KAS SELECTIONS Volume 19, issue 3, August 2012
Ahold’s CEO Dick Boer KAS BANK ‘Custodian of the Year 2012’ Conference on ‘Liquidity management at pension funds’ Europe on the road to a single payments market Ultimate Forward Rate: solution or pitfall for pension funds? Mijnbroker wants to offer a product that is easy to understand Conference on ‘Reporting in the Insurance World’ Developments in the European financial landscape Words from Wiesbaden FATCA: register and report From feedback to service improvement
KAS Selections KAS Selections is a quarterly newsletter from KAS BANK N.V. Although the information in this issue is drawn up with the utmost precision, no rights can be derived from it. Volume 19, Issue 3, August 2012 Contents: Ahold 3 KAS BANK ‘Custodian of the Year 2012’ 5 Laurens Vision 6 Conference on ‘Liquidity management at pension funds’ 7 Europe on the road to a single payments market 10 New Clients 11 Personnel notes 11 Ultimate Forward Rate: solution or pitfall for pension funds? 12 Global Custody Network News 15 Mijnbroker wants to offer a product that is easy to understand 17 Conference on ‘Reporting in the Insurance World’ 19 Developments in the European financial landscape 23 Words from Wiesbaden 27 FATCA: register and report 29 From feedback to service improvement 31 Comments on this issue, suggestions for future articles and mailing list requests should be addressed to: Netherlands Clearing & Banking Services Associate director: jeroen.duijn@kasbank.com Fund & Insurers Services Associate director: sicco.plesman@kasbank.com
Editorial Seminars and conferences are an excellent opportunity to brush up on the most recent developments in regulations and financial infrastructure. Even if it is a scorcher, as was the case at the seminars on ‘Liquidity management at pension funds’ and ‘Reporting in the insurance world’, organised by KAS BANK. It is inspiring to hear how enthusiastically the different speakers provide insight into what is often complex material. It is also a good opportunity for KAS BANK to test the solutions we devise against the experiences of our clients in practice. At the end of the day, what is important is that we translate your concrete questions and needs into practical solutions. A report on both seminars is included in this edition of KAS Selections. In his recent ‘Hoofdlijnennota’ (Framework Memorandum), Minister Kamp (Social Affairs and Employment) announced a possible revision to how the yield curve for determining the market value of pension funds’ commitments is set. Mark Schilstra discusses the question of whether applying the Ultimate Forward Rate (UFR) is indeed a good solution or rather a pitfall that will lead funds to wrongly overestimate their assets. Contrasted with this complicated issue is the simplicity of the trading system that online broker Mijnbroker uses to serve its clients. Eric de Bats and Koen Kuperus explain how and why client protection and transparency are priorities at Mijnbroker. Effective risk management plays an important role in these priorities and KAS BANK supports Mijnbroker in this area. In this edition of KAS Selections, we also start a series on the businesses behind our
Institutional Services Associate director: tamis.stuker@kasbank.com
institutional clients. Ahold CEO Dick Boer talks about how Ahold deals with the European
Sales & Business Development (S & BD) Head of S & BD: mark.van.weezenbeek@kasbank.com
establishment of a European pension fund for all its employees is also of interest.
German Branch Managing Director: frank.vogel@kasbank.com
The overview of developments in the European financial landscape clearly shows that the
KAS Investment Servicing GmbH CEO & Managing Director: joerg.sittmann@kasbank.com
The introduction of the Single European Payments Area (SEPA) in February 2014 is a
UK Branch Managing Director: laurens.vis@kasbank.com Translation: Wilkens c.s. Text editor: Robbert Veltman Editor: Carla Boogers KAS BANK N.V. Marketing & Commercial Development P.O. Box 24001, 1000 DB Amsterdam The Netherlands +31 20 557 5812 carla.boogers@kasbank.com Graphic Design: Ebbenhorst Design, De Meern Print: KAS BANK, Document & Systems Services
competition regulations, among other things. Multinational Ahold’s view on the possible
integration of the European capital market continues unabated, despite the euro crisis. good example of this, as is FACTA, a development that KAS BANK is following closely. We also give an update on the results of the Client Service Reviews. One of the points of attention is how KAS BANK invoices clients. Finally, I am proud to announce that KAS BANK has been honoured with the Custodian of the Year Award. Many of you responded to this with personal congratulations. I would like to thank you for your warm wishes on behalf of all our employees. Your responses are an excellent incentive for us to continue to work on improvements to our service provision. Sikko van Katwijk Managing Board of KAS BANK
This edition of KAS Selections includes the first in a series of articles about the businesses behind our clients. Dick Boer, Ahold CEO, talks about the corporate culture and the importance of governance in the group. How would you describe the corporate culture at Ahold? From the moment the first Albert Heijn store opened its doors in Oostzaan 125 years ago, everything we do has been driven by our customers’ needs. Our customers can decide at any moment to do their grocery shopping elsewhere. As a retailer, we must therefore constantly focus on giving our customers value for money and offering them an optimal range of goods and services and a superior shopping experience. That’s our passion, each and every day, and that’s what we teach our people to embrace. Other important elements in our culture are the pursuit of continuous renewal and improvement of our range and the way we keep seeking ways to simplify our business
Dick Boer, Ahold CEO
operations. customers to decide themselves how, when and where they At KAS BANK we are committed to deepening
do their shopping. Customers can order online and then
our relationship with clients. One of the ways
choose whether to have their shopping delivered to their
we do this is to conduct surveys to gauge
home or to come and collect it themselves.
customer satisfaction with the services provided by KAS BANK. What is Ahold’s
The financial and pension sectors are facing
strategic vision with regard to strengthening
increasingly strict regulations. To what extent
ties with your customers?
are the EU rules, for example in the field of
We aim to make our stores the preferred place for our
competition, directly applicable to Ahold?
customers to do their shopping. Our strategy is designed to
Obviously, these rules apply in full to our activities, and our
ensure that we attract customers to our stores and get them
acquisitions (including bol.com and 82 stores in the
to spend longer there by knowing and understanding them
Netherlands earlier this year) have been approved by the
better than anyone else. And by giving them precisely what
competition authorities. Regulations are fine as long as they
they want. In addition, we aim to grow by offering customers
serve a clear purpose and are efficiently applied, with no
alternatives that meet their changing needs and respond to
unnecessary administrative hassle for businesses. The
new technology. Of course the development of our online
benefits of a single European currency and a single internal
business plays an important role in this respect, and the
market still vastly outweigh the possible drawbacks. That’s
acquisition of bol.com provides a significant stimulus to our
something none of us should forget, despite the current
online position. Our activities are designed to enable
difficult economic conditions.
KAS Selections • August 2012
3
the right solution for all parties. That increases support for our pension scheme into the future. The establishment of a European pension fund for all Ahold employees in Europe is not on the agenda at the present time. Not only is there still a lack of uniformity regarding fiscal and social rules, but employees around the world have different perceptions of pension as a term of employment. And since we, as a retailer, aim to be firmly rooted in and occupy a central position in society, these local needs are extremely important to us. So we believe that it’s still too soon for a single European pension fund. How is Ahold responding to the economic and financial crisis in Europe? Consumer confidence remains low, and we obviously see that in our stores. Having said that, the present economic climate also offers opportunities as our competitors are also experiencing the same difficulties. In this environment a company like Ahold, with solid and well-positioned brands, a clear strategy and a healthy balance sheet, can continue to grow. How is that translated into the governance in
In your opinion, how will the retail sector look
your company?
five years from now?
Ahold has organised most support functions on a continent-
I expect there to be significant shifts in retail, similar to the
by-continent basis. Within Ahold Europe and Ahold USA, we
introduction of self-service stores in the 1950s. Thanks to
have set up so-called Centers of Excellence that serve
new technology and the development of social media,
several operating companies (including those in the Czech
customers are becoming increasingly powerful. Certain
Republic, Belgium and Germany). This enables us to benefit
stores will disappear from the high street, although this will
from the pooling of knowledge and expertise without losing
be matched by the appearance of myriad new retail
contact with the local market.
concepts, often with a combined online and offline service
and product offering targeting a different way of shopping.
Ahold is a multinational organisation. How do
Our strategy – reshaping retail @ Ahold – is entirely geared
you view the current pension debate in the
towards exploiting these developments so that we can
Netherlands and Europe? Are you considering
continue to grow in a sustainable and profitable manner.
setting up a European pension fund for all Ahold employees in Europe, for example? When dealing with a major issue like pensions, it’s important that everyone is involved in the debate and that we arrive at
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KAS Selections • August 2012
KAS BANK ‘Custodian of the Year 2012’ KAS BANK has been named ‘Custodian of the Year 2012’. The award was given out during the fifth prestigious European Pensions Awards in London on Wednesday 27 June. In the words of Laurens Vis (Managing Director of KAS BANK UK), ‘the award gives us even stronger motivation to further expand our services with innovative solutions for our clients.’ The European Pensions Awards were established by the
Albert Röell strikes the gong
international professional journal European Pensions. Pension funds, asset managers, fiduciary managers and
Laurens Vis (Managing Director of KAS BANK UK) accepted
custodians are nominated in a number of categories. The
the Custodian of the Year 2012 Award on behalf of
awards are given to providers who set the highest
KAS BANK. ‘Winning this award is both an honour and a
professional standards in their field, in order to best serve
privilege for our bank,’ said Laurens Vis. ‘We consider it
pension funds in these challenging times. The criteria include
recognition of our continuous commitment in our service
good service, innovation and complete dedication to the
provision for pension funds, asset managers and their
pension sector.
business partners in the European securities market.’ In addition to
Gong ceremony at Euronext Amsterdam
KAS BANK,
KAS BANK’s receipt of this award prompted NYSE Euronext
J.P. Morgan and
Amsterdam to invite a delegation from KAS BANK as a listed
Northern Trust were
company for the traditional gong ceremony at the opening of
also nominated in the Custodian of the Year category. The
the trading day. Accompanied by several representatives
judging panel was made up of 27 leading professionals from
from KAS BANK’s clients, Chairman of the Managing Board
the European pension sector. When the prize was awarded,
Albert Röell struck the gong on the trading floor in
one of the members of the judging panel, Robert Gardner,
Amsterdam at 9 a.m. sharp.
praised KAS BANK for its customer orientation and innovative capacity.
The gong ceremony was an age-old tradition signalling the start of the trading day at the Amsterdam Stock Exchange, the oldest stock market in the world. The ceremony was restored after the merger between the New York Stock Exchange and Euronext. Since then the sounding of the gong, like the bell ceremony on Wall Street, has grown into a phenomenon that attracts a great deal of attention. The event was broadcast live on ‘stock market station’ RTL-Z. The photos of the striking of the gong were displayed on the screens of the markets in New York and Amsterdam for the whole day.
F.l.t.r.: Miles Jup, Laurens Vis, Robert Gardner
KAS Selections • August 2012
5
Summer column
Laurens Vision ‘Summertime, And the Living is easy, Fish are jumping and the cotton is high, Your daddy is rich and your mamma’s good looking, so hush little baby, don’t you cry’. Few people will not know these famous George Gershwin lyrics. Porgy and Bess was situated in the deep old south of the States where day time temperatures easily climb to over 40 degrees Centigrade for weeks in a row. Summertime would have been the busiest time for the slaves with the cotton high and ready to be picked. Summertime today is the time to be enjoying what we have earned and been granted in our industrious lives. Summertime is also known as Daylight saving time (DST), and as such has been hailed to save energy, primarily from its effect on residential lightning. Ancient civilizations already adjusted daily schedules to the sun and much more flexible than we do in our time. Roman water clocks had different scales for different months. The American envoy to France, Benjamin Franklin, published a letter in 1784 suggesting Parisians to economize on candles by rising earlier to use morning sunlight. True to his own proverb: ‘Early to bed, and early to rise, makes a man healthy, wealthy and wise’. But Europe did not keep precise schedules and DST was still a long way off. It took Golf, Railways and a World War to introduce DST to mankind. Golf, because George Hudson (an Entomologist from New Zealand) was an avid golfer who hated to cut his round short at dusk. And who disliked, on his pre-breakfast bike rides through London, seeing its citizens sleeping through a large part of the summer days. His solution to advance the clock during summer months resulted in the First Daylight Savings Bill presented to the House of Commons in 1908. But the Bill did not make it into Law, in spite of fierce lobbying. This soon changed when rail and other means of transport and communication required the standardization of time. And in 1916, Germany and its World War I allies introduced the use of DST, primarily to conserve coal during wartime. Britain and the rest of Europe were soon to follow and finally the United Stated adopted in 1918. And also Gershwin was convinced: ‘So hush little baby, please don’t you cry, there is nothing that can harm you, with daddy and mammy standing by’. Since then the world has enacted, adjusted and repealed. And in our part of the world, the summertime is even caught
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KAS Selections • August 2012
in a genuine European Directive. The communication from the European Commission pursuant to Article 4 of Directive 2000/84/EC on summer time arrangements informs that the Commission is required to publish every 5 years the schedule for the dates on which summer time will begin (in March) and end (in October). At 01.00 Universal Time that is. Also here the EU means business. And so it is happy times for sportsmen and tourists, but pundits (DST: Daylight Slaving Time) and farmers have opposed to it. So there we have it. Every (second) Sunday in March we turn our clocks ahead an hour for a much welcomed extra hour of daylight for which we sacrifice a precious 60 minutes of sleep. And now a study has revealed that because of this the human cost of DST is high. The Monday after is full of workplace injuries (6% more) and with 70% more work days missed because of this. Little surprise then that the switch back to standard time is much easier and we all ‘gain’ a full hour. Summertime features also in the Health Information Bulletin of Bupa. Although this starts on a cheery note that working is positive because it gives one’s life structure and provides satisfaction, it can also give rise to work-related stress. Stress affects one in five people in the workplace, where, according to the acclaimed book ‘The motivation to work’ of Frederick Herzberg, job satisfiers deal with the factors involved in doing the job and job dissatisfiers deal with the factors which define the job situation. One of his stunning conclusions is that salary as a factor belongs more in the group that defines the job situation and is primarily a dissatisfier. For all people there are bigger and more sustaining motivators than money. But this is beside the point of a light hearted summer vision. Because when stress gets the better of you, and over 105 million (UK) working days are lost each year because of work related stress, why not take a walk and get some fresh air during the day (you have one hour extra of it in the summertime). Exercise and daylight are satisfiers: both mentally as well as physically. Indeed, it is summertime, the living is easy and the cotton is high.
Conference on ‘Liquidity management at pension funds’ On 24 May, KAS BANK hosted the conference ‘Liquidity
majority is happy with this intervention and feels that the
management at pension funds’. Five speakers addressed
ECB’s actions are worthwhile.
the topic of liquidity from various angles, ranging from a macro-perspective to liquidity management in practice.
If the markets are no longer willing to finance weak
Everyone agreed that managing liquidity risk is essential in
governments, De Jong sees the introduction of euro bonds
the current market. Pension funds should therefore
as inevitable. Otherwise liquidity will remain scarce and
formulate a clear liquidity policy. It emerged from the
expensive. The latter is not necessarily disadvantageous for
discussions after the conclusion of the conference that
pension funds. After all, they hold sufficient government
this topic is indeed high on the agenda at pension funds
securities that are ‘eligible’ as collateral for CCPs, for
and among their directors.
example. A nice return can be achieved on lending out these securities. In the meantime, De Jong advised pension funds Opening speaker Han de
to set up a clear policy for liquidity management and liquidity
Jong, chief economist at
risk.
ABN AMRO, shed light on liquidity management from
Jean Frijns, extraordinary
a macro-economic
professor of Investment
perspective and the current
Studies at VU University
developments surrounding
Amsterdam, discussed the
the euro. He briefly outlined
regulations for derivatives
three scenarios for dealing
and derivatives clearing in
with liquidity and liquidity
more depth. An important
risk. In the first scenario, it must be possible for all assets to
element in these
be converted into liquid funds as quickly as possible.
regulations, which include
A second scenario involves the conversion of a specific
the Dodd-Frank Act in the
percentage of the assets into liquid funds. As a third
US and EMIR in Europe, is the central clearing of standard
possibility, De Jong cited ‘taking a look around’ to see how
derivatives via a CCP. According to Frijns, the use of these
things were going. In 2007, for instance, it became clear that
CCPs gives rise to a new systemic risk; they could at some
a number of liquid markets had ‘frozen up’, in particular the
point become ‘too big to be saved’. In times of crisis, CCPs
interbank market. Stress tests then indicated that a financial
will tend to demand collateral more often and more quickly.
institution was more likely to collapse due to a lack of
In Frijns’ words: ‘CCPs eat up high-quality collateral.’ This
liquidity than due to low solvency.
makes liquidity scarcer and more expensive. The central banks and the ECB would then have to step in again to
According to De Jong, the essence of the current euro crisis
keep the market running. The multinational CCPs also fall
is the lack of liquidity and the question of whether the
under different national regulators, making rapid and
financial markets are willing to continue to finance weak
effective intervention in the event of a crisis more difficult.
governments. The European Central Bank plays a major role in that process by buying up bonds from weak European
Pension funds should therefore be apprehensive about the
countries. A small survey of the audience indicated that the
consequences of the new regulations for their liquidity policy.
KAS Selections • August 2012
7
Custodians can play an important advisory role in this. They
converted into liquid funds. In this approach, the part of the
not only know where the pension funds’ assets are, they are
portfolio that entails the least costs and at the same time fits
also able to deposit these in the right place in a timely
within the liquidity strategy must be liquidated.
manner if a CCP requests it, thus significantly lowering the After the break, Johan van der Ende, senior adviser at Duet
risk of insufficient liquidity.
Asset Manager and former CIO at PGGM, gave a few A question came from the audience as to whether central
examples of more
clearing does not in fact simplify the world. Connecting the
successful and less
CCP to the central bank or even giving it its own bank status
successful liquidity
would in that case be an improvement on the current
management in practice.
situation. According to Frijns, central clearing is indeed an
The essence of his
improvement, but central banks will not be willing to bear the
argument was that liquidity
risks of the CCPs. National interests are still too fragmented
is grossly underestimated
for that, while a CCP in fact works across borders. What is
as a risk. Many financial
therefore absolutely necessary, said Frijns, is complete
institutions do engage in
transparency with regard to the risks at the CCP.
liquidity planning but do not have a liquidity policy. Consequently they are more likely
There are different models for calculating liquidity risk.
to fail as the result of liquidity problems than as the result of
Associate professor at the faculty of Economics and
solvency problems. As an example, he cited an US insurer
Business Administration at VU University Amsterdam,
that found itself facing serious liquidity difficulties as a result
Svetlana Borovkova,
of five telephone calls from its largest clients. The liquidity
discussed a new
policy namely did not take into account that these clients
framework for calculating
could demand their deposits within 10 days if the insurer’s
and managing liquidity risk.
rating were to be downgraded in three steps. A risk that
This model is becoming
according to Van der Ende is also decidedly a real danger
increasingly accepted,
for Dutch industry-wide pension funds!
particularly among institutional investors.
Nonetheless, Van der Ende says that the liquidity risk can be
The model looks at the
managed well and relatively easily. The first step in that
investment portfolio in
process is recognising possible liquidity shocks from the
relation to liquidity risk. Primarily the risks of funding and
different derivatives and private equity portfolios. The events
asset liquidity and their interrelation are looked at.
from 2008 and 2009 provide enough input in this respect.
A significant difference in the valuation of the liquidity risk is,
Step 2 is setting up collateral management. This involves
for instance, whether the investor assumes a mark-to-
designating portfolios that can function as collateral; the
market strategy or a mark-to-liquidation strategy. The most
fund, together with the custodian, then concludes the
important ‘hidden’ variable is the investor’s liquidity policy.
required contracts with the counterparties. The next step is
Her argument was supported by practical example
to hold a ‘fire drill’: which processes are put in motion? What
calculations based on the marginal supply demand curve
actions are taken if the limits of the liquidity position are in
(MSDC). According to Borovkova, it is possible to set up an
view?
optimal exit strategy without the entire portfolio having to be
As a follow-up to that, it is a good idea to review the current
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KAS Selections • August 2012
hedging strategies. Could the hedge ratio be just a little less,
securities can fully be seen as liquidity. As such, KAS BANK
for instance? The fifth and last step is to once again think
integrally manages and optimises all commitments on a daily
about the small print in contracts. According to Van der
basis. It is important in this respect that the internal
Ende, there is a real danger that what happened to the US
governance function (risk, reporting, monitoring) is properly
insurer mentioned above could also happen to industry-wide
arranged. This is true for pension funds as well. There must
pension funds. If an adequate Z-score is not achieved, the
also be a plan B at hand. For reporting, KAS BANK uses the
various employers may cancel their contracts. Poor relative
level I-III structure of FAS 157 reporting, which is also
performance or benchmarks that are not adequately
suitable for pension funds.
connected to the underlying portfolios can suffice as reasons for this. This problem is mainly an issue for types of private
The day’s chairman,
equity investments.
Sikko van Katwijk, concluded the The last speaker,
afternoon with a brief
Rolf Kooijman (CFO
summary. His call for
KAS BANK) explained
the discussion to be
what changes have
continued while
been made in liquidity
enjoying a cool drink
management at
did not go unheeded.
KAS BANK. In terms
The tropical
of control measures,
temperatures certainly
liquidity risk is now the
encouraged this.
most important point of concern. An
On the occasion of the conference, a collection of articles
important lesson from
was put together from Con Keating (‘The long and short of
the 2008 credit crisis was the necessity of an integrated
liquidity’) and Mark Schilstra, Geert Jan Kremer and Coen
approach to liquidity. The integration of documents (ISIN
Laan on behalf of KAS BANK. You can request this reader
codes) such as government bonds and cash is required in
from your account manager.
order to be ‘in control’. A consequence of this is that
KAS Selections • August 2012
9
Europe on the road to a single payments market KAS BANK is undertaking intensive preparations for the
Changes to payment transactions
introduction of the Single Euro Payments Area (SEPA).
Businesses are required to inform their clients about their
This single European payment market will allow
new International Banking Account Number (IBAN) which will
businesses and consumers in 32 countries to all pay in
be required for all payment transactions in future. Invoices,
Euros in the same way as of 1 February 2014.
stationery and other correspondence that contain these data must be updated for this. In the Netherlands, the IBAN has
The single payment market will require quite a few changes,
18 characters, in other countries this ranges from 15 to
in particular with regard to account numbers, payment
maximum 34 characters. Until 1 February 2014, the current
instruments and the processing of those payment
and new payment systems will exist alongside each other:
instruments. In order to advise our clients about this as well
one for the account numbers currently in use and one for
as possible, we have prepared a list of Frequently Asked
IBAN. Until that time, businesses and consumers will be able
Questions on SEPA. The FAQ is available via our corporate
to use either their present account number or their IBAN.
website, www.kasbank.com, and can be viewed by all visitors to the site, not just by clients of KAS BANK.
With the new standard for transfers, SCT (SEPA Credit Transfer), payments can be made uniformly to parties in the
What is the purpose of SEPA?
Netherlands and to parties in the other SEPA countries. This
The new standards put an end to the differences between
standard has existed since 2008.
payment systems, which means euro payments will take place in the same way everywhere. It will be possible to use
Just as for transfers, there will also be new standards for
account numbers, transfers and collections for domestic
collections, the SDD (SEPA Direct Debit). These provide
and cross-border payments throughout SEPA.
room for the IBAN. This means that it is possible to authorise a supplier abroad to debit funds or to issue international
The Single Euro Payments Area encompasses all
debit authorisations oneself. The new standard for collection
27Â countries of the European Union, plus Norway, Iceland
has existed since 2010 in addition to the current collection
and Liechtenstein (which are members of the European
standard, but is still only used on a very limited scale.
Economic Area), and Switzerland and Monaco. Therefore, SEPA also includes countries that do not have the euro as
There are two types of collections: standard collection and
currency. The new technical standards and products only
commercial collection. Commercial collection is the new
apply for payments in Euros, however, and not for payments
version of what is now business collection. Companies can
in other currencies.
use this to issue and receive authorisations from Dutch and
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KAS Selections • August 2012
New Clients Netherlands JB Capital Markets S.V. Clearing Services Fincor Sociedade Corretora S.A. Clearing en Custody Services LMG European companies. The major difference is that there is
Clean Payments Services
no transaction reversal right (the current business collection has a period of five working days), meaning that new
Germany
authorisations are needed for the commercial collection. VEM Aktienbank AG Migration
Settlement Services
The migration to SEPA will take place on 1 February 2014. This end date set down in European legislation provides
United Kingdom
clarity for all providers and users of the payment system. An end date also keeps the transitional period, in which the
Peel Hunt
two systems must be used alongside each other, as short
UK Stock lending
as possible. Consumers and businesses have time to get used to using the IBAN as their account number, and
First International Group
businesses have time to adapt their administrations, systems
Model A settlement and Custody
and software to the new standards. The migration in the Netherlands will be guided by the National Forum on SEPA migration (NFS). The Forum has set up a National SEPA Migration Plan. The NFS is chaired
Personnel notes
by De Nederlandsche Bank (DNB). Sales & Business development The Betaalvereniging (Payment Association) will provide
1 August: Anja Maiberger, Head of Sales Institutional
technical documentation and specific guidelines for the
Custody and Depotbank Services Germany
various payment instruments. These documents can be found at www.betaalvereniging.nl.
Client management 1 August: Meir Elmaliah, account manager Fund &
We will continue to inform you regularly of the progress in
Insurers Services
introducing SEPA at KAS BANK, as well as of the
1 August:
opportunity to participate in test procedures.
15 August: Loes Tiemes, account manager Clearing &
Sandra Kรถnisser, relationship manager UK Banking Services
1 September: Ruud Geerdinck, account manager Institutional Services
KAS Selections โ ข August 2012
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Ultimate Forward Rate: solution or pitfall for pension funds? On 30 May of this year, Minister Kamp presented his ‘Hoofdlijnennota’ (Framework Memorandum) on revising the financial assessment framework for pensions. In the memo, the expected Ultimate Forward Rate (UFR) was cited as a change to how the yield curve is set for determining the market value of pension funds’ commitments. Although the definitive parameters of the Ultimate Forward Rate were not yet given in the Framework Memorandum, an indication of the impact on the funding level can still be determined. This ranges from 2 to 15 percentage points. The precise number depends on the UFR parameters and whether the pension fund is young or old. Mark Schilstra, Director of Client Management, discusses whether using the Ultimate Forward Rate represents a solution for pension funds or a new pitfall by which we will wrongly overestimate our assets. Mark Schilstra, Director Client Management The Ultimate Forward Rate Under the current Financial Assessment Framework
commitments must be valued at current market interest
(Financieel Toetsingskader, FTK), unconditional nominal
rates. Since pension commitments are generally long-term
pension commitments are the key factor. These
commitments, the valuation is extremely sensitive to the
Figure 1 Swapcurve vs UFR 4 3,5 3 2,5 2 1,5 1 0,5 0
0
10
20
30
40
Terms in years Swapcurve
12
UFR
KAS Selections • August 2012
50
60
70
long-term interest rate. Given the limited liquidity in the long
The effect of this will manifest more strongly for pension
segment of both government bonds and interest rate swaps,
funds with a young participant population, since the
determining the ‘right’ curve for this segment of the market
commitments of these funds lie further in the future. The
is no easy task.
table below gives an indication of the consequences for a young fund, an average fund and an old fund.
In the Solvency II proposals for insurers, it was decided to value insurers’ commitments at the so-called Ultimate
Figure 2
Forward Rate. The first part of the UFR curve, from today until the Last Liquid Point (LLP, set at 20 years for the time
Young fund
Average fund
Old fund
26.5 years
18 years
12.5 years
Notional interest rate based on swap curve
1.88%
1.85%
1.80%
Notional interest rate based on UFR
2.43%
2.19%
2.00%
Effecton funding level
+13.4 points
+6 points
+2.5 points
being), is based on the swap interest rates and matches the swap curve exactly. From the Last Liquid Point onwards, the 1-year forward rate is projected over 40 years via an algorithm to a long-term average expected to be 4.2%.
Focal point pension benefit in
This uses a parameter ɑ that reflects the convergence rate between the LLP and the long-term average UFR. What applies here is that if the convergence to the UFR is slow, all interest rates after 20 years depend on the 20-year interest rate. (For the difference between the swap curve and the UFR, see figure 1.)
Although a number of details still have to be worked out, there is a chance that pension funds will be able to value their commitments as of the end of 2012 at this UFR
Doubts can be raised however about the way in which the 4.2% of Solvency II has been determined. The interest rate has been determined over the period from 1900 to 2009, whereby each year has been given equal weight, thus yielding expected inflation of 2% with an expected real
In the Framework Memorandum from Minister Kamp, it is
interest rate of 2.2%. If the last few years are included (and
argued that the UFR method should also be applied for
possibly assigned even a heavier weight than earlier years),
pension funds. If DNB agrees to this, given the low current
the outcome is a much lower interest rate and consequently
level of the long-term swap interest rate, this would result in
higher valuation of commitments.
a substantial increase in the funding levels of (in particular, young) pension funds. The introduction of the UFR method
As a result of the rising funding level, there is also a risk that
would also decrease the volatility of the funding levels.
pension funds will take into account returns for which there is uncertainty that these will in fact be achieved in future,
Consequences of introducing the UFR
thus overestimating their assets. Because of the extra
Consequences for the funding level
payments stemming from the rising funding level, pension
It is clear that implementing the UFR method will result in a
funds may not be able to cover the future payments to the
(substantial) increase in the funding level for a large share of
current generation of younger people.
the pension funds. This results from partly abandoning the valuation of the commitments at market value. After all,
Stabilising effect
long-term commitments will no longer be valued at the curve
A stable long-term interest rate results in a decrease in
(however illiquid) but at a presumed long-term average.
the volatility of the funding level of pension funds for
KAS Selections • August 2012
13
In the current situation, if interest rates fall, pension funds will hedge more interest-rate risk, causing the long-term interest rate to decrease further
interest rates up to the LLP; after this point the pension commitments will become less sensitive to the interest rate and the quantity of interest coverage can be reduced. After all, as a result of the higher UFR and the ensuing decreasing duration of the commitments, the interest-hedge percentage will increase because the interest sensitivity on the asset side will not change.
(in particular) long-term commitments. A stable long-term interest rate could also result in less pro-cyclical behaviour
The interest hedge on the swap curve will also change, in
among pension funds. In the current situation, if interest
particular for pension funds that have spread the interest
rates fall, pension funds will hedge more interest-rate risk,
hedge over the swap curve under the current FTK. If the
causing the long-term interest rate to decrease further. This
pension fund wants to continue the same interest policy
will give rise to a ‘self-fulfilling prophecy’. In the event of
under the UFR method as under the current regulation,
interest rates above 4.2%, the UFR will ensure that pension
this means that the interest hedge must be decreased.
funds do not overestimate their assets by reducing the fluctuation in the interest rate level.
Consequences for the market If the new UFR method is introduced, most pension funds
Consequences for hedge effectiveness
will adjust their interest hedge to have their duration match
Use of the alternative discount curve will result in a lower
back in order. As such, a (substantial) part of the hedge
value for the liabilities and also in a liability duration that may
longer than 20 years (the LLP) will be unwound. This could
be significantly shorter at times. This has consequences for
result in a rise in the swap curve in the long segment, with
the hedge effectiveness. After all, the original hedge was set
possible losses for pension funds that have not unwound
up on the basis of the swap curve. There is no difference for
their exposure on the curve after 20 years on time. In conclusion In the Framework Memorandum on Revising the FTK, the UFR is cited as a possible way to set the interest curve for determining the market value of the commitments. The chosen value of 4.2% signals the return of something resembling the well-known 4% notional interest rate used until recently by DNB, as far as the longer terms are concerned. Although a number of details still have to be worked out, there is a chance that pension funds will be able to value their commitments as of the end of 2012 at this UFR. In anticipation of this, KAS BANK has already built the 3-month average and the UFR calculations into its systems. We would be happy to discuss with you the possible consequences of implementing these techniques for your pension fund.
14
KAS Selections • August 2012
Global Custody Network News Europe Europe – ECB discontinues CCBM2 project
establishment of additional clearing services for the cash
The Governing Council of
markets operated by PSE.
the European Central
The timeline for the Xetra project remains unchanged; the
Bank has decided to
launch of Xetra on PSE is scheduled for 30 November 2012.
discontinue the preparations for the
Russia – Delay T+n settlement cycle expected
Collateral Central Bank
MICEX-RTS is expected to delay
Management (CCBM2)
the introduction of the new
project in its current form. The project’s objective is to
settlement cycle until mid-2013.
increase the efficiency of the Eurosystem’s internal collateral
MICEX-RTS plans to move the
management systems. A harmonised solution should
settlement cycle from the current
facilitate the interaction of counterparties acting as collateral
T+0 settlement period to either a
providers with the Eurosystem. The CCBM2 will be fully
T+2, T+3 or T+4 settlement
compatible with TARGET2 and TARGET2-Securities (T2S),
cycle. Settlement reforms are
in particular with the communication interfaces and the
part of the strategy to make the
settlement procedures used by T2S for the delivery of
Russian exchange more accessible to foreign investors.
securities. It will handle all eligible collateral (both securities and non-marketable debt instruments).
Outside Europe
In the project detailing phase, a number of challenges were identified in the field of harmonisation. The Eurosystem has
ASEAN Markets – Trading link delayed
decided to address these issues first, before proceeding
The ASEAN (Association of Southeast Asian Nations) trading
with a common technical platform. The existing
link is taking longer than expected. Brokers from the
Correspondent Central Banking Model (CCBM) for cross-
Singapore, Malaysia and Thailand stock exchanges may
border collateral management remains in place.
begin to place orders across the platform in September 2012. The other exchanges (Hochiminh Stock Exchange,
Czech Republic – CCP implementation delayed by PSE
Hanoi Stock Exchange, Indonesia Stock Exchange and the
Prague Stock
Philippine Stock Exchange) will be connected in a later
Exchange (PSE)
stage. The ASEAN trading link will eliminate the cross-border
has announced
trading barriers in that region.
that implemen tation of the CCP
Brazil – New procedure for self-trades
solution has been
Self-trades, trades with the
delayed until
same counterparty on both
mid-2013. In
sides, will no longer be
February 2012 PSE announced the planned cooperation
automatically cancelled in
with CCP.A. The cooperation will enable the option to clear
Brazil; these trades will be
and settle PSE trades via CCP.A and will lead to the
subject to exchange fees.
KAS Selections • August 2012
15
Self-trades will be monitored by the Brazilian Securities and
Currently there are only six pension funds worldwide that
Exchange Commission (CVM) and by the Bm&FBOVESPA
have received a QFII licence. Pension funds with a QFII
Market Supervision (BSM). The new procedure is in effect
licence can benefit from prioritised application review and
starting 1 August 2012.
bigger quota amounts.
Canada – Maple receives approval for takeover of TMX
Japan – Increase in withholding tax from 2013
Maple Group has
Effective from
received regulatory
1 January 2013
approval for its
the Japanese
proposed
withholding tax
acquisition and
(WHT) on dividend
merger of TMX
and interest will be
Group, Alpha
increased
Trading Systems
temporarily. The
Inc. and Alpha Trading Limited Partnership (collectively,
national dividend tax for dividends paid out to foreign
‘Alpha’) and The Canadian Depository for Securities Limited
investors will increase by 2.1% to 7.147%. The national tax
(the Canadian CSD). The approval permits Maple to operate
on interest paid out to foreign investors will increase by 2.1%
a combined exchange and clearing group. Maple expects to
to 15.315%. The WHT rates will be increased for 25 years
complete the proposed acquisition on 1 August 2012.
starting from 1 January 2013. Increased WHT rates will be applied on payment date basis.
China – CSRC published relaxed QFII entry requirements
Tax benefits under double taxation treaties with Japan and
The China
J-BIEM (tax exemption scheme for Japanese fixed income
Securities
instruments) will not be affected.
Regulatory Commission
South Korea – New tax law requires foreign investors to
(CSRC) has
submit tax forms
published the
Under the new tax
amended entry
law, a foreign
rules for Qualified
investor wishing to
Foreign Institutional Investors (QFII). As a result it will
enjoy a reduced
become easier for foreign institutional investors to enter the
tax rate in
Chinese A-shares market.
accordance with a
Under the modified requirements, a Pension Fund can
Double Tax Treaty
qualify as QFII if it has: i) a track record and operational
has to submit the
experience of at least 2 years, and ii) at least USD 500
required forms. This requirement applies as of 1 July 2012.
million in assets under management in the most recent
We notified you of this requirement with our Service Update
financial year.
dated 10 April 2012.
16
KAS Selections • August 2012
We believe that client protection and transparency are very important
Mijnbroker wants to offer a product that is easy to understand Launched last year, Mijnbroker is the Netherlands’ third
they may later look at what else their broker has to offer.
Internet broker. The company uses a trading system
That is why we work exclusively on commission, rather than
developed in-house for stock market investments in
with a rebate system.
shares, options, futures and other instruments. Mijnbroker has chosen KAS BANK to handle the transactions.
Kuperus: KAS BANK took a very active role in helping us set
KAS Selections spoke with Eric de Bats, Managing
up the system, particularly with regard to risk management.
Director, and Koen Kuperus, Manager of Mijnbroker.
Are all trades going through the system properly? Are all transactions settled on time? Is the margin calculation set up
When did Mijnbroker start?
properly? This shows our clients that everything is perfectly
De Bats: Our first clients became active on our system in
in order; it is a kind of stamp of approval.
February 2011, after a year of preparation and testing. We talked with a number of parties during the preparations,
You started Mijnbroker in the midst of a
including a US party with an existing system. If we had gone
financial crisis. Did this have any noticeable
with them, our clients would have fallen under the US
effect?
guarantee scheme, but that wasn’t what we wanted. We
De Bats: That’s difficult to say, because you don’t know
believe that client protection and transparency are very
what the level of interest would have been had there been
important, and that’s why we have opted for a construction
no crisis. You can look at it another way, though: it attests to
in which KAS BANK administers all accounts. This means
faith in your product in a market that is going downhill. There
that all our clients fall under the Dutch deposit guarantee
is also a great deal of interest right now in personal investing
scheme, something that inspires confidence. Clients also
via the Internet. We noticed this, for example, during RTL Z’s
actively inquire about KAS BANK: who are they, what do
(Dutch Broadcasting Society) Investment Game, in which
they do, etc. Clearly, they also believe it is important that KAS BANK does not deal on its own account, and that it fully concentrates on administrative service provision and risk management. De Bats: The starting point for Mijnbroker was to create a simple product for a wide audience. Everyone must be able to work with it, either using their own PC, tablet or any other Internet tool. That is also why we wanted to own the system ourselves. This allows us to be more flexible and to implement changes quickly, such as direct trading in derivative products via Mijn-X. Simplicity and transparency are also consistent with our business model. Market research has shown that clients in this segment of the market look at costs first. Cost is the criterion they use to choose a provider. And if they are happy with the provider,
Eric de Bats, Managing Director, Mijnbroker
KAS Selections • August 2012
17
Everyone must be able to work with it, either using their own PC, tablet or any other Internet tool
web application is that you can login anywhere. The PC version enables the client to customise the screen layout to some extent. Other than that, the client only sees his portfolio and remaining spending limit. All he has to do is trade. All the underlying actions are the responsibility of KAS BANK. All the positions are reconciled overnight and the client starts each morning with a clean slate. Since everything is done digitally, the costs stay low and we have Koen Kuperus, Manager of Mijnbroker
hardly any overhead.
9,000 people participated last year. During the game, we
Your system now offers access to NYSE
explained our products and how our system works. All the
Euronext in Amsterdam, Brussels and Paris.
‘investments’ went via our system as well, and it was able to
Do you plan to expand the system with access
handle them easily. This gave us confidence that our
to other markets?
capacity, both of the system and of our staff, is more than
De Bats: We would like to expand to the US. Our clients are
adequate.
not technically bound by the operating hours of the markets in Europe; after all, they do the trading themselves, at
Kuperus: Our clients are active investors who aren’t so quick
midnight, if necessary. But we are constantly working to
to be put out of the game, in my view. More than half of our
change things. For instance, for some products we would
clients invest in derivatives, for instance. A typical client is a
like to stay open longer, from eight in the morning until half
man between the ages of 40 and 75 who has retired or has
past six in the evening. We are also looking into whether we
enough money and enough time to sit in front of the PC and
can start offering additional functionalities within the existing
trade in real time. However, we’re actively seeking a younger
markets. We will be starting webinars soon, as a supplement
audience. To that end, we organise seminars for students
to our seminars. We see it as part of our job to educate
that include guest speakers and an explanation of our
investors. But we also provide good, old-fashioned tours of
system, in cooperation with Intereffekt, for instance. Soon
the stock market. Perhaps it might be an idea to do that with
we will be active on Facebook. And we are developing an
KAS BANK as well. Your building is rich in history and our
app with the same functionalities as the web browser.
clients would like to get a closer look at that. However modern our clients may be, the fact that the institute
What is the intake process for new clients?
standing behind the operation has been active in the
Kuperus: It’s actually quite simple. The client opens a new
securities industry for more than two hundred years still
account at KAS BANK. You carry out all the necessary
inspires confidence in them.
procedures, including derived identification. All the paperwork has been reduced to four pages. As soon as a client has made an initial deposit into his account, his account is activated at Mijnbroker and he can start trading. To do so, he can either use a web application or download the system onto his own computer. The advantage of the
18
KAS Selections • August 2012
Conference on ‘Reporting in the Insurance World’ On Wednesday, 4 July, KAS BANK organised a
communication policy have not been adapted or have been
conference on Solvency II entitled ‘Reporting in the
adapted inadequately in line with the requirements of
Insurance World’. The presentations by the four speakers
Solvency II.
provided good insight into the impact of Solvency II on
An important starting point in DNB’s supervision is that the
DNB’s supervision and the practical consequences for
risk of a financial institution’s collapse must be limited and
insurers. During the break, there was an opportunity to
financial stability must not be jeopardised. In order to ensure
view a demo of KAS BANK’s Solvency II app. The app
that supervision is effective, a decision was made for
shows the Minimal Capital Requirement (MCR), the
risk-based supervision, extra attention for the conduct and
Solvency Capital Requirement (SCR), the NAV and the
culture of institutions, and proportional supervisory regimes,
performance per investment fund. During the concluding
among other things. All insurers have been assigned to one
panel discussion, responses were given to six statements
of four supervisory regimes. In its supervision, DNB devotes
concerning Solvency II.
extra attention to insurers’ profitability and business model and the quality and effectiveness of governance. Supervision
After a welcome from the day’s chairman Sikko van Katwijk,
also has its limits, however. The regulators cannot and do
Jeroen Klomp Bueters, programme manager for Solvency II
not want to banish risks altogether. After all, a regulator is not a director. Mathieu Filippo, senior manager for prudential supervision at insurer Achmea, wondered to what extent Solvency II is
at De Nederlandsche Bank, discussed DNB’s risk-based supervision under Solvency II. Before that, however, he briefly discussed the successful Own Risk and Solvency Assessment (ORSA) for insurers in 2011. ORSA has clear added value for insurers but implementation costs a
ready for the real world. In that context, he discussed the
significant amount in terms of time and capacity. The
certainties and uncertainties in the elaboration of the three
learning points are included in the voluntary practice session
Pillars of Solvency II.
for insurers in 2012.
In relation to the quantitative calculations (Pillar 1), for
A progress analysis from DNB indicates that a relatively large
example, the discount rate is still unclear, as is the precise
group of insurers still has a great deal of work to do,
impact of the new rules and requirements. For the qualitative
particularly when it comes to setting down the policy rules
requirements (Pillar 2), there is now clarity on the
and reporting procedures concerning the key functions. In
governance, the risk management system, the key
many cases the communication strategy and
functions, ORSA and the Prudent Person Principle. The
KAS Selections • August 2012
19
interpretation and guidelines of the European Insurance and
indicated among other things that the process can best be
Occupational Pensions Authority (EIOPA) are still uncertain
started with the assets. To simply start on the process and
however, as is the case for Pillar 1. As far as the ‘disclosure’
take small concrete steps was also one of the lessons
requirements are concerned (Pillar 3), there is still uncertainty
learned. Krom said that the Parallel Run also provided
about the timelines and the question of whether reporting
important input for the further development of Solvency II’s
must be ‘asset by asset’. However, the structure and
reporting requirement. ‘Good reports are a joint effort.’
frequency of the reports are now clear. According to Filippo, the puzzle pieces for the
The last speaker, Rolf Kooijman, CFO and member of the
implementation of Solvency II are slowly but surely falling into place. However, it is still just a matter of waiting for the precise details of all the parts of Solvency II. Peter Krom, Manager of Asset Management & Treasury at insurer VGZ, outlined the practical preparations at VGZ in
Managing Board at KAS BANK, wondered whether everyone was still able to follow the strategic information supply. In order not to lose sight of the forest for the trees, a clear vision is required at the outset. In translating the information into action, specific and measurable goals are a necessity, both for medium and for longer terms. In practice, anticipation of Solvency II. VGZ wants to experience what
the information supply focuses on three ‘target groups’:
Solvency is and means for its own organisation immediately
actuarial and risk, finance, and asset managers. The three
as of 1 January 2013. Since the preparations are complex, it
target groups have conflicting objectives and responsibilities,
was decided to use ‘time boxing’ to allocate boxes of three
however. For example, what are the performance variables
months each time. The approach is being determined for the
and who exactly is ultimately responsible for the goals set?
effects of Solvency II on the current situation. For the assets,
Is everyone in the organisation speaking the same language
for example, changes must be made in the source systems,
when it comes to accounting principles?
while with regard to the balance sheet, changes are needed
As ‘food for thought’, Kooijman stated that the largest
in the reporting process. Krom also discussed in more depth
common denominator among the three target groups could
all the activities surrounding the 2012 Parallel Run that must
be sought in terms of market value and cash flows. This
be delivered to DNB at the end of August.
requires, among other things, a clear set of definitions of
During the entire process, VGZ defined its top 3 risks
objectives, which in turn results in an unequivocal and
requiring extra attention. One of the risks is the availability of
logically constructed information flow for reporting to the
the right ‘tools’ for the technical requirements and the
regulator, consumer and other stakeholders. Preconditions
reporting. VGZ is supported in this by KAS BANK.
in this include the transparency and independence of the
Krom concluded his talk with the learning points at VGZ. He
information. The data and information flows must also be
20
KAS Selections • August 2012
F.l.t.r.: Mark Schilstra (Director Client Management KAS BANK), Mathieu Filippo (Senior Manager Prudential Supervision Achmea), Peter Krom (Vermogensbeheer & Treasury VGZ) and Edgar Kooter (Sales Director Institutional Services KAS BANK)
unequivocally arranged and above all, controlled. Finally, it is
presentation, 20% of insurers are still not prepared for
important that the knowledge and skill in the organisation
Solvency II, though they only represent a small share of the
goes further than its own responsibility for the
total turnover on the insurance market.
implementation of Solvency II.
Peter Krom stressed once again that it is important to ‘just go ahead’; start and learn along the way from any mistakes.
Panel discussion The concluding panel discussion with Mathieu Filippo, Peter
Statement 2: As a result of Solvency II, the logical
Krom and Mark Schilstra (Director Client Management at
information basis becomes a market value basis based
KAS BANK) was chaired by Edgar Kooter, Sales Director of
on cash flows.
Institutional Services at KAS BANK. For every statement, Kooter first asked for a response from one of the panel members. After that, the audience was invited to comment as well. Statement 1: Because of the weak capital position of
insurers in the countries neighbouring us, it is unrealistic to aim for a meaningful introduction of Solvency II by 1 January 2014.
Peter Krom endorsed the statement but wondered how exactly market value is defined in that case. That is why institutions must also always check themselves whether the value given by the market is indeed the right value. The way in which cash flows are discounted must also be carefully considered. Does steering take place on the basis of GAAP or Solvency II? Moreover, several parties must be reported to, each of whom can adhere to a different market value basis.
In his response, Filippo stated that failing to change over to
Mark Schilstra then wondered to what extent the economic
Solvency II is a bigger problem since Solvency I turned out
and financial crisis has an impact on the discussion of the
to be inadequate for today’s complex problems. The
valuation principles for Solvency II. Now that cash is ‘king’,
implementation problems are mainly an issue in Germany.
cash flows are the focus, but that could change in future.
The Netherlands, on the other hand, has been ‘best in
Filippo then noted that market value basis and cash flow are
class’. Nonetheless, as had already emerged from DNB’s
not the only performance indicators. Analysts will also look
KAS Selections • August 2012
21
at things like return on equity when valuing companies. That
Filippo agreed with Krom that the ‘real story’ often could not
is precisely why it is important for insurers to clearly explain
or not easily be found in the financial statements. The many
to all stakeholders what the concept economic value entails
requirements stipulated by regulators do not make it any
and means.
easier to explain in simple language what is going on. Two types of financial statements are therefore more likely to
Statement 3 The use of the Ultimate Forward Rate
cause confusion rather than clarity.
(UFR) to value commitments is an accountancy trick that will only work out negatively for insurers (and pension
Statement 5: Objectives for performance, reporting
funds) on balance.
and risks will be based on market value.
Mark Schilstra was surprised at the fact that it will be
In Filippo’s opinion, this is undesirable for the insurers’
possible in future to value the left and right side of the
environment. After all, analysts mainly look at the profit and
balance sheet against different curves. If the right side may
outlook and do not find an ‘implausible’ story desirable. In
be valued at a UFR of 4.2%, as is the case for pension
that respect, there is still a long way to go.
funds, the future immediately looks a bit brighter. Filippo then determined that insurers are free to use the same or
Statement 6: Despite the choices that we can still
different curves for the left and right side when valuing their
make, it is still the case that there is 1 SCR.
assets and commitments. He compared the search for the right extrapolation technique with the search for the Holy Grail. Filippo did feel it was wise to make the investment decisions dependent on the UFR. Every insurer must itself make a considered decision, for example with regard to the Last Liquid Point and calculating the present value of cash flows after 20 years. After all, valuation on the basis of UFR could also turn out negatively if the UFR were to increase to 6 per cent, for example. A question came from the audience as to whether allowing different curves perhaps introduced the danger that the balance sheet could be presented more positively than it actually is. Filippo said that Pillar 3 of Solvency II should in fact prevent that. Without transparency regarding the principles used and a good explanation of the decisions made, every insurer would ‘automatically’ be punished by its stakeholders. Filippo said that ultimately a ‘good practice’ would arise that would be accepted throughout Europe. Statement 4: Two types of financial statements provide
the required transparency to the market (stakeholders).
Krom thought it unlikely that everyone would be making the same choices in future. There therefore cannot be a case of a single SCR. In that context he asked that the regulator ‘respects’ the enterprise, the risks it runs and the choices it makes. Filippo stated that a single, identical SCR is only possible if the regulator itself calculates this instead of the insurer. When the insurer makes the calculation itself, it will have to explain clearly every time why certain choices have been made, for example, concerning the allocation of risk. He therefore argued that there should not be too much focus on the SCR. There was then a comment from the audience that the number of open variables in the SCR is limited. The day’s chairman Sikko van Katwijk concluded the afternoon with a breaf summary and thanked the speakers and panel for their contribution
Krom rejected this statement, referring to the fact that
to this interesting
insurers have different stakeholders to whom account must
congres.
be given. Mainly insured parties and interest groups pay attention to conduct. Two sets of financial statements will only lead to more questions as well as to unnecessarily increase costs.
22
KAS Selections • August 2012
Developments in the European financial landscape MiFID 2, Interoperability, EMIR, Basel III, Target2-
financial crisis made the European Commission (EC) revise
Securities and CSD legislation are just a few of the new
certain MiFID principles. MiFID 2 aims to update and build
rules and regulations and market developments that will
on the reforms introduced by the 2007 directive.
influence financial markets in the near future. This article gives a summary of revised and new European
The EC published its proposal for MiFID 2 in October 2011.
rules and regulations and infrastructural developments
This proposal primarily focuses on:
that should bring more harmonisation, safety,
• the introduction of Organised Trading Facilities (OTF) as a
transparency and efficiency to the fragmented European
new type of regulated trading venue. An OTF is a facility
securities market.
or system designed to bring together buying and selling interests or orders related to financial instruments e.g.
The picture below gives an impression of what levels of
broker crossing systems (internal matching systems that
the financial market chain are impacted by MiFID 2,
execute client orders against each other). Currently
Interoperability, EMIR, Basel III, Target2-Securities and CSD
Exchanges and Multilateral Trading Facilities (MTF) are
legislation.
recognised as regulated trading venues. This provision will bring more trading activities into a regulated
MiFID 2 MiFID was introduced in November 2007 with the objective
environment; • more competition among central counterparties (CCPs).
of enhancing the integration, transparency and competitive
The legislation prescribes that the trade feed should be
ness of the European financial market. It brought lower
available to more CCPs. This could lead to more
trading costs per execution, reduced bid-ask spreads,
interoperable links between CCPs;
facilitated faster trading and abolished the concentration rule for national exchanges. Technical developments and the
• extension of the (MiFID 1) transparency requirements to other asset classes;
KAS Selections • August 2012
23
offering interoperability is still limited. Currently, particularly Multilateral Trading Facilities offer their trade feed to different CCPs, and a selected number of European incumbent exchanges have linked to more than one CCP. Incumbent exchanges in particular have restraints to offer interoperability and are awaiting the introduction of EMIR. EMIR The European Market Infrastructure Regulation (EMIR) has been developed by the EC to increase stability within OTC derivative markets and to protect the financial system against the effects of a big default. The Regulation introduces provisions to improve • tighter control over commodities markets;
transparency and reduce the risks associated with the OTC
• new safeguards for algorithmic and high-frequency
derivatives market. This regulation primarily focuses on:
trading by enhanced investor protection via a more rigorous business conduct regime; • harmonisation of existing national rules that determine how firms from third countries access the EU market.
• a reporting obligation for OTC derivatives contracts (centrally cleared as well as bilaterally settled OTC derivatives contracts); • a clearing obligation for eligible OTC derivatives; • establishment of common rules for CCP and for trade repositories (TRs);
Status The legislative proposal has been submitted to the European Parliament and the European Council. The implementation is not expected until at least 2015.
• measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; • rules on the establishment of interoperability between CCPs.
CCP Interoperability CCP Interoperability is not a rule or regulation; it is a
Status
development introduced by the European infrastructure.
The text of EMIR was approved by both the European
Trading venues offer their trade feed to different CCPs. CCPs
Parliament and the Council of the European Union (EU).
that have access to multiple trading venues across Europe
The European Securities and Markets Authority (ESMA) is
need to become interoperable with competing CCPs. CCP
expected to issue the technical standards required by EMIR
interoperability is currently only available for the cash market.
in September 2012.
With CCP interoperability clearing members will have the
The introduction of the regulation is planned for the
ability to choose their CCPs and gain the benefit of
beginning of 2013, which is in line with the commitments
concentrating their clearing business.
made by G-20 leaders that OTC derivates transactions should be cleared through CCPs and reported to trade repositories by the end of 2012.
Status CCP interoperability is available for a growing number of trading venues. However, the number of trading venues
24
KAS Selections • August 2012
Basel III
CSD Legislation
Basel III was developed by the Basel Committee on Banking
The CSD legislation is an initiative by the EC to bring more
Supervision, which develops guidelines and supervisory
safety and efficiency to securities settlement in Europe. The
standards for the banking sector. In the last couple of years,
legislation will introduce common standards for Central
it has become clear that banks were exposed to risks that
Securities Depositories (CSDs) and will lead to a single
were not recognised by Basel II and that the rules set in
market for settlement in the EU.
Basel II were not sufficient. Basel III imposes additional requirements in comparison with the earlier accords and
The proposal contains the following elements:
sets rules to prevent the financial market from systemic risk.
• definition of CSD services. Three core CSD functions are
The proposal contains the following elements:
defined: i) notary function, ii) central safekeeping function,
• financial institutions should maintain higher capital to
iii) settlement function;
cover the risk to which these parties are exposed by their trading activities; • financial institutions should improve the quality of their capital; • financial institutions should comply with new capital requirements to cover the risk to which these institutions
• the settlement period will be harmonised and set at a maximum of two days after the trading day (T+2); • penalties for market participants that fail to deliver their securities on the agreed settlement date, and the introduction of a buy-in procedure; • issuers and investors will be required to keep an
are exposed when the solvency of their counterparties
electronic record for virtually all securities and to record
decreases. Basel III allows lower capital requirements
them in CSDs if they are traded on stock exchanges or
when OTC derivative contracts are cleared via a CCP;
other regulated markets;
• the Basel Committee imposes a limit on the leverage ratios of financial institutions; • systemically Important Financial Institutions (SIFIs) are considered ‘too big to fail’ and must therefore have higher loss absorbency capacity to reflect the greater risk that they pose to the financial system; • the Basel committee proposes building countercyclical
• CSDs will have to be authorised and supervised by their national competent authorities, and have to comply with organisational, prudential and conduct of business requirements; • authorised CSDs will be granted a ‘passport’ to provide their services in other EU member states; • CSDs in the EU will have access to other CSDs or
buffers. During economic growth, it requires banks to
market infrastructure, such as trading venues or central
build an additional buffer and during a declining
counterparties.
economic climate it allows banks to break into the additional buffer; • rules are set to cover the exposure that banks have to
In the short term, the proposed legislation is likely to create more competition between CSDs, with expected benefits for
central counterparties (CCPs). A 2% risk weight should
the quality and price of cross-border services. In the medium
be attached to any trade cleared through a CCP.
to long term, the CSD market could become more
Additionally, the committee proposes banks should
consolidated and less fragmented.
capitalise default fund contributions to CCPs. Status Status
According to the EC’s planning, the regulation will generally
Basel III will have a phased implementation starting in 2013
come into force in early 2013. However, provisions relating
and concluding in 2019.
KAS Selections • August 2012
25
to the harmonised T+2 settlement period will not take effect
additional CSDs that will join the T2S project.
until 1 January 2015.
The go-live date for T2S has been pushed back several times and is currently scheduled for 2015.
Target2-Securities Target2-Securities (T2S) is an initiative of the Eurosystem to
Conclusion
develop a single settlement platform in Europe for domestic
The European financial landscape will certainly be subject to
and cross-border settlement of securities. It will provide
significant transformation in the years to come. The impact
harmonised, real-time DVP settlement in central bank
of all these measures and initiatives on your business model
money. T2S will be introduced for settlement in euros and, in
depends on your role in the financial market. As a dedicated
a later stage, for other currencies.
specialist in securities services, KAS BANK follows all
T2S will remove barriers across countries and eliminate
developments very closely and will keep you informed
differences between domestic and cross-border settlement.
accordingly.
It is expected to reduce the cost of settlement and reduce complexity by harmonising the settlement process. Status In May 2012, the first group of nine European CSDs signed the T2S Framework Agreement with the European Central Bank (ECB). In July 2012 the ECB published a list of fifteen
26
KAS Selections • August 2012
Words from Wiesbaden The deciding factor
studies, many companies lag behind in preparing for the
Increasing reporting requirements are already causing
changes post Solvency II especially with respect to
insurance companies headaches. A consolidated report
reporting. While they are focusing on Pillar I (Capital
displaying fund assets and direct holdings could help.
Requirements) and Pillar II (Risk Management), Pillar III (Reporting) is not yet on the priority list. As of today, 84 per
Insurers are facing more and more challenges. Today they
cent of insurers companies have still not implemented the
need to hold their ground in an environment where there is
regulatory reporting, let alone upgraded their systems to
increasing competition and cost pressure and ever-changing
adapt to the changes. Consequently, only 16 per cent of
legal and regulatory frameworks. Increasing demands of
companies can produce the required EU-controlled quarterly
Solvency II on reporting and risk management coupled with
and annual reports (Source: BearingPoint).
the need for required IT upgrades are just a few examples. At the same time, transparency and up-to-date information
They need to act now!
on their investments is essential. This becomes very tricky when funds and direct holdings are administered by different providers. The deciding factor for smaller and mid-sized insurance companies in this highly-competitive environment might be the selection of the right administrator. An administrator who offers consolidated reporting and sophisticated IT solutions. Whilst the smaller and mid-sized insurers often have their funds administered externally by Master-KAGs, their direct holdings remain in-house. This results in differing quality and the challenge that regulatory requirements cannot easily be met. The burden of consolidating data from different sources is left in their own hands and is a time-consuming and costly task. Whilst the majority of large insurers are able to deal with these requirements internally, the smaller and mid-sized companies struggle. They just cannot justify the continuous investment in tailor-made IT solutions to fulfil those reporting
Funds and Direct Holdings under the same
and ever-increasing regulatory requirements.
roof With volatile markets and increasingly complex regulatory
The sourcing of market data can also cause problems, as
requirements on insurances in mind, Master-KAGs and
they very rarely own the costly licences from external
Depotbanks are facing the challenge of offering new,
providers to obtain all the necessary market information.
extended services to their clients. Within the KAS BANK
At the same time, the dynamic legal framework for insurance
Group, we have KAS Investment Servicing GmbH as
companies is adding further pressure to adapt fast to current
Master-KAG and KAS BANK N.V. - German Branch as
changes and anticipate future requirements. According to
Depotbank specialising in the administration and
KAS Selections • August 2012
27
safekeeping of mutual/special funds and direct holdings. Full administration and accounting services, including the valuation of all assets, are bundled with comprehensive
Direct holdings & Fund administration
standardised or tailor-made reporting.
NAV calculation
Virtually any type of assets can be booked on KAS BANK’s platform. The maintenance and creation of accounting records according to HGB and IFRS are all reflected utilising
Direct holding accounting
one of the leading systems, SimCorp Dimension. From SimCorp Dimension, entries can be efficiently exported
Reporting/Legal Reporting
through data interfaces into clients’ accounts or in-house systems. Extensive attention to detail and a uniform database with clean data feeds are key in the process. This
Ex-post limit checks
is the basis for the effortless production of comprehensive reports covering all regulatory needs of German insurance
Fund accounting
companies.
Annual report
The KAS BANK Group not only offers its clients Master-KAG services but also independent Depotbank services. All assets administered by KAS BANK Group have the same
Tax
data set at their disposal, so that IFRS reports can be produced easily and efficiently across different asset classes,
System administration
for example. Also external data can be integrated, which is important for externally managed fund mandates. Through KAG interfaces, this data can automatically flow into
Services KAS BANK Group
KAS BANK’s system sets. Holdings of external KAGs, transaction and pricing data for those fund assets are
necessary reporting to the authorities, or all challenges
imported into SimCorp Dimension on a daily basis. Through
around Solvency II, both prime examples where clients can
this process, the holdings of the insurance company and the
benefit from KAS BANK’s professional solutions.
KAG are checked and compared daily. The KAG interface also gives a glimpse into the individual positions and
All services for our insurance clients are offered on a
provides efficient consolidation of internally/externally
modular and/or tailor-made basis. Our clients enjoy access
administrated funds and direct holdings as specified by
to a wide range of products and services where they can
IFRS.
“pick and choose” the solutions that best fit their specific needs.
Pro-active support is key when regulatory requirements are imposed on our clients. Examples are changing accounting rules for the valuation of different assets types, with the
28
KAS Selections • August 2012
FATCA: register and report Europe and the rest of the world face a mammoth task
expected to conclude an agreement on this with the IRS
with regard to the US Foreign Account Tax Compliance
based on the FATCA regulations.
Act, better known as FATCA. The United States hopes this legislation will put an end to ‘offshore accounting’: the
Most of the entities that provide a financial service fall under
evasion of (withholding) tax by keeping financial balances
FATCA. Consequently, nearly all of KAS BANK’s clients will
in tax havens. FATCA requires non-US institutions to
also have to comply with FATCA. However, there are
identify and report ‘US persons’ to the IRS (US tax
distinctions according to the type of FFI and the
authority), which is a hugely time-consuming activity.
corresponding requirements. The IRS distinguishes Deemed Compliant FFIs, Non-Participating FFIs and Exempted
A recent survey by British organisation Tax Justice revealed 1
Organisations, among others.
that (the equivalent of) some 17,000 billion euros are held in tax havens worldwide (primarily in developing countries).
A Deemed Compliant FFI is an FFI that has applied to the
This represents approximately 165 billion euros in lost tax
IRS for ‘deemed compliant status’. The FFI is then assigned
revenue for governments. Although this publication was not
an identification number. The IRS currently qualifies certain
behind the introduction of FATCA, it does demonstrate why
local banks, local members of already participating FFI
the United States is taking steps to find out where deposits
groups, certain investment vehicles and certain foreign
are being held in order to ensure these are reported. The US
pension schemes as ‘deemed compliant’.
Congress is convinced that many US persons are holding 2
undisclosed funds in foreign accounts. It is estimated that
Foreign pension schemes
the US treasury is consequently missing out on many billions
In principle, foreign pension schemes are designated as
of dollars each year.
‘Deemed Compliant FFIs’ as they are not considered to be a high-risk group for tax evasion. However, the US Treasury
What does this mean for financial institutions?
Department and the IRS are still studying the many different
In short, FATCA means that all non-US financial institutions,
types of pension scheme that are presumed to pose a low
wherever they are in the world, must sign an agreement with
risk of tax evasion. Further guidelines on pension schemes
the IRS declaring that they will comply with the identification,
that are eligible for the ‘deemed compliant’ status should
reporting and withholding requirements contained in FATCA.
provide a definite answer on this.
This can ensure that a clear distinction is made between a ‘US person’ and a non-US person.
In order to be registered as an FFI on time, it is important to conclude an agreement with the IRS between 1 January
With effect from 1 July 2013, most Foreign Financial
2013 and 30 June 2013. Among other things, the
Institutions (FFIs) worldwide will have to pass on their
agreement makes it mandatory to provide information on the
information about ‘US persons’ to the IRS. The IRS hopes
identity and (worldwide) assets of US persons. FFIs that do
this will provide insight into all deposits held by US persons
not conclude an agreement with the IRS will face a
in order to prevent tax evasion/tax fraud. The FFIs are
withholding tax on income from the United States (US-
1 The survey used data from the IMF, the World Bank, the United Nations and a number of central banks. 2 See the glossary.
KAS Selections • August 2012
29
1 0 . 1 1.8 2.5 3.2 3.9 4. 5. 6 6 7
Reports on US persons and recalcitrant account holders
may be made to the local tax authorities instead of directly to the IRS. Glossary A US person is: • A citizen or resident of the United States; • A domestic partnership; • A domestic corporation; • Any estate other than a foreign estate; source income) and, at a later stage, on so-called pass-
• Any trust if:
through payments.
1. a court within the United States is able to exercise primary supervision over the administration of the trust; and
In phases starting from 1 July 2013 the following obligations
will apply:
2. one or more United States persons have the
authority to control all substantial decisions of the
• the identification of US persons on the basis of the
trust;
identification rules stipulated by FATCA • the reporting on US persons to the IRS
• Any other person that is not a foreign person.
• where necessary, the charging of 30% withholding tax on payments to ‘recalcitrant account holders’3 and
Links
non-participating FFIs.
www.nvb.nl www.irs.gov
Important developments In a joint statement with the IRS, Germany, the UK, France, Spain and Italy have expressed the intention of becoming FATCA-compliant as countries. The Netherlands has also indicated that it would like to sign the joint statement. It is not yet clear what consequences this will have for the details of the FATCA project. A FATCA-compliant country has various advantages as compared to the individual agreement that financial institutions must enter into with the IRS. For example, a financial institution registered in a FATCA-compliant country does not need to sign an individual agreement with the IRS.
3 Account holders who refuse further cooperation for the purposes of identification in accordance with FATCA.
30
KAS Selections • August 2012
1.7 4 4 . . 1 2 3 3 . . 1 2 2 . 2 1 . 1 2 1 . . 3 1 1 . 0 2 . 3 0 . 0 2 . 2 9 8 . . 1 8 3 . 2 7 . 7 3 . 2 6 . 6 3 . 5 . 2 5 4 . 5 3 4 . 4 4 . 3 3 . 3 4 . 2 . 2 5 . 23 1 4 . 1 5 . 4 0 . 0 5 . 9 . 9 5 . 94 4 8 . 8 5 . 4 7 . 7 5 . 6 . 4 6 6 . 6 5 . 5 . 5 6 . 5 4 . 4 6 . 3 . 5 3 7 . 3 . 6 2 . 2 7 . 1 6 . 1 7 . . 6 0 . 8 0 7 9 . 6. 9 . 7 6 8 . 8 7 . 6 7 8 . 7 7 . 6 . 6 6 8 . 7 5 . 5 8 . 7 4 9 . 8 3 . 7.4 3 9 . 8 2 . 2 9 . 1 8 . 9 8.1 0 . 9 9 . 9 . 9 8 8 . 8 9 . 8 7 . 9 6 . 9 9.5 From feedback 6 . 1 to service improvement 1.5
KAS BANK started the Client Service Review two years
The contact with KAS BANK’s employees has generally
ago. In this Review we ask all our clients for their opinion
been given a score of very good. A general point for
of the services they receive from KAS BANK. We would
improvement is to give more attention to matters such as
also like to hear their experiences of the service and
lead time and feedback on progress of questions.
support provided by our employees. This gives us
ongoing insight into the quality of our service provision
The services also score better than good, on average. One
and the points where improvement is possible. After all,
exception on the lower side is Invoicing - which still scores
the aim of the Service Review is to improve the service for
between satisfactory and good, though - and an exception
every one of our clients.
on the higher side is the Risk Monitor report - rated on average to be extremely good.
The invitations for the Client Service Review are sent
throughout the year. Every Review is ‘tailored’ to the
What happens with the points for
services that the client receives from KAS BANK and the
improvement?
employees with whom the client has contact. The account
In order to improve our invoicing, for instance, we have set
manager will discuss the outcomes of the Review personally
up a multidisciplinary working group. This has set itself the
if desired.
goal of developing an electronic invoice that measures up to the best on the market in terms of presentation and
Results
accessibility. The starting point is that the invoice must show
Half way through the year, half of our clients have filled in
at a glance how much is charged for each service and what
and returned the Service Review. The interim results show
rate applies. We expect to be able to show the results of this
that, in general, client satisfaction has risen from 7.0 in 2010
in Q1 2013.
to 7.4 in 2011 and to 7.6 halfway through 2012 (on a scale of 1 to 10). 8.0 7.8 7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0 2010
2011
2012
KAS Selections • August 2012
31
NETHERLANDS
NETHERLANDS
UNITED KINGDOM
KAS BANK AMSTERDAM P.O. Box 24001 1000 DB Amsterdam The Netherlands Spuistraat 172 1012 VT Amsterdam The Netherlands T: +31 20 557 59 11
GERMANY
KAS BANK LONDON 5th Floor 10 Old Broad Street London EC2N 1AA United Kingdom T: +44 20 7153 36 00
KAS BANK WIESBADEN Biebricher Allee 2 65187 Wiesbaden Germany T: +49 611 1865 3800
www.kasbank.com