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ISSUE 85 • Q2 2018

How US policy has shifted towards anti-globalism Web-based trading tech gains new ground Why the FCA should regulate for the many, not the few Kazakhstan’s new mining rules

One man rule and its impact on global markets WWW.FTSEGLOBALMARKETS.COM


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ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


EDITOR’S LETTER

Recent figures from the Institute of International Finance underscores the tribulation that emerging markets suffered in May, with foreign investors heaving out their investments in a total of $12.3bn in bonds and stocks, with outflows almost evenly split between equities and bonds. Asia took the biggest beating with $8bn leaving the region, while investors took out $4.7bn from African states and the Middle East. The outflow marks a dismal year so far for emerging markets; with little end to the segment’s worries in sight, despite some optimism from commentators. This year looks to be the year that politicians shot the securities markets, with both emerging markets and advanced markets suffering from the after effects of some testing political developments. The IIF puts it down to a lethal cocktail of funding pressure in Argentina, political pressures in Italy, Spain, Turkey, and the EU and industrial unrest (a truckers’ strike) in Brazil. The result: higher yields on some sovereign debt, rising borrowing costs across the board and a stronger dollar. The unilateral declaration of higher tariffs on steel and aluminium imports into the US have not helped either. There are the usual pressure points apparent. Mexico’s peso declined to its weakest level in more than a year on concern a trade pact with the US now won’t be approved by Congress before 2019; the problem with Mexico however roots deeper, as cartels continue to assassinate political candidates who threaten their gangsterism; and each day the country slowly inches towards being a failed state. Turkey’s political situation belies and swamps its economic potential, while South Africa’s rand has also taking something of a pounding as the economy slows. In a recent interview, Raghuram Raja, the Reserve Bank of India’s former governor and now professor at Chicago’s Booth School of Business, concedes that rising interest rates and (in particular) a tightening of US Federal Reserve monetary policy will create stresses for emerging markets, as the Trump administration steadily dismantles the multi-lateral order.

COVER PHOTO: Gage Skidmore from Peoria, AZ, United States of America ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Emerging markets are nowhere near out of the woods; particularly as the administration of the Trump presidency redraws the role of government in the US and beggar thy neighbour policies abroad. Trade, which looked to finally be on an even keel looks suddenly to be upended by a series of decisions by the White House that the US deficit is somehow a result of other countries taking the US for granted. In practice, it involves a much broader political re-writing of the old order. It is not a new path: it has already been riven by political mavens such as Turkey’s President Erdogan, Viktor Orban in Hungary and others. It all reads as a version of intersectionality for politicians, with ‘victimhood’ defining political policy, rather than a desire to actively better the world at home and at large – an interesting, if worrisome, shift in focus.

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TABLE OF CONTENTS MARKET LEADER 16 Days in March: how it changes US policy …………......………….……………………. Page 3 IN THE MARKETS Web-based trading technology gains ground……………………….......………………… Page 7 Weighing the value of the RCEP’s promise………………………………….....…………. Page 10 UK DWP to give pensions regulator new powers …………………….......……………. Page 13 KYC & AML: Humans versus RegTech ……………………………….......………………… Page 16 REGULATION The tightening hold of ESG on UK pension funds ………………………..........……… Page 18 Why the FCA should regulate for the many, not the few …………………..........……Page 19 ADGM launches crypto asset regulatory framework …………………............……… Page 21 TRADE Digitisation of trade finance builds traction ……………………............………………..Page 23 SENTINEL JP Morgan’s chief strategist Karen Ward looks at FHY2 ………...............……………Page 25 BREXIT Asset managers in limbo…………………………………………………..........……………….Page 27 COVER STORY The dangers of one man rule to the financial markets ………...............……………..Page 29 FOREIGN EXCHANGE Fintech transforms Africa’s FX trading landscape …………..............………………….Page 34 OIL MARKETS Trump, Russia and the oil buyers’ club …………………...................……………………Page 36 FRONTIER MARKETS Kazakhstan’s new legal regime for mining……………........................………………..Page 39 BUSINESS AND TECHNOLOGY Preparing for Brexit is easier in the Cloud………………..........................…………….Page 43 Appetite for apps outstrips development ………………..........................……………Page 44

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ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


MARKET LEADER

16 DAYS IN MARCH How US policy shifted sharply to an anti-globalist stance and its impact on trade Just as the global markets looked to have started a sustained recovery, the US stance of America First could ultimately trigger recessions in emerging markets and some advanced markets such as Canada as the imposition of trade tariffs begins to bite in July onwards. If a compromise can be reached, risk assets could see a rebound. If not, markets will likely focus on the possibility of a severe escalation in the tariff war ignited by the White House against its major trading partners.

White House South View by Jim Larkin. Photograph provided by stock.adobe.com, June 2018.

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N THE SPACE of 16 days in March US president Donald Trump changed the head of the National Economic Council. Following the resignation of its head Gary Cohen, appointing Larry Kudlow in his stead. On March 13th Secretary of State Rex Tillerson was fired via a tweet and replaced with Mike Pompeo and on March 22nd, following the resignation of National Security Adviser, HR McMaster, John Bolton returned to the White House to take over the post.

Laurent Clavel, head of Macroeconomic Research at AXA IM notes that, “US trade policy and the current administration’s rejection of multilateralism are getting more and more concerning.” Right now, both the White House and US markets believe that the US can weather any storm. As Clavel notes: “Despite the appreciation of the US dollar, “the US economy is doing great” (dixit Fed Chair Powell) and the Federal Reserve’s confidence is rising[sic].”

The firings and resignations resulted in the appointment of replacements that represent a significant policy pivot that has resulted in the imposition of tariffs against some of the US’s major trading partners; and signalled a hardening of US approaches to NAFTA and NATO. President Trump opted to force the US’s two largest trading partners with duties of 25% on steel and 10% on aluminium imports, under the rarely used Section 232 of a trade law that allows the imposition of tariffs for reasons of national security. While not exclusively targeted at its NAFTA partners, the tariffs make NAFTA talks more challenging. Moreover, both Canada and Mexico have chafed at suggestions by the US side that any treaty agreement would be circumscribed by a five-year sunset clause.

Not for other countries. Saxo Bank in its Quarterly Outlook for global markets warns of “waning global growth, falling credit impulses globally, and massive complacency on the risks of a trade war as we enter one of the most dangerous periods for the global economy since the Berlin Wall fell in 1989.” Trump’s tariffs come into effect on July 6th and talks of trade wars is now widespread. Saxo points to the short-sightedness of the world’s governments as escalating trade tensions ahead of the November 6th US mid-term elections, “where President Trump must prove he is getting the US ’a better deal’, are potentially leading to a more severe crisis”.

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Steen Jakobsen, chief economist and chief investment

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MARKET LEADER

Illustration of China City by baoyan. Photograph provided by stock.adobe.com, June 2018.

officer at Saxo Bank says, “What makes trade issues more challenging today is that currencies no longer follow the paths that current account dynamics imply they should. A country running a current account surplus is supposed to see a strong/higher currency, but in today’s world, the big current account surplus economies all seek to avoid currency strength versus the global dollar standard to maintain competitiveness and avoid the risk of deflation. It’s not just about Trump, either – it also has a lot to do with China’s move to raise its global profile along every axis. China’s chief approach to this vision is so far a mercantile one via its commitment to the One Belt, One Road plan. Beijing may have already given up on the US as a longterm export market – the longer it keeps its market share, the better. The US, of course, is now actively breaking down the very international organisations that have supported growth and globalisation since the end of World War II and after the fall of the Berlin Wall. Consensus still holds that an outright trade war will be avoided, but this ignores the mid-term election in the US.” Charles St Arnaud, senior investment strategist, Lombard Odier Investment Managers adds: “President Trump has signalled his next move: a tariff on the imports of cars into the US. If imposed, this would primarily hit Canada, Japan, Mexico, Germany and Korea. The biggest impact would likely be on Canada, Mexico and Japan, as car exports to the US represent 11%, 7% and 6% of their total exports, respectively. The shock to Canada’s economy would be particularly severe and the country could be plunged into recession. Though not quite as exposed as Canada, Mexico could face a similarly painful outcome. For Germany, while the auto sector is very important for the economy, its direct trade with the US is smaller than the other countries, shielding it somewhat.”

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St Arnaud acknowledges that the real risk arises from signals “being sent to markets, which have started to focus on the possibility of a severe escalation. Investors need to monitor carefully their exposure to risk assets, especially equities and emerging markets. However, it is important to note that the underlying fundamentals of many segments within developing economies are much stronger than they were in 2013. If external risks stabilise, we would expect a sharp rebound in risk assets, based on both valuations and fundamentals. The strategic thesis for accessing emerging markets risk premia remains strong.” While the volume of trade and trading relationships look to be strained in the second half of the year, NN Investment Partners insist that the asset class per se offers attractive investment potential. Markets they argue are not only strained by political tensions, but also the impact of regulation. “Investors attempting to enhance returns by moving into less liquid assets are increasingly faced with the challenge of these markets becoming crowded. The scale of demand creates significant pressure on spreads, which in turn makes it harder to maintain the reward for that additional illiquidity at an adequate level, especially with the turn in the credit cycle looming large on the horizon. The issue is only reinforced by the increasing cost of liquidity in plain vanilla bond markets - liquidity which later often turns out to be little more than a mirage,” holds Suresh Hegde, head of investment solutions at NN Investment Partners. “If investors once turned to illiquid assets because they were overpaying for ‘mirage liquidity’ in standardised markets, they now increasingly find themselves undercompensated for actual illiquidity in private markets,” he adds. “The compression of spread has not been uniformly observed, however, with some private markets continuing to show relatively stable illiquidity compensation, even in ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


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MARKET LEADER

Illustration by wowomnon. Photograph provided by stock.adobe.com, June 2018.

the wake of the great wave of money being put to work in the search for yield. For those looking to benefit from monetising illiquidity in new asset allocations, identifying the underlying forms of complexity that drive the illiquidity in a market is key.” With that in mind, Hegde says that trade and export finance are good examples of markets in which this complexity is both controllable, and more likely to be persist in the future. “Crucially, the fundamental credit risks are alike those in standard corporate and government bonds, i.e. the additional spread compensation versus liquid bonds relates to structural and operational complexity only, and not hidden or esoteric market risk. These assets offer a compelling and substantial opportunity for investors looking to increase returns by harnessing operational complexity in low credit risk investments, where they can also benefit from very low capital costs.” Trade finance has always been an attractive asset class, interest on loans is higher than corporate and sovereign bank lending; and as 90% of world trade is financed on an open book basis, backed by irrevocable letters of credit and insurance (from one of the three major insurers in the segment: Atradius, Hermes and CoFACE as well as a host of other private insurers), risk is minimised. Notwithstanding that reality, is the fact that the imposition of tariffs and counter-tariffs will be costly along the entire goods: consumer, commodities and capital goods chains. Ultimately, tariffs are blunt instruments. Moreover, while the US administration might not like globalisation, it has been adopted by most financial services firms and providers and friendly fire casualties will abound from any sustained attack on liberalised trade.

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Over time, suppliers and consumers will adjust, and the US is right in some instances. China charges higher tariffs on US products than the US charges on Chinese imports. Moreover, China erects significant non-tariff barriers, such as forcing foreign joint venture partners to licence their patents to Chinese partners. The same is true for other trading relationships the US has, not all, but some. However, this is not just about the US looking for improved terms of trade; it is about imposing American First values on the rest of the world. The tariff stance is about exerting maximum political pressure on key markets to see how they will react and cave in. What might temper the US stance is not foreign companies, but domestic ones. The US Chamber of Commerce has been vocal in its opposition to the policy and key firms such as General Motors and American icon, Harley Davidson, which announced that it will move more of its production outside of the US, as counter-tariffs from the EU on US motorcycles (to rise from 6% to 31%) would make it uneconomic to serve the European market from the States. It shows that while tariffs might diminish trade flows, ideas are easily relocated to accommodate new market conditions; by moving production closer to the point of sale, businesses avoid unnecessary costs. The long-term consequences of the more aggressive White House policy will take time to diffuse across the globe. What is certain is that countries and companies (US and otherwise) will take heightened aggression from the US administration only for so long; at least until they work out an alternative that will bypass it, by one means or another. For everyone to benefit, it is best to keep on talking and negotiating rather than threatening and grandstanding; “it is better to jaw, jaw rather than war, war,” as Churchill used to say. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


IN THE MARKETS

Web-based trading technology gains ground

Blue Network by psdesign1. Photograph provided by stock.adobe.com, June 2018.

Portfolio managers, research analysts, traders, sales, compliance officers through to middle and back office personnel use often complex combinations of applications (built either in-house or by specialist firms- or a mix of the two) to complete their day to day business. Historically, these same applications have been sometimes difficult to connect to one another and users regularly re-key information that should be readily accessible across a firm’s array of systems and software. However, all that is changing as a new breed of desk top operating system providers takes the securities trading desk into the modern era.

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HE RENAISSANCE OF the securities trading segment has underway for some time, although the pick-up has been intermittent and sometimes patchy. Even so, both the sell side and the buyside finally looks to be at an important tipping point; with notable momentum building towards a widespread adoption of more modern, open-architecture, flexible and web-based solutions, rather than terminal-based products and services. It is a necessary development. The industry’s long held technology habits are overdue for a refresh. The economics of the trading desk have been under scrutiny for years and for many reasons, including (but not confined to) enhanced regulatory, reporting and risk management requirements; altered revenue streams; changes in the trading infrastructure, rising competition impacting flow and fees; and cumbersome legacy desktop trading systems that are often subscription-based, expensive and which often look and feel out of date. OpenFin is one harbinger of change. The fintech maven provides trading rooms with a universal operating system; a sort of iOS for financial services applications. OpenFin’s European CEO Adam Toms says it offers a “fast front-end upgrade path and unified interface for desktop applications. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Essentially, it is an open source-based technology stack that enables its clients to run HTML5 applications (high-performance, multi-window) on sell-side and buy-side desktops, providing instantaneous user interface (UI) refreshment; and immediate and easy deployment of new applications, even with old legacy applications, which not too long ago could have taken between 6-18 months to implement”. In a series of moves to enhance its status as a one stop neutral platform, OpenFin has contributed code to the Symphony Software Foundation, a non-profit organisation that fosters innovation in financial services via open source software (OSS). The move, while straightforward, has wider connotations for the securities trading industries desktop tool set. OpenFin’s contribution of code to the Symphony Software Foundation, says Toms, enables its customers to deploy Symphony Chat, a trading desk communications tool, on the OpenFin operating system. The firm’s contribution code is based on a standard developed by the Foundation’s Desktop API Working Group and is open source. In part, the move is logical. Toms explains that OpenFin has been a Gold Member organisation of the Foundation and an active participant in the working group, which he says is dedicated to making Symphony interoperable with other

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IN THE MARKETS As Toms, explains it, OpenFin’s software is a gateway, enabling its clients to “seamlessly and rapidly adopt modern web technologies. It is the way the world is going.” Michael McFadgen, managing director, Euclid Opportunities, notes in a statement supporting Toms’ assertion says, “The ability to provide a cohesive and unified user experience is extremely powerful, and it makes our services more nimble [sic], allowing us to stay in front of innovations in any market. OpenFin has the ability to bring that kind of unification to the entire financial industry.”

Adam Toms, European chief executive officer, OpenFin. Photograph kindly supplied by Streets Consulting, February 2018.

industry applications. In part, the move is in line with wider industry developments. In April, the Symphony Software Foundation was relaunched and rebranded as the Fintech Open Source Foundation (FINOS). The move underscored FINOS’s expanded mandate to serve as an independent forum for high-impact collaboration across financial services. The Financial Desktop Connectivity and CollaborationConsortium (FDC3) initiative, was established back in October 2017 by OpenFin and backed by some 40 members from across the financial spectrum, from banks to data provides. FDC3 is designed to establish a standard protocol for interoperability and connectivity across financial desktop applications - enabling adopters to streamline workflows, increase productivity and reduce the cost of expensive integrations. in May OpenFin announced its contribution of the FCD3 program into FINOS’ open source governance framework. “At OpenFin, we share the commitment of FINOS to openness within the financial industry,” explains Mazy Dar, CEO of OpenFin. “Operating the FDC3 program within the framework of FINOS means contributors and users alike can rest assured that an independent, neutral third party with expertise in open source will steward the long-term growth and adoption of FDC3 standards.” “Creating interoperability among desktop applications is one of the most important open source initiatives in financial services,” adds Brad Levy, chairman of FINOS. “The FDC3 program in FINOS provides the cross-industry governance framework and the large collaborative community required to advance innovation in the desktop arena.”

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Providing a more streamlined operational backdrop implies cost competitiveness; which is a big issue right now for historic providers. As Kevin McPartland, head of research for market structure and technology at US consulting major Greenwich Associates, noted some years back in a 2015 whitepaper on technological innovation and the cost of change, “reducing the cost of change should be just as big a priority for financial firms as advocating for the efficiencies that come from the changes themselves”. A recent Greenwich Associates paper, updates the consultancy’s its views that the industry has perhaps lost opportunities in recent years to help update the trading desk. If so, then OpenFin is playing its part in spurring a turnaround for the trading industry, not only in terms of overall cost, but also in terms of the ease in adopting new technology. For its part, OpenFin speaks with some heft; backed by some $22m in funding (of which $15m was secured in February 2017) from heavyweight investors including Bain Capital Ventures, DRW Venture Capital, JPMorgan, NEX Group’s fintech investment business Euclid Opportunities, Nyca Partners, and Pivot Investment Partners, alongside an undisclosed list of angel investors and financial industry executives. Moreover, to date, its software OpenFin OS is licensed across more than 125,000 desktops globally and is used to deploy hundreds of applications to over 400 major banks and buy-side firms; with Toms’ priorities in 2018 involving helping firms and clients modernise the desktop and “driving the collaboration and interoperability frontier”. That OpenFin has contributed code to the Symphony Software Foundation is clearly part and parcel of that task set. However, while the integration, currently in beta, makes it really easy for any OpenFin customer to deploy Symphony Chat on OpenFin OS, it does not, insists Toms signify an exclusive arrangement. OpenFin remains market neutral; “industry and vendor agnostic” as he terms it. Toms adds that a commitment to open source software has been one of the firm’s core guiding principles; and the integration is as much about giving clients options as to their preferences in terms of applications providers, as much as it provides seamless interoperability.

ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


IN THE MARKETS

Netzwerk im Gegenlicht by psdesign1. Photograph provided by stock.adobe.com, June 2018.

The firm has form in this regard. In April last year OpenFin partnered with Algomi, a network company providing information-matching solutions for the optimisation of fixed income liquidity, which now uses OpenFin’s operating layer to deploy updated versions of the firm’s Synchronicity Software as a Service (SaaS) solution for the sell-side and its Honeycomb solution for the buy-side. Algomi’s CTO Usman Khan explained the dynamics behind the partnership when the partnership was announced; which also speaks to the rationale behind OpenFin’s burgeoning relationship with Symphony. “We are now entering a world in which capital markets technology providers can roll out software updates as frequently as technology companies update apps on smartphones. Being at the forefront of this evolution is a major part of our strategy,” Khan confirmed.

More importantly for the industry perhaps, Symphony helped break the traditional mould of a rigid pricing structure for messaging for fixed terms. In the market, the pricing bandwidth has now moved away from annual fixed term fees, priced in the thousands of dollars and based on the numbers of users, to monthly fees, priced at much lower rates (ranging from $10-$20 per user, depending on the provider) for communication tools.

Even so, Toms concedes OpenFin’s latest venture is a firm response to the growing “demand from customers to have Symphony Chat”. The integration is also significant for Symphony, which remains eager to establish its credentials as the industry’s social network of choice and which is marketing itself aggressively as a cheaper, more convenient alternative to historic providers, such as Bloomberg. Its rival looks to have responded with its own, competitively priced communications tools. By October 2017 Bloomberg had drastically cut the pricing of its own messaging tool Enterprise IB; a direct response to Symphony’s rising market share.

By embracing open source, Columbro confirms, vendors can benefit from each other’s ecosystems, enabling each firm’s best-in-class technology to reach “the widest number of developers”. Moreover, by leveraging open standards, “they can ensure high longevity integration to their customers”.

ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Back to the context of the OpenFin relationship, Symphony is currently focused on the possibilities offered by new technology. As Gabriele Columbro, executive director, Symphony Software Foundation details, the integration between Symphony and Open Fin is a marker of the “innovation that can be achieved through efficient collaboration on open source and open industry standards”.

For OpenFin’s Toms, his firm’s involvement with the “transparent and independent forum of the Symphony Foundation, sets new benchmarks for collaborative solutions that will allow clients to take more control and make the back-end more cost-effective”. It is transformative for the industry and is the latest chapter in the “terminal unbundling story,” he says.

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IN THE MARKETS

The RCEP’S PROMISE Renewed global trade, with Asia leading

Transport mit LKW, Schiff, Flugzeug und Bahn by Eisenhans. Photograph provided by stock.adobe.com, June 2018.

While the TPP tries to find its feet, many have been looking to the Regional Comprehensive Economic Partnership (RCEP) to stand up for global trade. Agnes Vargas, regional head, Greater China & ASEAN at Commerzbank, explores the deal and its potential to effect change

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HILE THE TPP tries to find its feet, many have been looking to the Regional Comprehensive Economic Partnership (RCEP) to stand up for global trade. Agnes Vargas, regional head, Greater China & ASEAN at Commerzbank, explores the deal and its potential to effect change. Global trade growth has been somewhat lacklustre of late. The World Trade Organization (WTO) has predicted that, for the first time in 15 years, world trade is likely to have grown more slowly than global GDP in 2017. The Asian Development Bank has also estimated that a huge $1.6trn of global trade remains unfinanced. Risks only increased in January 2017, when the United States announced its withdrawal from the Trans-Pacific Partnership (TPP), an ambitious trade agreement originally signed in February 2016 with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

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November 2017 has, encouragingly, seen these countries determine to press on with the deal without American participation. But it is Asia’s trading performance that has bolstered recent global trade growth. After the 2008 crash, Asia did more than any other region for the recovery of world trade, by contributing significantly to merchandise export volume growth in the post-crisis years. The WTO predicted 3.4 % export growth for Asia in 2016: this was the fastest of any region that year, and in spite of China’s economic slowdown. So it is in Asia that chances for reviving global trade lie – with many looking to the Regional Comprehensive Economic Partnership (RCEP) especially to stand up for globalisation. The RCEP is a proposed free trade agreement (FTA), which (if realised) would constitute the largest in the world. It is tasked with the economic integration of 16 nations and

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IN THE MARKETS

Networks and business connection by bagota. Photograph provided by stock.adobe.com, June 2018.

– to do this – it aims to lower import/export tariffs and increase trade flows. Under the RCEP’s mandate are the 10 countries of the ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and the six countries with which the ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). As a combined market, the potential might of the RCEP cannot be underestimated. The free trade area would cover a population of 3.5bn, and boast a GDP of $23.8trn – that is equivalent to 1/3 of the global whole. With such an extensive scope, the RCEP may well be the key to reinvigorating global trade. One specific target of the RCEP is to support SME growth and inclusion in the international business landscape. According to OECD statistics, SMEs account for 95-99 % of all businesses in the ASEAN – they truly are the key drivers of economic growth in the region. And it must be remembered that it is SMEs that have been hit hardest by what is known in the banking world as the “trade finance gap”: some 56% of trade finance transaction requests from SMEs are rejected worldwide. So, if the RCEP can boost financial inclusion by opening up new markets it could benefit both the intra-Asian and international trade landscapes. In light of our own history of financing SMEs and facilitating their global expansion, this is certainly something we at

ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Commerzbank will be watching closely. Progress continues – but hurdles remain Six years, five ministerial meetings and twenty rounds of negotiations on since the deal was first mooted, where is progress with the RCEP? Negotiations have been subject to delays and talks have now missed deadlines for three years in a row, 2017 included. Last year, for instance, was intended to be the year of the RCEP – something which in hindsight seems rather too optimistic. Yet there has been renewed impetus to talks in recent months. The latest talks held in Manila in November, at a dedicated RCEP summit following the city’s hosting of the 31st ASEAN summit, saw ministers from the constituent nations determine that negotiations on the deal be wrapped up in and signed in November 2018. This month, India’s Prime Minister Modi met the heads of state of the ASEAN members and reiterated the aim to “intensify efforts in 2018” towards the “swift conclusion of the RCEP”. But we shall have to wait to see what progress this year will actually bring. Emerging markets poised to benefit The less-developed economies in the RCEP – Myanmar, Cambodia, and Laos in particular – are best placed to gain from the trade agreement. The reasons are three-fold.

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IN THE MARKETS

of the TPP, they stand to gain enormously from the RCEP. Notably, seven RCEP nations are also members of the TPP, some of which stood to gain enormously from that deal. Vietnam, for example, had been predicted to enjoy an 11 % GDP increase from the TPP alone. Despite signatories’ determination to carry on with the TPP, given the increased degree of risk arising from the US’ departure, success with the RCEP will be increasingly on Vietnam, Brunei and Malaysia’s agendas. China, for its own part, will doubtless strive to make progress with the RCEP as Japan and the 10 other Asian-Pacific countries throw a lifeline to the TPP – the trade deal from which Beijing is conspicuously absent.

Agnes Vargas, regional head, Greater China & ASEAN at Commerzbank. Photograph provided by Harry Lesser, at Moorgate Communications, June 2018.

First, these economies are largely reliant on low-cost manufacturing sectors – especially the textile industry. As part of the RCEP, exporters in these countries stand to enjoy increased market access to the deep markets of wealthy consumers in Australia, New Zealand and China. Second is the flexibility of the RCEP deal itself. With 16 nations involved in the deal, there is little existing standardisation when it comes to regulations. But the agreement is being designed in such a way as to protect less-developed nations from having to match larger economies’ tariff reductions for intellectual property, copyright and patents (TRIPS provisions) and others. A third benefit these emerging markets will gain is a strengthened economic relationship with China. They could attract increased flows of foreign direct investment (FDI) from capital-rich investors eager for new, untapped opportunities abroad. With the US’ exit from leadership of the TPP, of course, comes the rise in importance of the RCEP – as well as the increased influence on the global stage of its Chinese patron. Indeed, it was a sign of the times that China’s premier, Xi Jinping, delivered a landmark speech in praise of globalisation and free trade at the World Economic Forum in Davos in January 2017 – the very same month in which President Trump announced the US’ withdrawal from in the TPP. Therefore, while emerging economies such as Vietnam, Brunei and Malaysia have fallen victim to the stalling ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Political will demanded from the Philippines As the most recent host of talks on the RCEP, and last year’s chair of the ASEAN, the Philippines has been among the most vocal for making progress with the deal. President Rodrigo Duterte has exhorted fellow leaders to show the political will necessary to finish talks, explaining that the “changing global economic landscape requires us to urgently bring the negotiations to a close”, but that he is “optimistic” of building the “much-needed political momentum”. The Philippine premier also explained that the RCEP is intended to be more than a mere free trade area: “[The RCEP] is not simply an added trade agreement, but a trade agreement that could provide the size and scale to unleash new growth potentials and write the new rules of the game of the international trade order.” India’s reservations One particular obstacle facing the deal, it seems, is India’s reservations about high tariff cuts. Both Singapore and Malaysia boast near 90% negligible trade tariffs. Yet export and import duties account for a significant amount of government revenue, and ratification of the RCEP at present would require a considerable reduction for India’s, which are currently relatively high. Another Indian concern seems to rest with the prospect of opening up its service industries to competition from the other more developed nations, and its manufacturing sector to foreign investment. While committed to the RCEP, it is evident that India seeks a “balanced” outcome to the talks. However, the RCEP has been careful to include a great number of caveats. These ensure that nations with unequally sized economies are not dealt an unfair hand. Thanks to such versatility, the RCEP’s member nations hope to reconcile with India’s concerns very soon.

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IN THE MARKETS

UK DWP plans to give pension regulator new powers to safeguard DB pensions

Official portrait of Esther McVey. Photograph provided by Wikimedia Commons, June 2018.

The UK’s Department for Work and Pensions’ (DWP’s) defined benefit (DB) whitepaper Protecting Defined Benefit Pension Schemes proposes giving The Pensions Regulator (TPR) powers to crack down on rogue handling of DB schemes. TPR will be given a “tougher and more productive role” to help tackle employers putting members at risk, heightening its existing ‘anti-avoidance powers’, introducing ‘punitive’ fines on firms that deliberately put their DB pension scheme at risk. What are the implications for employers?

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ECRETARY OF STATE for Work and Pensions Esther McVey says, “It is clear that not all employers want to act fairly. At the heart of the white paper is a strong message for employers tempted to act in a way that is detrimental to their pension scheme. We will not tolerate such behaviour; and will come down heavily on attempts by employers to avoid their responsibilities. We are supporting TPR to be a clearer, quicker and tougher organisation by

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giving it new and improved powers to gather information and require employer co-operation.” The whitepaper outlines the range of new powers that it wants to be given to the TPR; including disqualifying company directors who have “committed wilful or grossly reckless behaviour in relation to a pension scheme”. Contribution notice and financial support direction powers are ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


IN THE MARKETS

also enhanced. The TPR’s information-gathering powers have also been enhanced. The powers are “supported by penalties to drive co-operation”, such as requiring attendance at interviews, civil sanctions for non-compliance with section 72 notices and inspection powers. The new rules will also harmonise with powers it already has for auto-enrolment and master trust schemes. TPR’s code on DB funding standards will be revised, focusing on prudence when assessing liabilities; appropriate factors for recovery plans, and ensuring a long-term view is considered when setting a pension scheme’s funding objective. In addition, the DWP sets out the potential for new formal legislation that will underpin the enhanced role of the regulator, saying the UK government will implement policy to “encourage efficiencies and facilitate consolidation for the improvement of outcomes for members and employers” and will consult on building a new legislative framework and authorisation and accreditation regimes for new forms of consolidation vehicles. It will also work with the market to develop and strengthen the oversight regime covering areas such as the work of trustees. Specifically, it intends to collaborate with TPR to raise the benefits of consolidation with trustees through the Trustee Knowledge and Understanding toolkit and associated guidance, while modifying guaranteed minimum pensions (GMP) conversion legislation to support benefit simplification, making consolidation easier. Moreover, DB trustees will be required to appoint a chairman who will need to provide a chair’s statement to the regulator alongside the scheme’s triennial valuation. Measures outlined in the whitepaper will be phased in, with the government taking the lead in some areas with primary legislation, with stakeholders including TPR and the Pension Protection Fund (PPF) involved in others. “More work is required to build a consensus about the best way to deliver our aims and to design the detail of our proposals”, the DWP said in the paper, confirming further consultations and the evolutionary process it aims to foster. Some market commentators have reacted positively to the whitepaper. Rory Murphy, chair of Trustees at the Merchant Navy Officers Pension Fund (MNOPF), says he is supportive of the proposed measures. “Unscrupulous company directors have hitherto been able to undermine DB pensions through reckless or negligent actions. This not only impacts badly on the members of their own pension

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schemes but undermines consumer confidence in the wider pensions industry. This must not be allowed to continue. The reality is that, as the paper notes, “most employers want to do the right thing by their pension scheme.” Graham McLean, head of scheme funding, Willis Towers Watson, takes a wider view, “The government has granted the pensions regulator’s wish. Instead of having to demonstrate that assumptions it dislikes have not been ‘chosen prudently’ or that deficit recovery plans are not ‘appropriate’, the Regulator will get to decide what these terms mean – at least on a ‘comply or explain’ basis. Today’s emphasis on toughening up the funding regime marks a change in tone from 2014. Then, the Regulator was given a new employer-friendly objective and responded by dropping its previous mantra that trustees should aim for deficits to be paid off as quickly as the employers could reasonably afford. Four years is a long time in pensions policy,” Mclean says. McLean says this is a prescriptive change, which could make it harder for schemes to take full account of their specific circumstances. Even so, he concedes: “But we don’t yet know what will be prescribed. We might see a maximum ‘normal’ length for recovery plans or rules about when deficit contributions must take priority over dividends. Regulatory pronouncements on acceptable discount rates and on how statutory funding targets should fit with the scheme’s end game objective could also increase the deficits that some employers have to pay off. For now, the government has endorsed the regulator’s analysis that imprudent and inappropriate agreements are slipping through the net without saying how this has been judged”. “For some schemes, the end result may be that the employer pays more in and does so sooner, but the law of unintended consequences could also come into play. Some employers could be emboldened to resist trustees’ demands on the grounds that a weaker settlement would be within the Regulator’s acceptable range. When the Regulator used to say it would scrutinise recovery plans longer than 10 years, we saw a lot of 10-year recovery plans – and not all of these would have been longer in the absence of any trigger,” says McLean. “Since 2003, a key principle of the defined benefit regime has been that a solvent employer cannot walk away from its pension scheme without paying a sum based on the price of securing all benefits with an insurer. Now, in its efforts to promote consolidation, the Government is looking at allowing a lower cost exit where that is judged to be in

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IN THE MARKETS

Retraite by Coloures-pic. Photograph provided by stock.adobe.com, June 2018.

members’ interests. This would be a huge change.” In a detailed review of the paper by investment consultants Redington, the firm notes: “We have all seen high profile examples of where corporate failures have impacted a significant number of pension scheme members. The PPF is a fantastic safety net but going into the PPF can still result in material cuts to member benefits and it is vital that trustees don’t become complacent … We agree that there is no need for a complete overhaul of the DB pension system, but we do need a better way of managing pension schemes within the current regulatory framework. A more integrated approach to risk management, and a focus on the real world drivers, rather than the assumptions used for a three year valuation cycle, could significantly move the dial in generating better outcomes for all pension scheme stakeholders. “ The firm notes that “Creating a framework which allows capital to be injected in to pension schemes to increase the chances of paying pensions whilst also generating returns for the capital providers should result in a much higher change

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of members in ‘distressed schemes’ receiving their full pensions. This structure would only really be possible with sufficient scale – by aggregating several pension schemes – and so the consultation on these frameworks is welcome.” Redington also points out that recent Schemes Without a Substantive Sponsor (SWOSS) framework released by the PPF markedly improves the likelihood of paying full benefits from DB schemes, even where the sponsor has failed. “Any schemes with sponsors deemed to be in distress should look at how to get to ‘SWOSS’ funding as quickly as possible, to maximize the chance of paying full benefits,” it advises. However, it does note that a significant barrier which still needs to be tackled is quality of data and the systems on which the data is held. “This is where we need to see real improvement! We also think there needs to be caution for potential issues of misuse and unintentional pressure to consolidate,” it says.

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REGULATION

Andrew Frost; director, Investment Management Solutions at Lawson Conner. Photograph kindly supplied by Giselle Daverat at GD Consulting, June 2018.

KYC & AML: Humans versus RegTech With the UK’s Anti-Money Laundering (AML) regime amendments to implement the Fourth Money Laundering Directive (MLD4) last year, compliance teams around the world are under even more pressure to deliver on their obligations. This, on top of all the other new global rules and regulations that have been introduced since the financial crisis of 2008 (such as MiFID, AIFMD, Dodd-Frank, BRRD, Basel II et al), has heightened the global regulatory landscape. Andrew Frost; director, Investment Management Solutions at Lawson Conner, assesses the implications of change.

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NOW YOUR CLIENT (KYC) checks already addressed the responsibilities to comply with sanction regulations as well as to combat the likes of corruption, fraud, money laundering and terrorist financing. The new and amended UK AML rules do not deviate from these but rather add to them. In essence, not only do they enjoin firms to reduce risk, regulators also have increased demands to satisfy their reporting frameworks. The new regulations have introduced more obligations on financial services and require firms to have a complete AML/ KYC programme implemented; have adequate resources in place to monitor and enforce compliance with the relevant requirements; put in place adequate controls and oversight over the AML programme; respond to any changes quickly and produce comprehensive reports; comply with latest data security rules; and provide full audit trails. Though these may appear simple enough to comply with, an increasing number of firms are failing to adequately meet them. In house compliance departments or AML financial crime advisory teams are usually at the forefront of setting up any KYC and AML policies. This often leads to the lack of

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consultation with employees tasked with implementing the day to day activity and mean that though there is a strong policy meeting all regulatory obligations, it will simply be impossible to implement. A common misconception that many firms fall foul of is that they can sometimes believe that policy setting is a onetime task or only needs to be updated. As regulators are forever updating their obligations the policies need to be updated too. It is most likely those executing the day to day that will be more acutely aware of any changes in real time and will have the best knowledge on how to update these. Firms would be wise to involve a wider group in the initial drafting if they wish to avoid both the disconnect between policy drafting and execution, and the disconnect between policy and regulation. Archaic technology and processes also pose many issues for financial services firms vis-à-vis KYC and AML checks. There is no denying that these tasks are repetitive and often lead to data inconsistencies, inaccuracies, and a duplication of processes. They are also often performed on numerous systems which inevitably lead to the implemenISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


REGULATION

Puzzle by mangpor2004. Photograph provided by stock.adobe.com, June 2018.

tation of manual solutions with the purpose of attempting to bridge end-to-end operational procedures. Extensive documentation requests and verification, as well as proof of identity are also required. These outdated processes not only frustrate all those involved, including the client/ potential client, but create an environment prone to high risk factors. These processes take up a considerable amount of time and escalate costs making it a serious issue for financial institutions to stay ahead of criminals. Operating on a global scale also adds issues to meeting all requirements from various regulators. Policies are often drafted from headquarters and local regulatory nuances are left out causing problems further down the line when certain KYC procedures cannot be implemented across all jurisdictions. Regulation is a fast-moving area and regulators are constantly updating their mandates and obligations. To not be caught out, all global firms should have a coherent and well-implemented international KYC and AML framework in place. Overcoming these challenges is no easy feat. Tackling issues around technology can be solved by the introduction of shared ledger facilities, though setting these up and managing the necessary infrastructure will not be easy and could take time and prove to be disruptive, at least to begin with. It is true, automating processes can help ensure that firms comply with deferring international regulations. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

“RegTech� is now offering solutions, but to maximize the potential associated with these it will still depend on the skilled use of the technology and specialist knowledge. To successfully reap potential benefits; firms should invest in the necessary knowledge, expertise and manual skills to operate them. There will always be a need for the human touch. RegTech may be able to improve efficiency, cost, speed by automating a manual process, and help to streamline and simplify it; the main benefit will be the ongoing monitoring of a client. Software can monitor not only the client after an on-boarding exercise but the regulatory scene worldwide. Software can identify updates in regulations and sanction lists, but it will take a skilled person to highlight and analyse these. New and innovative technology will no doubt continue to enter the market over the next few years. What will be important is how firms decide to use it. To realise its full potential, financial institutions should ensure that they also employ people with the correct manual skills, expertise and know-how globally. Instructing a trusted global service provider is another option to keep costs down. They can combine the implementation of the technology with the manual analysis whilst also reviewing the captured local data. This will set an organisation apart and give it the very best possible tools to ensure full compliance, on a budget, with regulatory KYC and AML obligations on a global scale proving that humans still very much play a significant part in staying compliant and keeping to current regulatory requirements.

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REGULATION

The tightening hold of ESG on UK pension funds

Growing money tree by acarapi. Photograph provided by stock.adobe.com, June 2018.

Occupational pension fund members will be given powers to hold their schemes to account over how social and environmental factors impact their investments.

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NDER NEW UK government regulations published in mid-June, trustees will be required to produce a policy which includes an assessment of the sustainability of their investment decisions. This policy will need to be available to members so that they can make their own assessment of efforts to combat various risks, including climate change, poor corporate governance and socially harmful practices.

The government’s response includes plans to clarify the requirements for trustees of occupational pensions and the independent governance committees of workplace personal pensions around consideration of broader long term financial risks; the ability of pension schemes to consider members’ non-financial or ethical concerns; and the role of engagement alongside voting as an important aspect of stewardship of pension scheme assets

The government is bringing forward reforms to take account of how people put their values at the heart of the things they choose to buy, the places they live and visit, and the jobs they do.

Pension scheme members will be able to see how their money is being put to work, and to make their views heard. Moreover, defined contribution schemes will need to make this policy available to the wider public. The new rules cover more than £1.5trn worth of investments by occupational pension schemes. Esther McVey, Secretary of State for Work and Pensions says, “These new regulations will empower savers all over Britain, ensuring that their voices are heard when their savings are invested. As we see the younger generation who care more about where their money is going, they are also increasingly questioning that their pensions are invested in a way that aligns with their values. This money can now be used to build a more sustainable, fairer and equal society for future generations.”

Back in November 2016, the government asked the Law Commission to look at how far pension funds may or should consider issues of social impact when making investment decisions. The Law Commission’s report found there are no substantive regulatory barriers to making social impact investment by pension funds. Most of the barriers are in fact structural and behavioural, including the need for clearer legislation and guidance particularly with regard to social issues.

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REGULATION

The Cash Connundrum by Dmitry Ersler. Photograph provided by stock.adobe.com, June 2018

Why the FCA should regulate for the many and not the few (or Michael Sheen) FCA chief executive, Andrew Bailey declared war on high-cost credit at the end of May, when he published a long-awaited review into the sector. Greg Stevens, chief executive of the Consumer Credit Trade Association looks at the implications of the move.

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IGH-COST CREDIT is minuscule compared to the overdrafts, credit cards and motor finance that comprise the lion’s share of consumer lending by volume. And yet it presents the FCA with the trickiest of political challenges: do the campaigners’ bidding and target the lenders; or prioritise the consumer and maintain access to credit. The leading debt charities are clamouring for tighter controls. In recent weeks their efforts have been greatly boosted by the involvement of actor-turned-activist Michael Sheen whose presence has electrified the debate. The FCA is trying to balance the need for consumers to access credit with the necessity to protect them from harm; and Andrew Bailey is acutely aware of the precariousness of this balancing act. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

In a speech to bankers last year he acknowledged that “there is an issue around access to credit, which for me is at the heart of our interest in high-cost credit. Put simply, it would not be an acceptable outcome to cut consumers off from access to credit when they have a justifiable need for credit, for instance to smooth erratic or lumpy income”. The debt charities are more single-minded. For them the prescription is simple: cap the lenders’ charges and vulnerable consumers will be less indebted. If demand persists, social lenders like credit unions will meet it. Past experience shows this to be wishful thinking. The political allure of rate caps is undoubted. Even George Osborne was susceptible: it was he as Chancellor who introduced the cap on payday lenders. But the FCA must

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REGULATION

Greg Stevens, chief executive of the Consumer Credit Trade Association. Photograph kindly supplied by Marcus Goldsmith at transmission-private.com, June 2018.

resist the pull of politics and regulate in the interests of the millions who need credit to manage their household budgets. It must look at the economic facts and regulate for the many, not the few, or for Michael Sheen. Uncomfortable as it may be, the bald truth is there is a causal link between moves to increase consumer protection and a constriction in the supply of legal sources of credit. The irony is that moves to cap charges and protect consumers end up having the opposite effect. Debt campaigners contest this, but the evidence is mounting by the day. First, look at the Bank of England’s own statistics. Its Credit Conditions Survey for Q1 showed the availability of unsecured credit to households had decreased “significantly” in the first quarter as lenders tightened their criteria. The Bank’s Money and Credit survey in May reported a further constriction: the first reported monthly decline since 2013. Second, the UK government’s April announcement of a 16% increase in funding for its Illegal Money Lending Teams. The Treasury concedes there are over 300,000 people in debt to illegal lenders with many experts saying numbers are much higher in the “ghost economy”. The FCA’s own statistics show 3.6 million UK adults are borrowing from ‘friends and family’, for many a euphemism for unregulated lenders.

liament in May. Despite claiming there had been no ‘waterbed effect’ since it brought in the cap on payday lending, Bailey admitted the amount of outstanding ‘rent-to-own’ and ‘home credit’ debt had more than doubled in the two years since the cap was introduced. If ever there was going to be a waterbed effect as a result of a cap, it would be to these two sectors. The conclusions are clear: the overall availability of credit is decreasing; the FCA’s interventions are reducing choice but not demand; and, correspondingly, the incidence of illegal, unregulated credit is rising. The lessons should also be clear: limiting the supply of credit does nothing to reduce the demand. Take away first choices and consumers will hunt out alternatives. These may be in the regulated sector, equally they may not. Worryingly, there is more to come. The FCA is about to bring in new regulations that will drive even more companies out of the market. Its proposed rules on affordability will fall much more heavily on businesses serving ‘non-mainstream’ consumers than the banks. Given the economics of small sum lending, these extra costs will be impossible for many to bear. The result will be market exit and less access and choice for consumers. This may be what the campaigners want to see, but it will not be welcomed by the vast majority of consumers up and down the country.

Third, a remarkable admission from Andrew Bailey in Par-

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REGULATION

Abstract crypto cyber security technology on global network background by pinkeyes. Photograph provided by stock.adobe.com, June 2018

ADGM launches crypto asset regulatory framework for the MENA region

Abu Dhabi Global Market (ADGM), the International Financial Centre in Abu Dhabi, has launched a comprehensive framework to regulate spot crypto asset activities, including those undertaken by exchanges, custodians and other intermediaries in ADGM. The guidelines follow on from a market consultation, which ended at the close of May and is one of the first articulations by a meaningful regional regulator of a firm regulatory framework covering new digital assets.

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HE FRAMEWORK, DESCRIBED by the ADGM Financial Services Regulatory Authority (FSRA), is designed to address the full range of risks associated with crypto asset activities, including risks relating to money laundering and financial crime, consumer protection, technology governance, custody and exchange operations. This new framework is one of the early scaled regulations in the crypto currency and digital assets space: many regulators have accepted that cryptocurrencies will be a sustainable asset set, even though not all cryptocurrencies will survive; and it is likely that it will form the basis of future guidelines, given its comprehensive approach to guidance on the segment. For example: it clearly distinguishes the

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definition and related guidance to security tokens: that is, virtual tokens that have the features and characteristics of a Security under the FSMR (such as shares, debentures, units in a collective investment fund); crypto-assets, that is, non-fiat virtual currencies; utility tokens, in other words, virtual tokens that do not exhibit the features and characteristics of a regulated investment / instrument under the FSMR; Richard Teng, chief executive officer, FSRA of ADGM, notes, “We are encouraged by the significant global and regional interest from exchanges, custodians, intermediaries and other institutions to our crypto spot regulatory

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REGULATION

Bitcoin. Blockchain. Crypto currency by BT IMAGE. Photograph provided by stock.adobe.com, June 2018

framework. Globally, responsible crypto asset players are seeking a regulatory regime upholding high standards that foster market confidence. By introducing a comprehensive and best-in-class regulatory framework, the FSRA is taking a leading role in instilling proper governance, oversight and transparency over crypto asset activities, positioning ADGM as a destination of choice for crypto asset players. Our engagement with fellow global regulators also validated our position that the key risks highlighted have to be addressed for crypto assets to be more widely accepted and institutionalised.” The FSRA has defined crypto assets in the FSMR as a digital representation of value that can be digitally traded and functions as a medium of exchange; and/or a unit of account; and/or a store of value but does not have legal tender status in any jurisdiction. A Crypto Asset is - neither issued nor guaranteed by any jurisdiction and fulfils the above functions only by agreement within the community of users of the crypto asset; and “distinguished from fiat currency and e-money.” The FSRA treats crypto assets as commodities and, therefore, are not deemed Specified Investments under the FSMR. However, pursuant to the Spot Crypto Asset Framework, market intermediaries (e.g. broker dealers, custodians, asset managers) and Crypto Asset Exchanges dealing in or managing crypto assets will need to be licensed / approved by FSRA as OCAB Holders. Only activities in accepted crypto assets will be permitted.

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Among some of the key elements of the guidelines, market intermediaries and market operators dealing or managing investments in Security Tokens need to be licensed/ approved by FSRA as FSP holders, recognised investment exchanges or recognised clearing houses, as applicable. Utility tokens or non-security tokens are again treated as commodities and, therefore, not deemed Specified Investments under the FSMR. Unless utility tokens are caught under the definition of crypto assets, spot trading and transactions in utility tokens do not constitute Regulated Activities, activities envisaged under a Recognition Order (for example, those of a recognised investment exchange or recognised clearing house), or activities envisaged under the Market Rules (MKT). As regards derivatives and collective investment funds of crypto assets, security tokens and utility tokens regulated as specified investments under the FSMR. Market intermediaries and market operators dealing in derivatives or collective investment funds will need to be licensed/approved by FSRA as FSP holders, and recognised investment exchanges or recognised clearing houses, as applicable. The FSRA says however that the Spot Crypto Asset Framework is not intended to apply to initial token or coin offerings (ICOs), (whether security or utility tokens), or other capital raising purposes.

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TRADE

Digitalisation of trade finance gains traction

Olivier Paul, head of policy at the Banking Commission. Photograph kindly supplied by Charlotte Toon, Moorgate Group, June 2018.

The ICC Banking Commission’s 10th Annual Global Survey on Trade Finance suggests that digitalisation of the sector is increasing, although obstacles remain in the path towards efficient and paperless trade finance. The survey, which gathered insights from 251 respondents in 91 countries, indicates that a key barrier to digitalisation is the lack of standardisation throughout the sector. Olivier Paul, head of policy at the Banking Commission, explains that work is still needed to drive forward the digital agenda, although progress to date has been positive.

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HE MOVE TOWARDS paperless trade finance has been a long-standing objective for many in the industry. As our 10th Annual Survey on Trade Finance indicates, digitalisation is beginning to gain significant traction. Some 45% of respondents to this year’s survey indicated they intend to prioritise digital trade and the development and deployment of platforms over the next one to three years. In a related development, interest in supply chain finance (SCF) is also gathering momentum. SCF, which usually involves financing through an online platform, is providing

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a growing number of banks with a strong alternative to traditional trade finance. What’s more, some 56% of bank respondents that offer SCF stated they had already developed their own proprietary systems rather than rely on an outsourced platform. Nonetheless, the benefits of implementing technology solutions in trade finance processes have not been felt by all banks, with only 9% of respondents agreeing digitalisation had improved efficiency to date. Divergent standards are cited as a key reason for the lack of improvement. This is apparent within SCF platforms and their lack of common

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TRADE

abstract digital signature over night city background by kwanchaift. Photograph provided by stock.adobe.com, June 2018

standards for exchanging data. As a result, some 32% of respondents with proprietary systems reported issues due to the lack of interoperability. Nevertheless, over 60% of banks said they were moving towards further digitalisation, while just 7% indicated they had no plans to implement technology solutions in their trade finance offerings. Certainly, digitalisation of the trade finance sector is aimed at improving efficiency and processes, which should allow for greater trade finance capacity. And that should help relieve one of the greatest concerns for trade finance – that of the trade finance gap. The difference between the demand and supply of trade finance currently stands at US$1.5 trillion, according to figures from the Asian Development Bank. What is more, some 22% of respondents expect the unmet demand to increase in the next 12 months. Nonetheless, the survey indicates a positive outlook on the current and future provision of trade finance. Two thirds of respondents declared the amount of traditional trade finance they provided in 2017 was higher than the previous year. SCF provision is also increasing, with 43% of respondents indicating their SCF business grew in the past year. In total, respondents to the survey provided over US$4.6 trillion in traditional trade finance and US$ 813 billion in supply chain finance last year. Over the next one to three years, some 41% of respondents expect the trade finance gap to shrink. Regulation – a barrier to provision? Unfortunately, regulation remains one of the major barriers preventing the bridging of the trade finance gap. The survey revealed that regulatory compliance requirements are still inhibiting banks’ ability to provide trade finance. Some 90% of respondents highlighted regulatory compli-

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ance as a major obstacle to growth. Know Your Customer and Know Your Customer’s Customer (KYC/KYCC) obligations remain an issue for trade finance providers, with 18% of respondents to the survey citing compliance with KYC/KYCC regulations as the reason for a decrease in their provision of trade finance. What’s more, some 40% of respondents revealed the requirements were already a persistent challenge for SCF delivery. The survey also outlines regulation to counter the financing of terrorism (CFT) as a key concern. Some 56% of respondents have serious concerns about the impact of CFT regulations on their ability to provide adequate trade finance in support of cross-border trade. While practitioners recognise the need for adequate compliance measures, the lack of clarity surrounding regulatory expectations has led to overly-stringent self-imposed industry measures. Fulfilling all these regulatory requirements consequently represents an unnecessarily resource and time-heavy burden for banks. Despite these issues, the survey revealed a generally positive outlook on the future of the trade finance sector: some 73% of respondents to the survey expect trade financing to grow over the next 12 months. Banks, especially, see the potential for SCF, with 91% of bank respondents expecting revenue growth from SCF in the next one to three years. Regarding the potential for future digitalisation, respondents agree that continued investment is necessary, with 46% believing the longterm focus should be on implementing and leveraging the opportunities from new technologies. Importantly, the implementation of common standards is necessary to increase efficiency and market capacity, while enabling cost-effective due diligence.

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SENTINEL

A synchronised recovery is still in place Karen Ward, chief market strategist for the UK and Europe, JP Morgan Asset Management. Photograph kindly supplied by JP Morgan Asset Management, June 2018.

In our regular market outlook, regular columnist, Karen Ward, chief market strategist for the UK and Europe, JP Morgan Asset Management outlines what is on her radar for the second half of 2018…

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HE SYNCHRONISED RECOVERY, which proved so fertile for assets markets last year, is still ongoing, with growth in the major economies-the US, the eurozone, Japan and China-still above trend. This is translating into robust corporate earnings. First-quarter earnings beat expectations across the board. US bourses were the star performer as the sizeable tax cut helped earnings per share jump 25% in the first quarter. Even so, earnings were also comfortably above expectations in Europe and Japan. European companies reported earnings growth of 10% and the Labour shortages suggest firms will need to raise productivity Growth has been broadening from consumer spending to corporate investment. The memories of the great recession took a long time to fade, and for many years corporates lacked the confidence to expand business investment. Although this has been a long recovery it has been a very shallow one, largely due to this hesitancy among corporates to invest. Firms are being forced to spend more on capital as labour is becoming increasingly scarce–particularly in the US. Going forward, firms will have to squeeze more out of their existing employees—in other words, they will need to raise productivity. Evidence of rising productivity would be a very positive development for markets because it has the

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potential to extend the cycle, keep inflation low (by reducing unit labour costs), support corporate profitability and limit the need for much higher interest rates. Left alone, there is potential for this virtuous cycle of growing confidence, growing investment and growing productivity to flourish. But policy coming out of Washington is creating risks around the benign outlook. The prospect of a global trade war is the most concerning. The US administration believes the large current account deficit in non-energy goods is a reflection of lopsided trade deals. So far, the only concrete action has been the introduction of tariffs on steel and aluminium entering the US. These alone will have very little impact on either US or global activity. But the risk is these relatively minor actions escalate in a “tit-for-tat” manner to other products. Our central expectation is that these skirmishes do not escalate into a full trade war. Although “cheap” imports challenge some sectors and workers in the US, the vast majority of US households benefit from these lower prices. Much does depend on how these policies are received domestically as the midterm elections approach. It is unclear at this stage whether the US administration has a political incentive to dial it up or dial it down before voters go to ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


SENTINEL

clocks falling behind a chain with lock by faithie. Photograph provided by stock.adobe.com, June 2018

the ballot box. This uncertainty alone argues for a more cautious approach to risk. The US administration has pulled out of the Iran nuclear deal, which has helped push oil prices towards USD 80/ barrel. The combination of trade concerns and higher oil prices is weighing on European sentiment. The composite purchasing managers’ index-the main survey of business sentiment-now suggests the eurozone is growing at around 2%, rather than a level closer to 3% at the end of last year. We have seen a similar downturn in the sentiment of Japanese companies, which are similarly trade and oil sensitive. We expect global trade concerns to recede and the underlying drivers of the European recovery to reassert themselves through the second half of the year. European banks are now on a much firmer footing and competition is seeing interest rates fall and lending standards loosen. The labour market is also healing. Employment is growing as fast in Europe as in the US, which is helping push consumer confidence towards record highs. The Italian election created considerable volatility over the course of May as the market digested the implications of a government led by the two main populist parties (Five Star Movement and Northern League). We still have a lot to learn about the new Italian coalition’s economic and political priorities. However, many of the more extreme policies that each party included in early manifestos—such as a referendum on the euro--have been abandoned. The main features of the programme at this stage are tax cuts and a universal income for Italy’s poorest households. This could serve to boost Italian activity in the near term,

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but such fiscal largesse may also trouble the European Commission given that Italy’s government debt to GDP already stands at 130%. After an alleged corruption scandal, Spain’s prime minister was also forced to leave office. We don’t believe either of these political developments will destabilise the region politically or economically in the short term. However, it will likely make Germany more reluctant to engage in the risk-sharing that is required for further integration. Progress on the banking union is looking less likely, which does increase the vulnerabilities of the region in the next downturn. This has served to weigh on the prospects for European equity benchmarks, given their high weighting to financials. A Brexit deal likely By the October 18th/19th summit, we expect a Brexit deal to be agreed-one that preserves trade in both goods and services. Such a positive outcome may not seem obvious in the coming weeks, given the concessions that will need to be accepted by certain factions of the UK Conservative Party. The headlines will likely get worse before they get better. If our expectations are proved to be correct, there could be considerable implications for UK markets. We would expect to see a broad-based increase in sterling, which would in turn lower UK inflation at a time when real wages are rising. The outlook for the UK consumer could improve significantly into next year. Given that unemployment stands at a multi-decade low, it is likely to be increasingly clear that the economy does not need such accommodative monetary policy. We expect the Bank of England to raise the base rate of interest by 25 basis points (bps) in November and to hike twice more next year. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


BREXIT

Asset Managers in Limbo

Were the UK government’s projected terms, agreed by Cabinet, too much for Brexit Secretary David Davis to handle? Davis handed in his resignation in early July 2018.

As Brexit negotiations enter their second year, the UK Asset Management industry braces for long-term insecurity. Loss of access to the European single market and possible changes in the delegation model leave UK asset managers anxious. Despite this, Britain’s withdrawal presents itself as a valuable opportunity for rival European financial centres wishing to fill the growing power vacuum left by London’s diminishing financial dominance. By Bastian Dittrich, Global Head of Business Development Real Assets and Manuela Frohlich, Global Head of Business Development Financial Assets at LRI Group.

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ITH THE UK due to leave the EU within a year, and no firm exit agreement in place, UK asset managers have fallen into a state of uncertainty. The loss of access to the European single market and rights to manage funds domiciled in EU countries jeopardise the future of the UK’s position as the largest asset management centre in Europe and second globally (after the U.S.) As of 2018, Britain’s asset management Industry is worth over EUR 9.1trn with London functioning as Europe’s asset management hub employing more than 38,000 people.

the UK leaves the EU, all British UCITS funds and AIFs will automatically be treated as third-country AIFs. As such UK entities will no longer be able to manage and market funds in the EU. The most recent EU negotiation stance has offered post Brexit UK financial firms access to the single market as long as Brussels deems the UK laws and regulations equivalent to its own, a right the EU reserves to withdraw at any time and consequently a condition London is unlikely to accept. The majority of financial experts agree that the UK will lose its “marketing passport.”

The departure of a member from a political and economic union at the scale of Brexit is unprecedented. Neither UCITS nor the AIFM directives will apply to UK firms once

A Pragmatic Solution to Brexit Problems Among the cities competing for London’s financial industry, Luxembourg stands as a prime jurisdiction for UK-based

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BREXIT EU state while delegating the investment management to fund managers in another country. This relationship between Brexit and ManCos was highlighted in PwC’s recently published Observatory for Management Companies: 2018 Barometer in which 77% perceived Brexit as having a significant impact on the ManCo business.

Bastian Dittrich, global head of business develop­ment Real Assets. Photograph kind supplied by Kelly Durrant at Newgate Communications, June 2018.

fund managers with its excellent reputation as an onshore financial centre and an established financial infrastructure. Of the 51% of asset and wealth managers planning to relocate to Europe, 41% have chosen Luxembourg, 37% Ireland, 12% Germany and 6% France. As of March 2018, 32 companies, including over 20 major financial institutions, have started or signalled the start of new operations in the Grand Duchy. Prominent names such as Citibank, JP Morgan and Carlyle plan on establishing or expanding their operations in Luxembourg according to a statement by Luxembourg for Finance. The number of relocations to the Duchy is thought to rise as many businesses with a wait-and-see approach will be forced to implement their contingency plans and relocate in the near future. While relocating operations to the EU remains the safest strategy to guarantee access to the European single market, Luxembourg’s third party management services provide a unique opportunity to UK asset managers to access the EU. Firms requiring an EU-regulated subsidiary in addition to a UK one, are presented with significant cost and logistical issues as firms will be subject to two regulatory capital requirements. To avoid salary, service fee and technology costs while bridging the Brexit status quo, managers can appoint a third party Luxembourg Management Company (ManCo) to manage their funds. ManCos would select the appropriate structures and handle distribution strategies allowing asset managers to focus on their core competencies: sourcing deals and investment management. This solution exists through the current delegation model, which allows funds to be set up by asset managers in one

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Will Brexit overhaul the Luxembourgish Fund Delegation Model? Brexit has launched debate on whether regulations on the European fund delegation model need to be tougher. Hailed as a reliable, well-functioning and tested framework that has served Europe and global investors well over the past three decades, the delegation model is now prone to being overhauled as a consequence of Brexit. Delegation allows portfolio management to take place in hubs outside of the EU such as in Hong Kong, Singapore or New York while the fund remains domiciled within the EU. The model currently impacts around 90% of AuM in EU funds. The European Securities and Markets Authority (ESMA) has already signaled their intention to tighten delegation rules which would hinder UK asset manager’s access to the EU’s premiere fund domiciles Dublin and Luxembourg. The fact that more than a third of European client money is managed from the UK concerns ESMA, as it worries that a large proportion of assets regulated in the EU will be run from a non-EU country. The authority is seeking to implement requirements forcing fund managers to maintain a presence and substance in the form of employees in offices where funds are domiciled. However, Luxembourg, Europe’s largest fund domicile has also expressed objection to ESMA’s proposal. Luxembourg maintains that the current delegation model is a well-integrated global system with high standards and regulatory co-operation, a key pillar contributing to the EU’s cross-border investment model which has made UCITS and AIFs a global brand. Fund delegation does not depend on EU membership and any changes to make this so would have far reaching global consequences. While a greater degree of confidence will replace the current uncertainty when the conditions of Brexit are finalised in March of 2019, changes, adjustments and revisions will be constant companions of the European financial model well into the future. Before Brexit is even finalised a trend is emerging which is seeing London lose pieces of its asset management industry to the rival financial centres of Luxembourg, Frankfurt, Paris and Dublin as managers seek an EU base after Brexit. Despite this, it would be foolish to think that London will not endure Brexit.

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COVER STORY

ONE MAN RULE Its implications for global markets

Triangle-world Map illustration by BKundra. Photograph provided by stock.adobe.com, June 2018

It is said that the political outcomes of the second decade of any century will extend their effects across the entire hundred-year span. What is this century to make of the political rise of one-man rulers, including China’s Xi Jinping; Turkey’s Recep Tayyip Erdogan; Russia’s Vladimir Putin and a host of other leaders with similar ambitions? Over the last almost 70 years, real or imagined, the global economic and political order was lathered with a centrist liberal democratic cover, even with sometimes wild political swings to either the right or left. Under the Trump administration in the US, and with the rise of a new breed of ‘lifetime’ leaders, the established economic order looks to be in question. Is the comprehensive regulatory structure, established in the post 2007/2008 financial crisis enough to hold the current, more stable financial system in place? Or will the new, more aggressive breed of politicians be the undoing of the carefully reconstructed global markets?

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URKISH PRESIDENT Tayyip Erdogan’s victory in late June elections cemented in his hands sweeping new executive powers, bolstered by his Islamist-rooted AK Party also winning a majority in parliament. His victory means the office of prime minister will be abolished, power will be centralised in the presidential office, with the president now able to issue decrees to appoint cabinet ministers and regulate ministries, declare states of emergency, remove civil servants, all without the need for parliamentary approval. Erdogan in a post-election victory speech told the country that there would be no retreat from his drive to transform the country into a strong democratic economy. The deeply popular president is admired by supporters for what they see as delivering years of economic growth and for deep spending on the country’s infrastructure, including airports, hospitals, schools and roads. His critics however point out that this has come at the cost of an independent judiciary,

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a free media and more than 160,000 people (including judges, journalists and some schoolteachers) still in prison. Markets were less sanguine than his supporters about the election outcome. The Turkish lira, already subject to a loss of some 18% since the start of the year, took another pounding in morning trading following a market-opening rally immediately after confirmation of the election result. However, the Turkish stock market rose 2.2% and bond yield narrowed on the news. Even so, market commentators remain cautious. Should the president begin to tinker with central bank policies, market reaction could be negative. In that regard, Erdogan might have won a battle, but perhaps not the war. Despite its growth rate, the country faces some testing issues. Inflation is rising once more and is now over 12% (way above the central bank’s official target of 5%); the lira has lost almost a fifth of its value since the start of the year and the country’s balance of trade is worsening

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COVER STORY

By World Economic Forum from Cologny, Switzerland - World Economic Forum Annual Meeting Davos 2006

and the government is ill-managing the country’s large fiscal deficit. Not only that, both the independence of the country’s central bank is in question and the ability of the Bank of Turkey to pre-empt rises in inflation. In fact, for the last few years, the central bank (some say on Erdogan’s orders) has been following an unusually loose monetary policy. According to Per Hammarlund, chief emerging markets strategist at SEB, “Erdogan and the AKP have not provided any details on what economic policies they will change in order to address these problems. In order to offset the apparent weakening of growth in Q2 2018, the government looks likely to pursue a high-growth strategy, which will exacerbate the current account deficit, weaken public finances, and add risk in the banking system. The relief rally may push down USD/TRY (now 4.58) to as low as 4.41, but the rally will be temporary unless the government signals a real change in policy.” At the end of February this year, China moved to end the two-term limit on the presidency, clearing the way for Xi Jinping to govern the country indefinitely; bringing to an end a brief 13-year flirtation with the orderly, institutionalised transfer of power. The move upended years of careful management of the leadership, following the decades of often chaotic rule under Mao Tse Tung. Leadership was curtailed by agreed terms, age limits and party consensus.

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On the way to unfettered dictatorship, Xi has overseen the imprisonment or execution of hundreds of thousands of party cadres, activists, human rights lawyers, military officers, oligarchs – anyone who stood in his path. Xi has strong beliefs: he doesn’t like liberalism; his concept of politics is one of domination, with no mercy for defeated opponents and he is not above using the Communist Party as a means of confirming his legitimacy. On the plus side, Xi looks to be in favour of the rise of the private sector in China; has begun to tackle China’s debt; has not been slow in driving the restructuring of out of date steel manufacturing and coal mining; and has been vigilant in cracking down, though not entirely dismantling, China’s graft system, the qian guize, which have allowed companies and individuals to bribe their way out of trouble. He is also a canny operator, with deep pockets; a necessity in this new world of autocrats with attitude. China’s central bank said in mid-June that it would release as much as $107bn into the country’s financial system by reducing the amount of deposits, as of July 5th, that commercial banks are required to hold as it seeks effective countermeasures to the trade war that the United States has unilaterally declared on importers. The move effectively loosens monetary policy as the government and Xi become more concerned about the inevitable downside risks to business and demand as the US and China (in turn) impose tariffs on more of each other’s exports. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


COVER STORY

By Kremlin.ru, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=67528233

China has to make bold moves: it needs to sustain its 6.9% growth levels, even as signs of slowing appear. While there are no immediate signs of a massive drop and growth is expected to touch 6.4% this year, only slightly below the government’s official target (6.5%); though the simmering trade war could cut up to more percentage points knocked off growth, depending on the final scale of tariffs. Moreover, manufacturing output and real estate values continues to rise. A slight fly in Xi’s ointment is the need to rein in the country’s debt, with the liabilities of state-owned enterprises continuing to outpace growth. Last year Moody’s and S&P downgraded the sovereign’s rating. It won’t be an easy task: the trade war won’t help; and Xi and the government have yet to normalise China’s still burgeoning shadow economy. Even so, while still adhering to the same tenets as last year’s note on the downgrade, Moody’s reported at the start of June this year, that the country’s economic restructuring is picking up pace and a distinct move into higher value goods and services. However, China still remains reliant on US technology says Moody’s though this will reduce in coming years. The issue in all this, both for Turkey and China, just two of new autocratic templates, is that credit defaults in both countries could rise, albeit for different reasons as it becomes harder for some companies to refinance their

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debt or extend medium term trade finance facilities. In particular, companies with weak balance sheets and those relying on either short-term debt, or trade financing, are particularly vulnerable. It also adds to risk aversion among lenders and investors. Political risk is once again lifting its head above the global trade parapet. For Turkish borrowers, if Erdogan continues to pursue his ultra-loose monetary policies, could find themselves with more expensive loans at much shorter tenors. Even for Xi, if he relaxes monetary policy further to compensate for the worst effects of the trade war, he will have to find the means to convince the Chinese that living standards are better under his autocracy than under someone else and ensure that the domestic debt market remains highly liquid. In this regard, Vladimir Putin fell on the right side of the cards. Widespread sanctions following the annexation of Crimea and parts of the Ukraine, unwittingly provided him with cover should Russia’s economy tank. It wont; and improving oil prices will help him even more in the near term. Recent figures from the European Commission suggest the Russian economy is expected to grow by 1.7% this year as higher oil prices seep through, even as Western sanctions continue to exert downward pressure (it expects growth to touch 1.6% next year). Real wages in Russia are on the rise and inflation remains well within central bank targets (3.7% this year, 4% next, well down on the 15% peak in

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COVER STORY

Photo credit: KOKUYO (talk | contribs)

2015). Moreover, at the end of February, ratings on Russian debt was upgraded from ‘junk’ or ‘speculative’ by Standard & Poors. Moreover, public accounts show Russia’s financial balance to be in good order, with a deficit relative to income of barely 1.5% this year. Even so, the good times won’t last forever for Putin as people are sentient enough to remember the high growth years of 2000 to 2008. The key for Putin is to find new sources of revenue away from oil, which still generates 30% of GDP and more pertinently, 50% of the state budget. Putin may now be looking at legacy and his role in history. Unfortunately, his March election victory speech focused more on military and strategy rather than economic reforms. Russia is heavily marked by state intervention and corruption, with some 70% of the economy now state owned. Dictatorship, first coined by Joseph Weydermeyer, is defined by control of the state apparatus, with its attendant elements of force and oppression. The concept was of course expanded by the deeply unpleasant Karl Marx, who in his often sterile and distant writings, distinguished between types of dictatorships; that of the bourgeoisie (not good); that of the proletariat (good) and the eventual rise from the revolutionary ruins of a benevolent dictatorship (better, though with many qualifications and a perhaps ideologically unsound belief that sainthood and politics would eventually coalesce).

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That was unlikely in the 19th century as it is in the 21st. People might aver that things are different now, that the global financial system remains agnostic and is often governed by agreed global or regional rules and regulations that supercede the vagaries of individual national trends. Certainly, the directives and initiatives of the European Union, Dodd Frank and the work of the FSB, have engendered virtual global adherence to new norms of financial restraint, risk management and more effective debt management, across national accounts and business segments. The question now, is whether the greater mass of financial transactions is politically agnostic and compliant with accepted global practice (digital assets notwithstanding) to make the rise of the autocrat virtually irrelevant. That won’t always be the case. Trump’s billionaire tax giveaway is one example of an act with predominantly local import; the declaration of unilateral trade wars, reneging on trade deals, climate change and security agreements, beggar my neighbour attitudes and a heavy-handed immigration policy has both unclear yet substantial international repercussions. That kind of shockwave is something that markets in the third decade of the century will have to accommodate. Turkey for instance, is a March land; strategically placed between two different cultural and political regimes (hence the vulnerability of the Byzantine Empire and its sporadic aggression). Interestingly, Erdogan is claiming regional hegemony, with all that entails.

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COVER STORY

Pawn marionette by sveta. Photograph provided by stock.adobe.com, June 2018

Irrespective, Trump’s decisions are already beating down on business segments, Hammarlund at SEB says, “The US is sharpening its trade rhetoric, and the main targets, China and the EU, are taking the bait by announcing similar measures, seemingly unwittingly justifying President Trump’s argument that higher tariffs are somehow beneficial. The escalation defies any semblance of rationality, except politicians’ need to look strong and decisive in face of challenges from abroad. Notwithstanding the sheer folly of the escalation — trade tariffs hurt not only the target country, but also consumers and industries in the initiator — the increasing threat of a trade war is weighing heavily on equities and currencies in export-dependent Emerging Markets (EMs).” More is coming. The US Treasury is set to reveal an investment and export restriction package by Friday 26 June, and to roll out 25% tariffs on some $34bn worth of imports from China on 6 July. President Trump has also asked the United States Trade Representative to draw up a list of Chinese products worth $200bn that would be subject to a 10% tariff, and he has threatened to impose additional tariffs on imports from the EU, targeting (in particular) the auto industry. According to Hammarlund. “With the US trading partners responding in kind, risk sentiment looks likely to remain depressed. Some relief could come from a potential turn up in PMIs at the end of June and early July

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as the EM economic soft patch seems to be firming. Yet, EM looks likely to be in the doldrums for another one to three months. The People’s Bank of China (PBoC) cut the reserve requirement ratios (RRR) by 50bps over the weekend (effective from July 5th), which together with the rising risk of a trade war prompted us to revise down our forecast for the CNY. We expect USD/CNY (now 6.54) to end 2018 at 6.60.” China too is on a well-trodden historical path that expects if not global, then unquestioned regional economic and political dominance. Xi will never be deflected from that, and in that regard, has time and money on his side. How it will respond in coming months is up for question. To deflect his ambitions for China, and given any shadow business relations between China and the Trump business empire, Xi will likely take the soft road short term; but not for long. If he is to survive in the new autocrat field he will have to show his talons at some point; if anyone is likely to unsheathe them, it could likely be the White House. For the rest of the world caught in the emergence of the new order, we must perforce rest on the axiom of Giuseppe Tomaso di Lampedusa’s novel The Leopard, which chronicles the upheaval of Sicilian high society in revolution-torn 19th century Sicily, that everything needs to change, so that everything can remain the same. The hope is that the same is true for this latest batch of change merchants.

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FOREIGN EXCHANGE

Tactile screen by sdecoret. Photograph provided by stock.adobe.com, June 2018

Fintech transforms Africa’s FX trading landscape Africa’s fragmented markets and lack of legacy foreign exchange trading infrastructure means that the continent has become a melting pot of fintech activity and innovation. The evolution to electronic foreign currency trading in Africa, whilst slow to start, is today gaining tremendous traction writes Tim Hutchinson, head of digital for financial markets at Standard Bank.

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N SOUTH AFRICA only five years ago almost 90% of foreign currency trades happened over the telephone. “Today, despite challenges around illiquidity and complicated political and capital control environments, approximately 75% of trades are conducted digitally with a mere 25% conducted on the phone. With 57.6% of the world’s 174m active registered mobile money accounts in Sub-Saharan Africa, the continent is becoming a world leader in fintech generally and mobile money in particular. As African citizens and business people transact globally Africa’s highly developed fintech culture is not only deepening on the continent but is also migrating out of Africa. The foreign exchange flows that Africa’s expanding fintech culture supports are very important to the continent’s financial services providers, most of whom are developing fintech capabilities or partnering with the most popular or effective home-grown African fintech’s to ensure that they capture this flow. To function as an effective market maker, we need to source liquidity in market. We also need to, instantly, formulate risk-based pricing in an ever-changing world. Thereafter we need to distribute price. In Africa this requires developing solutions that allows retail, corporate and institutional customers to access foreign exchange markets across multiple jurisdictions. At the same time in most markets, we also need to show central banks what we

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are doing. All transactions need to be transparent and electronically traceable so that local authorities are prepared to approve digital trades. Today, however, banks are not only expected to provide the systems and networks to facilitate basic transactions but are, “also required to provide insight and guidance beyond pure execution by offering additional value-based services across research, hedging and, most importantly, settlement capability. Currency research for example, is increasingly a big client requirement. Having on the ground experience and local expertise as well as the ability to deliver this digitally is vital in this regard. In addition, banks are also increasingly required to inform and guide clients through the broader economic, legal and political landscapes in which transactions occur. For example, one of the considerations in developing Standard Bank’s digital capability was how to combine market intelligence and research with real-time pricing, trade execution and post-trade services. Today it is not enough just to execute trades. It is equally important that we advise and inform the broader universe in which trades happen. From a technology point of view regulatory technology for example, is assisting Africa to manage new regulatory developments in heavily currency-controlled environments. Similarly, the rise in robotic process automation (RPA) and ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


FOREIGN EXCHANGE

A spread of cash by Tierney. Photograph provided by stock.adobe.com, June 2018

artificial intelligence (AI), has allowed the bank to develop solutions that leapfrog traditional business problems. Digital trading in Africa is also evolving in its own often very different way. We have found that it is not just a question of importing developed world systems. Our approach with clients is to work with them to help understand their internal needs in terms of governance and operational efficiency. We then partner with clients to develop and implement digital solutions that talk to the heart of their business need. The bank’s own Business Online (BOL) platform provides an example of how the bank has built digital transaction capabilities, allowing clients to view balances across the continent while making third party currency payments and supporting general cash management. This kind of broad, business-wide digital cash view and capability puts control back in the hands of the clients helping them manage their own cash flow. From an Institutional perspective it’s very important to be able to offer customisable solutions to clients managing money on behalf of their investors. Our investment in Application Programming Interface (API) technology, for

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example, is tracking exactly its client’s growing ability to build these capabilities into their own systems. On the retail side our SHYFT app - a digital wallet allowing global transactions in US dollars, euros, sterling and Australian dollars has extended this control element to the man in the street. While Africa’s record in digital adaptation and innovation is impressive, the technology part is often the easier part to implement. The human and cultural systems, and client behaviour changes, required to give this digital evolution life – like getting customer analogue systems to start pricing electronically to make trades visible 24/7 – is often a lot harder to achieve than the technology upgrade. In short, bank employees, customers and regulators all need to undergo fundamental cultural shifts in how they do things and understand the world. It is often these broader cultural and market shifts that as a pan-African bank we are called on to advise as clients seek to understand and engage Africa effectively. Given the rapid pace of digital evolution within Africa’s varied market, customer, legislative and cultural landscapes, we need to balance customer value and efficiency - and regulatory pressures to be more transparent - with what is, in the long run, best for the market.

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OIL MARKETS

Trump, Russia and the oil buyers’ club: an all-out push to curb OPEC?

Black and blue oil barrels. By stockdevil Photograph provided by stock.adobe.com, June 2018

The Trump-Putin summit on July 18th is expected to signal the start of the emergence of a new global power bloc; one that is anxious to overturn longstanding institutions, such as the EU, NATO, and not least OPEC. That is not the only existential threat to the oil cartel: reports have been consistent since early April that India, Korea, Japan and China are in talks to establish an oil buyers’ alliance; a fact not addressed at all at the last OPEC summit on June 22nd. Then of course, there is the resurgence of renewals and President Trump’s trade war. What is an OPEC member to do?

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HIS TIME ROUND its different. The latest stabilisation of oil prices looks to be exacting a new cost on traditional oil producers. Following a strong start to the year for oil prices, despite OPEC’s efforts in June to introduce rationality to the oil market, the outlook for segment has become increasingly challenged as multiple crosswinds look to be gaining strength. In crude oil, a multi-month rally ran out of steam after the OPEC-plus group of oil-producing nations agreed to increase production to help cap the rise in prices. What might threaten both oil prices and the OPEC strategy over the summer months? The first threat is the slow burn of the new Asian oil buyers’ alliance, initiated by India and including China, South Korea and Japan to help negotiate better terms with sellers. It is not a new story. You can go back to 2005 when India’s then oil minister Mani Shankar Aiyar proposed the establishments of an alliance of oil

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importers. It’s a pertinent theme for India which is the third largest oil importer (after China and the US). Japan and South Korea follow in short order. Neither is it a toothless tiger. Combined the four countries account for as much as a third of total global oil imports. According to S&P Global’s July oil report, “The spike in crude prices -- and the resultant spike in prompt backwardation -- had a pronounced impact on every crude market, causing many differentials to plunge to multi-year lows, attracting record flows of US crude into the region, and closing arbitrage windows for crudes that rely heavily on Asian demand to sell. While the market pulled back slightly as trading moved into June, geopolitical and macroeconomic risk are likely to continue to play a major role in the market moving forward as a looming trade war between the US, China and the European Union, as well as renewed unrest in Libya, is likely to increase market volatility.” ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


OIL MARKETS

Oil Field. By sPaul Fleet Photograph provided by stock.adobe.com, June 2018

ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

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OIL MARKETS

bullying on the market as a whole. Even so, any possible alliance though is currently clashing with a rising trade war, led by the US, with an immediate impact on suppliers. On July 4th Reuters reported that sellers of US sour crude have cut their offers for Asian buyers as China moved closer to imposing tariffs on energy supplies from the US, as part of the escalating trade dispute between the two countries. However, US suppliers are also cutting prices, which is resulting in some interesting buying swings. They have to shift a lot of supply, as US output has risen by more than 30% over the last two years. On the surface, it gels with OPEC members’, particularly Middle East members’, plans to raise output by 1m barrels a day. China imports a lot of sour crude from the US and Saudi Arabia would have been hoping to fill any gaps, created by the tariff war, with its own sour crude supply. The reality and continued likelihood is though that US suppliers will continue to cut prices and flood the Asian market with so-called Mars crude, that will in turn help depress sales for Middle East crude through July. This has a term impact, as it will affect cargoes loaded in September. Some 10m barrels of US Mars crude has already been sold to Japanese, South Korean, Malaysia and Indian refiners for third quarter (Q3) delivery and October cargo is already 50 cents cheaper than Mars sale prices for September delivery. Moreover, Malaysia’s Petroliam Nasional Bhd has also bought its first ever US oil cargo, 1m barrels of Mars for its Malacca refinery, according to local press reports. However, there are interesting cross-developments and rogue drivers in the dynamic demand/supply global oil chain. Rising output from both the US and OPEC has likely shaved at least 1%-2% off current oil prices. Trade turbulence has been helped by Libya’s National Oil Corporation (NOC) declaring force majeure on a good slug of supply, affecting as much as 850,000 barrels per day. Added to that have been involuntary disruptions in output from Iran and Venezuela, with global supply helped by the deployment of spare capacity by Saudi Arabia, the Emirates, Iraq and Kuwait. Russia too is filling market gaps. US president Donald Trump, also threw in his lot over the start of July weekend, issuing sometimes contradictory warnings to both the World Trade Organisation that the US would do ‘something’ if the US is not treated properly and OPEC to stop manipulating oil markets, while (at the same time) pressuring Saudi Arabia to raise supplies to compensate for a dip in Iranian export flow. President Trump forgot perhaps that it was his decision to withdraw from the Iran nuclear agreement in early May , which saw

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end-users in Europe scrambling to cover the potential loss of Iranian volume, boosting the sour crude complex across the region. Separately Saudi Arabia has been discussing developments in the oil markets with Russia and while the two have agreed to continue close coordination in the interests of producers, there may be a change in tempo of these efforts following the US-Russia summit, depending on how much the US president manages to get to grips with the nuances of the global market in traded goods in general and oil markets in particular. The ultimate challenge for OPEC however is that demand for oil is slowing and will continue to wilt over the long, long term. Higher oil prices will only exacerbate the trend, both for importers to come together to pressure for better deals and for countries to find alternative sources of power. Right now, seaborne oil imports have been on a downward path since the second quarter, not just because of the trade tiff, but higher costs are encouraging more efficient use of energy. Moreover, growth in China is slowing, with a knock-on effect on energy demand, Nonetheless, for its part, China is playing all sides to the middle. Thinking long term, at the beginning of July, China Development Bank has given Venezuela $250m to boost oil production and secure supply. Longer term OPEC and all oil majors are on notice that by 2030, according to the International Energy Agency, renewables will become the world’s largest power source. The IEA notes, “With 60 cents of every dollar invested in new power plants to 2040 spent on renewable energy technologies, global renewables-based electricity generation increases by some 8,300 TeraWatt-hours (more than half of the increase in total generation).” That increase is “equivalent to the output of all of today’s fossil-fuel generation plants in China, the United States and the European Union combined.” It represents new investment of some $7trn in renewables over the next quarter century. Right now though geopolitical strains will inevitably result in market strain. The untimely decision by the White House to impose sanctions on Iran has created problems for some EU refineries, even as the EU has opposed the US stance. Italy, France and Spain have been the largest buyers of Iranian supply; while Japan and South Korea, have also been impacted. For Iran, the impact has been short of disastrous; it is hard for ships to carry Iranian cargo as they are unable to secure P&I insurance; and while Saudi Arabia, Iraq and the US are keen to fill the gap, but there is a sour taste in everyone’s mouth at the effect of White House ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


FRONTIER MARKETS - COMMODITIES

Kazakhstan’s new legal regime for mining

Mining machinery by anavaczi. Photograph provided by stock.adobe.com, June 2018

The new SSU Code substantially changes the legal framework for mining in Kazakhstan -- especially in comparison with the legal frameworks governing the oil & gas or uranium operations which are also regulated by the SSU Code. The new mining legal framework, at least on paper, looks more straightforward and investor-friendly now (of course, with a few reservations) now. Even so, it remains to be seen whether this will be so in practice and whether the Kazakhstan Government will follow along this line (especially, with no clear stability guarantee) in possible future boom days in the industry. By Aset Shyngyssov, partner in the Kazakhstan office of global law firm Morgan Lewis.

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N JUNE 29TH this year a new Subsoil Use Code (SSU Code) came into effect, replacing the current Subsoil Use Law (Old Law) that was in effect for almost a decade. While the SSU Code has established a completely new legal framework for mining in Kazakhstan and many follow-on changes are on the way, we will look closely at 15 key novelties of interest and importance for existing and new investors in Kazakhstan mining sector. In this article we will focus only on mining of most hard minerals – the legal regime for other natural resources (such as uranium, oil and gas, sand and similar common or lesser-value subsoil substances) is different and not covered here. Although a licencing regime existed in Kazakhstan in the early years of its independence, it was abolished in 1999, ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

and since then mining has been regulated through a contract-based regime. Under pressure from existing mining operators’ strong lobbying and considering the recent downturn in the world mining industry, the Kazakhstan Government is trying to support and sustain the local industry – which is vital for several cities and population in those cities (comprising a sizeable percentage of Kazakhstan’s total population) by applying world best mining practices. Canada’s and Australia’s licence-based practices were taken as a benchmark for establishing the new legal framework. Now mining rights for new projects will be granted under licence and there are two types. The first is an exploration licence, which covers exploration and appraisal, for six years with a possible one-time five-year extension in case the exploration licence covers ten or more blocks. Any

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FRONTIER MARKETS - COMMODITIES

Nurzhol Boulevard in Astana, Kazakhstan by Worldwide Pictures. Photograph provided by stock.adobe.com, June 2018

extension will be subject to mandatory relinquishment of at minimum 40% of the licence area. The second is a production licence that covers mining, mineral processing and operational exploration, for 25 years with a possible extension for the same period, which may be granted several times. A holder of an exploration licence will have the right of exclusivity to receive a production licence; such exclusivity right will have to be exercised while the exploration licence is still in effect. Existing investors may convert current contracts into licences under the SSU Code; but they should note that the code explicitly permits any new licence to contain more obligations, includes rules for licence revocation and penalty payments other than those provided in the SSU Code. Alternatively, investors will have to make changes to the current contracts: a necessity mandated by the new requirements of the SSU Code that apply retroactively to the existing contracts and/or the desire to extend the existing contract. Any extension is limited in period and subject to additional obligations with respect to so-called “major fields” that are determined per reserves volume (for example, more than 100m tons of iron ore; more than 250 tons of gold; more than 30m tons of copper or more than 5m tons of lead). There will no longer be tenders, except for blocks that were

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included into the state balance of natural resources prior to effectiveness of the SSU Code or areas within 30-kilometer radius from contract area borderline under a subsoil use contract that was made prior to December 31st, 2017. Licences will be granted on a first come, first served basis. Information about available blocks will be set out in the State Subsoil Fund Management Program (SSFMP) that will be developed by the designated competent authority (currently the Ministry of Investments and Development) and is subject to the intensive discussion between the mining companies and the ministry. It is expected that within the next four years the SSFMP will be fully created and licences will be granted under a new regime step-by-step for approximately 1.2m blocks. The competent authority may reject granting a licence if a submitted package of documents or requested area does not comply with mandatory requirements. Unlike the Old Law, the new SSU Code provides for the authority’s right to reject granting a licence if there is a recorded imputation against an investor or its affiliate in Kazakhstan (for example, where the previous licence was revoked or there was a breach of liquidation obligations under previous licence). Of course, as before, granting of a licence may also be rejected for national security reasons. Any rejection may be ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


FRONTIER MARKETS - COMMODITIES

challenged in Kazakhstani courts within ten business days. Retention Retention is a new concept for Kazakhstan mining law – taken from Australian law and practice. It amounts to a holding status of a block (or a part of it) that has been granted to an investor under production licence but does not have to be further explored or mined due to market conditions, lack of technology, force majeure or rehabilitation procedures. Retention may be granted by the authority upon the investor’s request for five years, with a possible one-time five-year extension. If retention status is granted, the term of the production licence will be extended for the retention term. While the value of the investor’s minimal financial obligations will be reduced during retention, the investor will still have to perform certain field conservation works, pay training and research and development financial commitments per licence requirements and secure employment / training of employees. Annual minimal expenses It will no longer be necessary to agree with the competent authority the value and scope of a work program. The SSU Code sets out the value of annual minimal expenses for each of the stages: for exploration – per year of licence and number of blocks; and for production, per licence area and type of mineral. A scope of work is also determined for each of the stages. In case the investor does not pay the required value of annual minimal expenses in a given year, it must pay such expenses within the first four months of the next calendar year during exploration stage, and three months during production stage. Under the SSU Code, information on licence performance (as well as licence holders) will become public. Reserves calculation and reporting Following the approval of Kazakhstan Reporting Code (KAZRC) by the Combined Reserves International Reporting Standards Committee (CRIRSCO) and election of Kazakhstan as the tenth CRIRSCO member in 2016, Kazakhstan started switching gradually from the old Soviet-style reserves calculation and reporting system to internationally recognised and market-oriented standards. Starting June 29th, calculation and reporting on reserves under new licences will be made in accordance with KAZRC. By January 1st, 2024 all existing investors in Kazakhstan mining must re-calculate their reserves in accordance with the KAZRC requirements. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Joint ventures Since the SSU Code provides that only one person (either an individual or a legal entity) may be a licence holder, it will not be possible to establish an unincorporated joint venture (or consortium) for this purpose. However, there is no restriction on setting up a joint venture (SPV) that will act as licence holder, and nothing under Kazakhstan law prohibits such SPV to be a foreign (non-Kazakhstan) entity acting via its Kazakhstan branch. Security. The SSU Code provides for completely new rules on securing performance of liquidation (abandonment) obligations. There will be no liquidation fund (made in the form of a bank deposit account opened in investor’s name). Rather, an investor will have to secure these obligations by granting a pledge of a bank deposit, or parent-company or bank guarantee and/or insurance in favour of Kazakhstan. While a bank deposit may be opened with a Kazakhstan bank (including a foreign bank licenced in Kazakhstan) and insurance policy may be provided by a Kazakhstan insurance organisation (including a foreign insurer licenced in Kazakhstan) only, a guarantee may be given by any foreign bank or foreign parent company that complies with minimal credit rating requirements that will be set by the Competent Authority. For exploration licence security, the required value per block will be determined by the authority. Total security value (for all blocks covered by exploration licence) will be decreased upon relinquishment of certain portion of licence area and completion of liquidation works on such relinquished part. Security value for production licence will be determined per liquidation plan to be developed by the investor and approved by the authority. While in general an investor will be free to choose the preferred form of the security (a pledge, guarantee and/or insurance) for its project, the SSU Code requires that for a production licence the security value must be covered by bank guarantee or pledge of bank account as follows: during the first third of the production licence term – no less than 40%; during the second third of the production licence term – no less than 60% and during the remainder period – 100%. The current and further evolved SSU Code rules on state priority right with respect to transfers of the subsoil use right or related rights will no longer apply to hard minerals

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projects (although it will continue to apply to oil and gas and uranium projects). The requirement of permission of the Competent Authority will remain, however. Such permission will be valid for a year and may be extended for additional six months. Other key novelties of the SSU Code in this regard are: the list of exemptions from such permission will be broadened – the list is still not perfect and does not exclude most of immaterial transactions that do not constitute “change of control” per se, but at least it is expanding; the term of granting such permission is substantially reduced down to one month – but, for “major fields” such term will be three months due to required consideration of the application by the national security authority; and the application will be filed by the proposed buyer (not the seller, as it is provided in the Old Law). It is also important to keep in mind that an exploration licence may not be transferred within the first year of its validity. Lack of the Competent Authority’s permission will result in the underlying transfer being void and revocation of licence (only if there is a threat to national security and such breach of law has not been cured within a year or replaced by another transaction permitted by the Competent Authority). Unlike the Old Law, the SSU Code defines direct control, which includes holding more than 25% of interest, shares, convertible securities; voting right for more than 25% of all votes; receipt of more than 25% of net income in subsoil user; or decision-making rights in accordance with a contract or Kazakhstan law. Indirect control, which involves the right to control another entity through third entity that holds direct control over such other entity. An investor under contract or licence will need to notify the competent authority in writing on any change of control (direct or indirect) within 30 days after any change. Like Old Law, the SSU Code does not provide for an express consequence of the lack of notice on change of control. Encumbrance and stability An encumbrance of subsoil use right under licence will no longer trigger the Competent Authority’s permission but will need to be registered with the Ministry of Justice in the same manner as for encumbrance over movable property. While there are no clear rules on obtaining the Competent Authority’s permission before or during foreclosure, it appears that such permission will be required only for a new holder of the licence to validate the foreclosed subsoil use right. While the SSU Code is clear with respect to the stability (and related general carve-outs, such as national security,

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public safety) of contracts in the oil and gas and uranium sectors, there is no such clarity with respect to stability of licences for hard minerals. Investors will have to rely on a general principle of the SSU Code that declares stability of the subsoil use terms, without defining what such terms stand for. In addition, existing investors must apply various provisions of the SSU Code to the existing contracts since the SSU Code establishes retroactive effect for some of its provisions (e.g., liquidation, transfer, etc.). This is a complex, difficult subject, requiring detailed analysis in each case. Licences will be governed by Kazakhstan law only and disputes under licence will be considered by Kazakhstan courts, unless a relevant international treaty (e.g., a bilateral investment treaty) ratified by Kazakhstan expressly permits resolution in foreign court and/or arbitration. This rule reflects the Kazakhstan Government’s unwillingness (which has grown stronger year by year since the turn of the new century, and arguably has become one of the key factors in the Kazakhstan investment climate having become less attractive) to let the licence holder and licensor to freely choose at least the dispute resolution venue and procedure. Any breach of law and/or licence may be cured within a certain period, which varies depending on the type of breach. During the production stage a breach related to local content requirements or training and/or R&D financing commitments may be cured by paying a penalty (for local content requirements – 30% of unperformed obligation; for training and/or R&D financing commitments – the unpaid amount). The competent authority will notify a breaching party of licence revocation and the licence will be cancelled within three months after such notice. Revocation may be challenged in Kazakhstan court within 15 business days after receipt of the Competent Authority’s notice. The SSU Code also establishes a separate new licence regime for artisanal mining (for precious metals and stones) by individuals at placer deposits or pits. Only Kazakhstan citizens will be able to obtain such three-year licence from regional authorities. Such mining works may be conducted on another licence holder’s licence area only upon consent of that licence holder. Since the SSU Code has completely changed the legal framework for hard minerals mining, the Ministry of Investments and Development developed several new rules and regulations that are referred to in the SSU Code and will provide more details on certain matters under the SSU Code. These documents became available to public on June 29 and require a thorough additional review and analysis. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


BUSINESS AND TECHNOLOGY

Preparing for Brexit is Easier in the Cloud Recent Gartner research indicates that Brexit will have a massive impact on how IT budgets will be spent in 2018. Organisations will want greater flexibility, and as such will be spending more on software and cloud-based services rather than making long-term, upfront investments. In the article below, Monica Brink, director of EMEA Marketing at iland, discusses why the pre-Brexit environment is creating a spike in cloud adoption, and how companies are using various cloud applications to adapt to an uncertain business environment. By Monica Brink, director EMEA Marketing, iland.

Brexit chess concept by Pixelbliss. Photograph provided by stock.adobe.com, June 2018

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HERE IS MUCH uncertainty around how the new EU General Data Protection Regulation (GDPR) that comes into effect in May 2018 will work alongside Brexit. Both UK and EU based companies must anticipate tremendous changes to policy and politics. Many questions are being put on the table for debate. Will GDPR be as easily enforceable in the UK after Brexit? Will the terms of leaving the EU have an impact on GDPR? On the whole, there is natural concern that the combined impact of Brexit and GDPR will put a strain on UK businesses. There is also the question of how the new regulations will apply to international companies setting up offices in the EU. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

Gartner research indicates that Brexit will have a massive impact on how IT budgets will be spent in 2018. Organisations will want greater flexibility, and as such will be spending more on software and cloud-based services rather than making long-term, upfront investments. Brexit will accelerate the adoption of cloud-based services as companies prepare for an uncertain economic environment. Cloud Services have been proven to help control IT spend by moving IT CAPEX to OPEX, which will be increasingly important. In short, businesses will understandably be more cautious with IT spend, and this will drive them towards cloud services. In pursuit of greater flexibility and controlled IT spending in

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BUSINESS AND TECHNOLOGY

Brexit by Pixelbliss. Photograph provided by stock.adobe.com

the pre-Brexit environment, companies will want to avoid lock-in with any one cloud provider. When choosing cloud providers, flexible pricing structures will be a high priority, as will the need to avoid paying for unused cloud capacity. Operating in a hybrid cloud model, with some workloads in an on-premises data centre configured in a private cloud and others deployed to the public cloud, offers many advantages. The hybrid cloud model benefits organisations that have different workloads with different characteristics and requirements. For example, applications that have predictable capacity demands and regular, ongoing usage are often kept on-premises. Meanwhile, apps that have seasonal variability and can clearly benefit from highly scalable, on-demand capacity are deployed to the cloud. Having this hybrid cloud model will give companies the flexible, scalable options they need to adapt to uncertain business environments. In addition, in the uncertain regulatory environment, companies will look for a cloud provider that can not only offer cloud services, but also support across the full lifecycle of a service from pre-sales to onboarding to ongoing management. Many organisations will need support from their cloud providers to navigate changing compliance requirements. Providers will need to outline crystal clear paths to cloud compliance and data privacy regulations, including on-demand security and compliance reports that give customers full visibility and control of their cloud environments and can help them pass data privacy and other compliance audits. Brexit further complicates cloud compliance and data privacy concerns, as data privacy rules for the EU and the UK could change in the future. This makes it even more imperative that UK organisations remain up to date

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with data privacy and cloud security requirements. Larger companies often require a Model Contract Clause as part of their cloud agreements to ensure the liability of a breach is shared between the cloud provider and the customer. Yet it is not only stormy skies ahead. Brexit will also create new opportunities for businesses by allowing for the emergence of new markets, new trade partners, evolving domestic demand, and so forth. As 2018 progresses, cloud services will help companies be agile enough to take advantage of these opportunities without exhausting their IT budgets. They will be able to quickly spin up new workloads, test new apps and add more IT capacity and scalability in the cloud. Recent Forrester research tells us that cloud providers are continuously expanding their offerings in the European market, and that on-premises private cloud adoption in the UK has jumped from around a third in 2016 to more than 60% in 2017. Forrester speculates that this “sudden enthusiasm” for private cloud could illustrate how Brexit is prompting businesses to adopt cloud more quickly than they otherwise would, as they prepare for every possible Brexit outcome. To avoid high upfront investments during this preparation period, businesses can take advantage of services such as Infrastructure-as-a-Service (IaaS) and Disaster-Recovery-as-a-Service (DRaaS). IaaS allows for the hosting of development, testing and production workloads in the cloud. It also allows businesses to scale up and down on demand and increase capacity without investing in on-premises IT infrastructure. DRaaS gives the option of replicating IT apps and data to the cloud for failover in the event of a disaster to ensure business continuity. In this way, businesses can avoid investing in a second data centre location for DR. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS


BUSINESS AND TECHNOLOGY

Appetite for apps outstrips capacity to develop them in UK businesses UK businesses are at risk of experiencing an “app crunch” as fierce demand for apps meets a developer skills shortage and a lack of investment in customer-facing tools, according to the latest State of Application Development report, based on polling of over 3,500 IT professionals. The poll was organised by OutSystems the low-code rapid application developer, which publishes the report.

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HE 2018 GLOBAL research report examines the challenges faced, development priorities and acceleration strategies of IT teams worldwide, putting the spotlight on critical issues. What is clear is that demand for apps is booming in the UK, where demand looks to be much higher than the global average, with 45% of UK IT professionals stating they will develop more than 10 apps in 2018 (compared with 42% globally) and 14% aiming to deliver more than 100 apps this year (compared with 10% globally). Nick Pike, vice-president UK and Ireland at OutSystems explains, “Demand for apps in the UK is clearly booming, but our survey indicates that the availability of developer talent and investment in customer-centric tools are not keeping pace. As demand outstrips supply the app development crunch will bite. This means backlogs are likely to increase resulting in frustration among UK businesses as they face delays in digital transformation programmes. They need to think strategically about investing in the tools that can accelerate app development, boost the productivity of developers and help them develop the kinds of customer-facing apps that they want to build.” Even so, backlogs appear to be a significant problem, with 61% of UK organisations polled reporting a backlog in app development with 17% having more than ten apps behind schedule. The skills shortage is more acute in the UK: 67% of UK respondents had hired web or mobile developers in the past year with 87% of those surveyed reporting difficulties in hiring the right talent, compared with an average of 80% reporting difficulties globally. While UK businesses are prioritising the development of customer-facing applications over internal business apps, they are less than half as likely as their global counterparts to have invested in customer-centric tools such as customer journey mapping, design thinking and lean UX. This will limit their ability to deliver compelling, customer-focused apps. ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

It adds up to the UK being behind the curve in low-code adoption. The country lags the rest of the world in adopting low code, with only 24% of organisations using rapid application development systems/platforms, compared with 34% globally. Worldwide, the survey results point to evidence that low code adoption has crossed the chasm and is becoming a mainstream approach to meeting the challenges of swift, agile and controlled app development among the “early majority”. Some 34% of businesses said that they were already using low-code and a further 9% plan to do so. The growth potential in the low-code market is underlined by OutSystems recent $360m investment funding round, demonstrating that the sector is set for expansion in the near- to mid-term. Organisations that are already using low-code reported major benefits and were 21% more likely to describe their organisation as being happy or somewhat happy with the speed of app development and three times more likely to report having no app development backlog. Low-code is also fuelling agile and DevOps, with organisations that are using rapid application development more likely to describe their level of maturity as further advanced than those that do not use it. Those using low-code also reported better governance of citizen development, being three times more likely to describe it as highly governed than counterparts that don’t use low-code platforms. Pike says, “Organisations who are embracing low-code/rapid application development are reaping considerable performance benefits. They are developing faster and more efficiently, with fewer back logs and greater satisfaction overall. As low-code continues to become mainstream we will see more organisations using it as an essential catalyst to power business transformation.”

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ISSUE 85 Q2 2018•FTSE GLOBAL MARKETS

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FTSE Global Markets  

Issue 85 Q2

FTSE Global Markets  

Issue 85 Q2

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