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New EDHEC study calls into question the suitability of the calibration of private equity in the Solvency II standard formula
June 21, 2010--In the study, entitled “On the Suitability of the Calibration of Private Equity Risk in the Solvency II Standard Formula,” EDHEC calls into question the method and the data used by the European regulator to measure the risk of private equity investments, in particular the correlation coefficient of performance of private equity and that of listed equities.
The drawing-up of Solvency II prudential rules has become a matter of major concern for the private equity sector since the current measure for private equity risk, used by the European regulator, is likely to dissuade insurers from investing in this asset class. As an example, in the French market, in 2007, the total investments in private equity represented €22bn in the balance sheet of insurance companies (FFSA 2008). They finance 21% of the funds raised (AFIC); thus becoming the leading national investors in unlisted stocks.
In addition to casting doubt over the use of VaR (Value at Risk), which requires the implementation of correlation matrices that have been very controversial to date, the EDHEC Financial Analysis and Accounting Research Centre study questions the representativeness of the LPX50 index selected by the regulator to measure the capital required for private equity investment risk. This index, which is defined on the basis of the stock prices of the fifty largest listed private equity firms in the world (i) is not representative of investments of European insurance companies, either on a geographical level or as a representation of the weight of investments in venture and buy-out, (ii) does not reflect the non-liquid contractual nature of investments in private equity, and (iii) as a result of the underlying investments, the LPX50 poses an idiosyncratic risk that is added to the risk of investment in private equity.
To correct the identified drawbacks of the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) approach, EDHEC’s proposal involves replacing the LPX50 index with a benchmark that is more representative of insurance portfolios invested in private equity. The analysis is based on the performance of private equity funds for various investment classes and geographical zones, taken from the Thomson One database. In accordance with the practices of the private equity industry and academic approaches, the EDHEC Financial Analysis and Accounting Research Centre calculated the internal rates of return (IRR) of private equity funds by vintage year, and then measured the return of an equivalent investment in the MSCI indices, with the same portfolio structure as the private equity benchmark (vintage year, incoming and outgoing cash flows, geographic zone). This index is known as the Public Market Equivalent Plus (PME +).
The correlation between private equity and listed market performance is measured using four families of private equity investments (two geographical zones combined with two types of investment: buy-out and venture). In order to provide an optimal reflection of European insurance companies’ investments, these four families were then aggregated into a single portfolio. The results (both by family and for the aggregated portfolio) show that private equity performance is significantly less correlated to that of listed equity markets than assumed in the 0.75 correlation coefficient selected by the CEIOPS.
Finally, the study shows through simulations the impact of the level of the correlation coefficient (representing diversification in investments) not only on the capital requirement for equity risk but also on the marginal cost of the capital requirement as a consequence of asset reallocation between listed equities and private equity.
This study was sponsored by the Association Française des Investisseurs en Capital (AFIC).
GDP per inhabitant in the Member States varied between 41% and 268% of the EU27 average
June 21, 2010--Based on first preliminary estimates for 2009, Gross Domestic Product (GDP) per inhabitant expressed in Purchasing Power Standards2 (PPS) varied from 41% to 268% of the EU27 average across the Member States.
In Finland, France, Spain, Italy, Cyprus and Greece, GDP per inhabitant was within 10% of the EU27 average. Ireland, the Netherlands, Austria, Sweden, Denmark, the United Kingdom, Germany and Belgium were between 15% and 35% above the average, while the highest level of GDP per inhabitant in the EU27 was recorded in Luxembourg3.
average. Hungary, Estonia, Poland and Lithuania were between 30% and 50% lower, while Latvia, Romania and Bulgaria were between 50% and 60% below the EU27 average.
These figures for GDP per inhabitant, expressed in PPS, are published by Eurostat, the statistical Office of the European Union. They cover the 27 EU Member States, the three candidate countries, three EFTA Member States and four Western Balkan countries.
Banks granted another year over derivatives
june 18, 2010--Banks engaged in trading some of the complex derivatives that were at the heart of the financial crisis were on Friday given almost a year of extra time to adjust to new capital charges that are expected to make it more expensive to use them.
Banks have been waiting to see how much capital they will be required to hold on their balance sheets to guard against losses on their trading book since the Basel Committee on Banking Supervision, the standard-setter for banking regulation, came out with initial proposals last July
CESR publishes the 2009 Annual Report
June 18, 2010--As reflected by CESR’s 2009 Annual Report, the regulatory follow-up of the financial crisis has greatly dominated our agenda, in particular, evidenced by CESR’s work on financial reporting in times of crises, follow-up work on Lehman’s default and on short selling.
Elements of learning from the financial crisis have also greatly influenced other work streams in CESR’s Work Programme, such as the review of MiFID, and these work streams lead to work on a significant number of advisory statements addressed to the European Commission, covering all pillars of the EU financial regulatory framework in the field of securities. In addition, new fields of regulation are now at the core of our work, for example, the implementation of the new Regulation on Credit Rating Agencies.
EasyETF S&P 100 Becomes EasyETF S&P 500 As Leading US Market Index Becomes Available On NYSE Euronext (Paris)
June 18, 2010--EasyETF is launching an ETF on the S&P 500 listed on NYSE Euronext in Paris. EasyETF S&P 100 will change its underlying index and become EasyETF S&P 500. The tracker is capitalising on the recent opening of the S&P 500 licence to European ETF issuers and broadening its coverage of the North American equity market.
From now on, EasyETF S&P 500 will offer the opportunity to invest in the key index of the US equity market. As with all trackers in the EasyETF range, it combines simplicity and transparency in giving investors access to the best of the US market at the lowest cost.
EasyETF S&P 500 is available in EUR and USD on the NYSE Euronext (Paris), Deutsche Boërse (Frankfurt), and Borsa Italiana (Milan). It is eligible for personal equity plans and conforms to the European UCITS III directive.
The S&P 500 index comprises equities of the 500 largest US companies, covering nearly 75% of US equities.
“For this reason, it is an ideal gateway to the US market for European investors. The S&P 500 Index is regarded as THE benchmark for the US equity market, as proven by the number of funds using it as their benchmark in the world: more than USD 3.5 trillion AUM combined!” says Danièle Tohmé-Adet, Head of ETF and Indexed Funds Development.
“We are delighted by the recent opening of the S&P 500 licence to European ETF issuers, which gives investors the opportunity to participate in the evolution of US securities throughout a well-renowned index,” adds Scott Ebner, Senior Vice President, Global Exchange Traded Products at NYSE Euronext. “The offer of ETFs listed on the NYSE Euronext in Paris facilitates access to an ever more diversified range of securities, asset classes, and strategies.”
The market maker on EasyETF S&P 500 is BNP Paribas.
Technical details regarding the funds:
EasyETF S&P 500 EUR
Legal structure: Mutual fund under Luxembourg law (UCITS III)
ISIN code: FR 0010616300
Management company: BNP Paribas Asset Management
Currency: EUR
Dividend: none, accumulation
Replication: synthetic
Annual management fees: 0.20%
Stock market: Euronext Paris
Bloomberg code: SPTR 500 N
EasyETF S&P 500 USD
Legal structure: Mutual fund under Luxembourg law (UCITS III)
ISIN code: FR 0010218843
Management company: BNP Paribas Asset Management
Currency: EUR
Dividend: none, accumulation
Replication: synthetic
Annual management fees: 0.20%
Stock market: Euronext Paris
Bloomberg code: SPTR 500 N
Banking reforms are "not without consequences"
June 18, 2010--Failure to consider the impact of banking reforms on the wider economy could hold back global recovery according to an international meeting of bankers and regulators held in London today.
The Fifth City of London - Swiss Financial Round Table discussed key topics common to both countries' financial services sectors.
The topics and conclusions drawn were:
Financial stability:
Tackling restoration of global financial stability presents considerable challenges for regulators and is a key task for all stakeholders. The primary objectives should be to minimise the risk of a bank failing; minimise the immediate and ultimate cost to the taxpayer of a bank's failure; and minimise market disruption and further contagion caused by the failure of a bank. Additional capital should not be the automatic answer to gaps in regulation. Macro-prudential supervision, greater shareholder and board engagement, and greater in-house risk control are just as important. It is crucial that regulatory bodies use the right mix of tools and react in a measured way.
Capital and liquidity:
The banking industry is facing higher capital charges designed to discourage excessive risk-taking and new liquidity requirements to make banks less dependent on short-term funding. Politicians and the public want banks to lend more, but want to limit the returns to lenders, which makes it more difficult for banks to raise the capital that the authorities want. In addition, the higher costs of capital and liquidity for the industry will result in dearer borrowing, lower returns to depositors and a rationing of credit.
Speculators do not drive commodity prices: OECD study reinforces previous EDHEC-Risk research results
June 17, 2010--In a comprehensive research report entitled 'Speculation and Financial Fund Activity', the Organisation for Economic Co-operation and Development (OECD) has reinforced the conclusion of previous EDHEC-Risk position papers, notably "Oil Prices: the True Role of Speculation", November 2008, and "Has There Been Excessive Speculation in the US Oil Futures Markets?", November 2009, that there is no link between the increase in financial investment in commodities and the volatility of the prices of the physical commodities themselves.
At a time when numerous politicians are attempting to pin the blame on participants in the financial industry for all the current ills, this contribution is welcome. As an academic research centre, EDHEC-Risk Institute has long maintained that the questions of regulation should be based not on emotion or populism but on facts.
view the Speculation and Financial Fund Activity report-OECD
view the Oil Prices: the True Role of Speculation EDHEC report
view the Has There Been Excessive Speculation in the US Oil Futures Markets? EDHEC-Risk paper
Should regulators judge culture?
June 17, 2010--Unacceptable culture within firms was a major contributor to the financial crisis and so regulators should play a greater role in judging how culture drives firms’ behaviour and impacts on society as a whole, according to the chief executive of the Financial Services Authority (FSA).
In a speech at the Chartered Institute for Securities & Investment (CISI) conference in London entitled, ‘Do regulators have a role to play in judging culture and ethics?’, Hector Sants discussed his personal view that many of the causes of the financial crisis were deeply rooted in behavioural issues.
He commented that ‘even after all the supposed lessons learned exercises, we are still seeing some decisions by management in major firms that we would judge not to be prudent’ and, as a result, greater intervention is needed from regulators to ensure decisions made by firms deliver the outcomes society expects.
Hector Sants, said:
“Historically regulators have avoided judging culture and behaviour as it has been seen as too judgemental a role to play.
“However, given the issues we continue to see over time, I believe this one-dimensional approach has to be questioned. Every other aspect of the regulatory framework is under scrutiny and we should not shy away from debating the culture question.”
FSA Chairman welcomes Chancellor's plans for regulatory reform
June 16, 2010--The Chairman of the Financial Services Authority (FSA), Lord Turner, has welcomed the changes to financial regulation outlined by the Chancellor of the Exchequer in his Mansion House speech this evening, and Hector Sants’ agreement to remain as Chief Executive of the FSA, leading the transition and the creation of a new prudential authority.
Lord Turner said: "The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead.
"In particular I am delighted that Hector, who has done so much to transform the FSA during the past few years, has agreed to lead the transition to the new structure in 2012, and to become the first Chief Executive of the Prudential Authority and a Deputy Governor of the Bank of England."
"The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change. But it also demonstrated the need to bridge the gap between macro-prudential policy and the supervision of individual firms. The Chancellor's proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way.
"On retail customer protection, the FSA has recognised the need for a shift in our past approach, moving to the more interventionist approach which we set out in our recently published Retail Conduct Strategy. The new Consumer Protection and Markets Authority will have a strong focus on this challenge, while also maintaining strong focus on conduct issues in wholesale products.
"There are important issues still to be resolved – in particular the arrangements for our Enforcement activities and for those Markets activities which relate to exchanges, clearing infrastructure and prudential issues – and we look forward to working closely with the government in considering the relative merits of different possible arrangements for these. But the overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA's achievements over the last few years of major change."
CESR Publishes The Reponses To The Consultation On CESR's Advice In The Context Of The MiFID Review: Non-Equity Markets Transparency
June 17, 2010--CESR has published the reponses to the consultation on CESR's advice in the context of the MiFID Review: Non-equity markets transparency.
view responses
