special offer including promotional prices on selected drinks and complimentary bar snacks while stocks last.

See you there for some Christmas cheer :-)

Bull and Bear
33 Pekin Street, Singapore 048671
+65 6557 0879

Finalizing the New Fund Management Regime in Singapore

In August, the Monetary Authority of Singapore (‘MAS’) introduced the new enhanced regime for Fund Management Companies. More stringent requirements apply to all Fund Management Companies, current Exempt Fund Managers (‘EMF’) must seek admission as Registered Fund Management Companies (‘RFMC’) or Licensed Fund Management Companies (‘LFMC’).
MAS recently issued additional information for the implementation of the new fund management regime.
These documents provide additional information on the requirements for RFMCs and in particular their control and reporting framework.
According to a survey conducted by MAS in March 2012, 90% of the approx. 560 EMFs are expected to seek admission as RFMC or LFMC. Until 31 October 2012, 58 EMFs had applied to become a RFMC or LFMC. 10 EMFs shut down. By 2 December 2012, 13 RFMCs were registered. A rush in applications for RFMCs or LFMCs may thus be expected in the two month remaining for the applications.

Monday, November 12, 2012

Random Walkers Roundtable - OIS Discounting

This Thursday, before we all head to Club Street to enjoy a few glasses of Beaujolais we will be welcoming Ben Watson from our Sydney office to Singapore where he will be hosting a Random Walkers Roundtable on OIS Discounting from 7pm.

Ben has over 17 years experience as a Quantitative Analyst with RBS, ABN Amro, Citigroup, Salomon Smith Barney and Natwest Markets. Ben has also worked as an analyst with gas and grain trading companies. More recently Ben implemented OIS/CSA discounting at a major bank. This project included a global pricing system that includes live CSA spread calculations and the driver risk sensitivities to translate the OIS/CSA risk into tradable products. Ben earned a MSc. In Decision Sciences (with Distinction) from the University of Westminster, London, UK and a Bcom. in Accountancy and Finance from the University of Tasmania, Australia.

Please let me know if you are interested in attending & see you there!

Thursday, November 1, 2012

OIS Discounting – A lot to Consider

A lot has changed in the banking world over the last 5 years, so it is not surprising that the way banks value future cash has come under a lot of consideration. The discounting of future cashflows is fundamental to understanding the value of any financial product. After all, the discounted value is the price at the end of the day. The old cash and carry arbitrage argument tells us the right rate to use when discounting is the cost of funds.

Under Libor discounting, there was the assumption that banks can fund at Libor which is not unreasonable if you fund exclusively at say 3m Libor, but we know that this is just not the case. Banks these days should be trying as much as possible to their assets and liabilities, and that means the true cost of funding is somewhere down their own curve. There is an argument that unsecured counterparties should be discounted at the firms cost of funds, although in practice I don’t know how widely this idea has been adopted. If however a Credit Support Annexe (CSA) is present in an ISDA, and collateral is posted against an exposure then story is different. Typically in the case where cash is the collateral choice, the reference rate used to pay interest on the collateral is the Overnight Index Swap (OIS). It follows then that it should be the OIS curve that is to be used for discounting future cashflows.

Another way of thinking about this issue is to consider the credit implications of posting collateral. CSA’s are an excellent way of mitigating credit risk and in its purest form where net exposures are margined daily, no residual credit risk remains. To a financial institution this implies the future cashflows should be values at the risk free rate of return, and that exactly is what the OIS rate implies.
OIS Discounting presents many challenges to a bank. The idea that you have a 40+ year OIS curve in some markets is difficult to imagine, even for developed markets. The Australian market there are Bills OIS Basis (BOBs) quotes to 30 years, but to my knowledge there have only been a handful of trades beyond 3 years. For emerging markets, the idea of a long dated OIS curve is a difficult question to ponder as some markets have no OIS market at all, or the quoted market is only for a few months.

Many CSAs specify collateral to be posted in a currency that is not the same trade in question. For example we have a Sterling swap, but collateral will be posted in EONIA (EUR OIS). The curve needed to price such a swap is the EUR OIS in GBP curve. The implication of doing this however is we will end up with risk to GBP and EUR currency basis and EONIA. From a traditional risk system we would see sensitivity to EONIA.GBP, but a trader however cannot directly hedge against this curve. From a traditional risk system we would see sensitivity to EONIA in GBP, but a trader however cannot directly hedge against this curve. The risk needs to be decomposed in to the underlying risks of GBP basis, EUR basis and EONIA. This is not just a systems issue; it requires a change in thinking from the trader, risk management and the other support functions like finance and middle office. Management also needs to be on-board as well as it is likely there will be a P&L impact.

There has been quite a bit of talk about standardisation of CSA terms. One of the ideas is to adopt the London Clearing House (LCH) approach where you fund in in the same currency as the trade. Certainly posting collateral in the same currency as the underlying transaction has benefits as the trader would not have any cross currency basis risk or FRA/OIS risk in another currency as described above. While this may have some operational benefits, it might not be desirable for minor currencies. The LCH approach has a concentration of risk in specific currencies, and this creates an issue currently not properly comprehended. We saw during the global financial crisis there was a squeeze in USD and US banks had to raise USD via the cross currency market. Now what would happen if LCH clients get margined in a currency they cannot raise? OK, having a squeeze that ended up in a complete freeze in USD may be unrealistic, but it could happen to a minor currency. The LCH approach is assuming all parties have complete access to cash in each currency.  So what is the alternative? Multi-Currency CSA prevents this type of scenario from happening. This is where you have a choice of different currencies to post. There are a number of issues still outstanding in respect of pricing with these types of agreements, such as optionality at the point where one might switch collateral. However such agreements do provide organisations the flexibility to fund in a way that suits them.

The challenges for any financial institution faces with an OIS migration are many. For banks, understanding the true cost of funds for each client, creating long dated OIS curves, changing the discounting on every cash flow, translating the risk back into driver risk and making sure traders, risk managers, accounts and business management understand what is happening are going to be issues. How the organisation decides to manage the risk will be telling as well. A smart bank should be thinking how they can make money out of this. The transition to OIS discounting will leave the market less than perfect and that provides opportunity. Those who understand it the best will make money.

For price takers such as fund managers, there is opportunity as well as sensible selection of counterparties will make a difference. Also understanding how banks value your trades will put you in a position where you can have a sensible conversation about them. In some cases the best thing to do might be to renegotiate your CSA terms.

I think OIS discount is the biggest change to the swaps market in 30 years. Banks in Asia and Australia are yet to fully embrace OIS discounting, but that does not mean there is time for contemplation. Slow adopters are going to be the ones that miss out on the opportunities it presents.  My white paper goes into more details on these issues, but it also looks at the risk implications of cross currency swaps and the risk aspect under OIS discounting. There are many issues to consider and Maroon Analytics are able to help institution that is being confronted with OIS discounting.

Wednesday, October 31, 2012

Tax Crimes as Money Laundering Predicate Offences in Singapore

Following through on the updated FATF Recommendations, MAS has issued a consultation paper on the new designation of tax crimes as money laundering predicate offences. Willful and fraudulent tax evasion are to be designated serious tax crimes and become predicate offences to money laundering in Singapore.
By 1 July 2013, all financial institutions in Singapore must enhance their money laundering prevention measures accordingly. Most markedly, they must identify tax-specific risk indicators (‘red-flag indicators’) and introduce them in their existing AML framework. Where necessary, additional information must be obtained to verify the tax status. In addition to applying these measures starting 1 July 2013, the financial intermediaries must undertake a critical review of their existing client relationships.

MAS encourages finanical institutions to consider the framework the Private Banking Industry Group is developing as a reference when evaluating the suitability of their practices. The objective is to establish a framework fitting your specific business and its specific risks. The challenge is on.

Commodities Risk Management Training

Our latest training course - Commodities Risk Management - is proving popular with financial institutions in Singapore.

Contact us to book in-house training for this or other topics.

UBS to Exit Fixed Income

The only thing more surprising that the announcement of Star Wars Episode VII this week was UBS's decision to exit fixed income trading, citing new capital adequacy regulations making the business unviable: via @reuters

Quiz Time: Strategy Among Thieves

5 thieves of different ages have a collection of 100 coins.

Between them they decide to split the coins using this scheme:

  • The oldest thief proposes how to share the coins.
  • ALL thieves (including the oldest) vote either for or against it.
  • If 50% or more of the thieves vote for it, then the coins will be shared that way.
  • Otherwise, the thief proposing the scheme will be killed, and the process is repeated with the thieves that remain.

As thieves tend to be cunning, if a thief would get the same number of coins if he voted for or against a proposal, he will vote against so that the thief who proposed the plan will be killed.

Assuming that all 5 thieves are intelligent, rational, greedy, and do not wish to die (and are rather good at math for thieves), what will happen?

Saturday, August 25, 2012

FX Options Course at NUS's new Centre of Quantitative Finance

The new Center of Quantitative Finance at NUS has invited Professor Uwe Wystup to conduct a 3-day course on Foreign Exchange Options Markets.

The course takes place on Oct 3-5 2012 (Wed-Fri) in the Department of Mathematics, NUS campus.

Random Walkers Roundtable on CVA

On Wednesday 5th September Dr Tony Webb, FINCAD's Director of Analytics, will lead a discussion on CVA - sharing his experience, best practices and modern techniques on this hot topic.

Tony is visiting Singapore from Vancouver. He has a PhD in Fluid Dynamics, an MBA, and other degrees from University of British Columbia, University of Wales and Cambridge University. He has over 10 years of experience in quant finance across a variety of asset classes.

Wednesday, August 8, 2012

Making Sense of Analytics - The Maroon Analytics Map

Last month I had the honour of chairing the inaugural Business Analytics Forum Asia in Singapore. We were graced with speakers from such esteemed organisations as Shell, Deloitte, PwC, Hong Kong, American Express, Telstra, the University of Hong Kong and Great Eastern Life Assurance.

They were a diverse group united in one way - all had an entirely different story of what "analytics" actually is. From Gary Biddle of the University of Hong Kong (and a fellow Chicago grad) talking about using techniques such as EVA to incentivise behaviour and set strategy, to Hugo Walkinshaw of Deloitte talking about "Big Data" and their Analytics Institute, everyone had a different take.

Tuesday, July 31, 2012

Random Walkers Roundtable: Pricing and Risk Management of Interest Rate Quantos

On 19th June, Maroon and CQF co-hosted the first Singapore Random Walkers roundtable to discuss the pricing and risk management of interest rate quanto swaps. Bringing together quant finance practitioners from a variety of leading global firms, including investment banks, auditors, and systems providers, it proved to be a lively and instructive session.

Led by a local expert in the field, a strong agenda focussed on the practical aspects of managing a portfolio of quantos from the sell-side perspective:

Thursday, July 12, 2012

Maroon Analytics Joins FINCAD Channel Program

VANCOUVER and SINGAPORE, July 11, 2012  FINCAD, the market leader for innovative OTC derivatives solutions, announced today that Maroon Analytics Pte Ltd, a Singapore-based professional services company specialising in the application of quantitative finance, has joined the FINCAD Channel Program as a Channel Partner and will be providing local sales, support and professional services to FINCAD's clients in Southeast Asia.

Maroon Analytics, founded in 2007, works with investment banks, hedge funds and sovereign wealth

Thursday, June 14, 2012

Job Vacancy: Risk Analyst

We are seeking to hire a junior risk analyst to work on-site with a prestigious client in Singapore.

Preferred key skills and experience are below.

If you feel you are a suitable fit, please apply by following the instructions here: 

  • At least 5 years of experience in Market Risk/ Counterparty Risk.
  • Hands on with information management and programming skills.
  • Programming on VBA/ Matlab.
  • Experience in presenting and defending Strategy/ Policy
  • Understanding of construction of Yield Curves
  • Computation of Risk –VaR/ Greeks
  • Understanding of Potential Future Exposures/ Counterparty Risk
  • Formulating Stress Test scenarios.
  • Applying mathematical techniques to pricing / risk analysis.
  • Knowledge of Regulations like Basel, IOSCO, ISDA, Dodd-Frank.
  • Desirable to have understanding of Margining / Capital in Prime Brokerage or CCP context.


Monday, March 12, 2012

Malaysian Dragon Fish Bonds

In uncertain times it is not uncommon to see an increase in demand for good luck charms, and especially so across Asia. It is little surprise, then, to hear that that an enterprising venture in Malaysia has been raising capital through selling Arowana Bonds, reports the Gulf Times.

The Arowana is a fish that is also known as the “golden dragon” in Chinese culture because its size, shape, metallic scales and whiskers give it the appearance of a dragon. Fish in general are considered lucky because the Chinese word for fish - "yu" - also sounds like the word for wealth. However, 2012 looks set to be a bumper year for the arowana, it being the Year of the Water Dragon.

Investors hurried to buy the 5,000 ten-year bonds on offer at RM2,500 each to become part-owners of the Arowana Ventures fish farm. Sales of the fish, which can fetch up to $50,000 each, are reported to be up 20% this year and the market is estimated to be worth $300m annually.