This newsletter aims to brief a wider community, particularly professionals in the early stage of their careers in the capital markets, on some of the issues where ICMA is engaged on behalf of its members. E-mail us at futureleaders@icmagroup.org to comment.


What’s on members’ minds?

Fragmentation of the Capital Markets - One of the things ICMA and its members worry about are the effects of fragmentation in the capital markets, including those arising from Brexit and as a consequence of revised financial regulations. Research has shown that integrated markets are beneficial for sustained economic growth and financial stability.

Transition away from LIBOR - LIBOR and other IBORs are embedded across the global financial system, referenced by financial contracts (derivatives) and cash products (bonds and loans) worth $trillions. The global transition to alternative near risk-free rates, ahead of the end of 2021, is well underway but challenges remain.

Mandatory buy-ins - A technical part of the EU Central Securities Depository Regulation, relating to settlement, will come into force in September 2020. Buy-ins when a trade fails to settle will become mandatory, affecting market liquidity.

New reporting requirements for repo - Under provisions in the EU Securities Financing Transactions Regulation, coming into effect in 2020, repo transactions will need to be reported to a trade repository.  

Read about these in our latest Quarterly Report or ask us for more information.


ICMA Podcast

We started the ICMA podcast back in March - these are the most popular episodes (also available on iTunes and Spotify, search ICMA Podcast):

Introduction to the Securities Financing Transactions Regulation - SFTR
The Prospectus Regulation explained
Green bonds moving the dial on sustainable finance
What is Bond Connect?
Being LGBT+ in the workplace


Negative yields… and their effects on pension funds

Today, we are living in interesting times. A substantial part of global government bond markets are currently experiencing negative yields. The consensus view is a weakening outlook for global growth with a considerable risk of economic recession in the next few years. Many foresee a continuation of super loose monetary policies from major central banks such as the US Fed, the ECB and the Bank of Japan. These views imply the current situation of very low or even negative bond yields might persist for many more years.
A further complication is found in the low but positive inflation outlook. As a result, developed world real interest rates (being nominal rates corrected for inflation) are seen to remain firmly negative for the foreseeable future. For savers such an interest rate outlook does not bode very well. Negative rates means saving for future income has become more expensive. And therefore more money has to be put aside if a certain future income is desired. Alternatively, more investment risk has to be taken. For pension funds, next to the low rate environment, the increased life expectancy of their pensioners has meant further financial headwinds.

What are the effects of these trends for pension funds and their sponsors? Historically, the typical pension fund participant enjoyed a ‘defined benefit’ (DB). In this system pensioners were told they would be entitled to receive an ‘inflation proof’ pension starting at the age of 65 years. The pension fund and sponsor would be taking the investment and longevity risk. Given the current low investment returns and increased longevity these systems have simply become unaffordable. The solvency of existing (DB based) pension funds has deteriorated substantially because of the fall of long term interest rates in combination with insufficient matching between the duration of assets and liabilities. Many pension funds are now underfunded and have insufficient assets to cover all future liabilities. Sooner or later adjustment will be needed. What are the options?

Pension fund adjustments In response to the described trends, some pension funds raised the annual premiums charged to their sponsor in order to preserve sufficient solvency of the pension fund. Alternatively some pension funds have started to stop compensating inflation for their pensioners. This implies a gradual erosion of purchasing power. More extreme, a minority of pension funds have decreased nominal pensions in order to restore the balance between asset and liabilities. A final measure is to increase the age at which pensioners are entitled to start receiving their pension. All of these actions effectively imply more uncertainty for individual employees about their future pensions as the investment and longevity risk is partially transferred from the sponsor to the individual.

Closure of DB system / rise of DC system In reaction to the problematic situation several corporate sponsors have moved to close their existing DB systems. Instead the sponsor contributes by an annual premium, a ‘defined contribution’ (DC) into a new scheme, in which employees are now left with the investment and longevity risk themselves. Again resulting in more uncertainty about future pensions, although DC is obviously completely transparent about the risk transfer to the individual. A downside of the DC system is that there is no mutualisation benefit on life expectancy, thus individual savings must be significantly higher to manage the ‘risk’ of living much longer than, on average, expected.

Intergenerational conflicts Younger employees contributing to underfunded DB pension schemes are facing the risk that the pension fund will pay out overly generous pensions to elder generations and thus have insufficient assets by the time the later generations retire themselves. Retired employees on the other hand are worrying their pensions will be cut in the near future. These retired employees have typically little opportunity nor desire to go back into the labour market. Each generation is left with uncertainty and resulting stress. As pension contracts and governance might not be clear on how to solve the intergenerational dilemma, decision makers face tough choices of how to divide the pain.

Agent problem Sponsors, employees trade unions, boards and regulators seem to be collectively wondering what went wrong and how to cope with the resulting imbalances. In many occasions the situation is best described as ‘important but not urgent’ and painful decisions to correct the imbalances are accordingly postponed. Perhaps over time, the situation of low interest rates might have ended, other stakeholders might have taken the lead on painful decisions or the decision maker himself might have delegated or handed over accountability. 

Solutions It is clear the current DB systems are not sustainable and at the same time there is no easy ways out. For individuals, the best way to deal with the situation seems to take control of their own pension destiny. Saving sufficient labour income for retirement and maintaining work-life long access to the labour market are obviously key. Buying insurance on very-old age (say 85 years plus) from either commercial insurance companies and/or mutual pools is a further risk mitigating possibility. Ultimately however, accepting some level uncertainty about retirement age and retirement benefits and the trade-of between age and benefit will be unavoidable. Many individuals do not seem aware of the situation though.

Governments can support by raising awareness via education on retirement, and by relaxing the rules for mandatory (DB) pension scheme participation. Furthermore, providing a minimum basic pension income and some fiscal incentives for additional individual pension savings might help. Pension funds will change their operating models and improve their investment portfolios to better match assets and liabilities from various angles such as interest rate and (il)liquidity. Bank dis-intermediation is another opportunity for pension funds. The broader private sector (insurance companies, banks, mutual fund providers, private wealth managers, fin tech companies, …) will want to try and create new business models to cater for the new needs of current and future pensioners. As such the current set of challenges will lead to new opportunities for those whom are paying attention. We are living in interesting times indeed.

Hans Stoter, Global Head of Core Investments, and Erik van Bergen, Head of Pensions AXA Investment Managers


Common Domain Model – what is it?

The CDM has been designed by ISDA as an industry solution to tackle the lack of standard conventions for how derivatives trade events and processes are represented. Developed in response to regulatory changes, high costs associated with current manual processes, and a demand for greater automation across the industry, the ISDA CDM establishes a common blueprint for events that occur throughout the derivatives lifecycle, paving the way for greater automation.

Essentially the CDM creates common building blocks in machine readable format that can be used by all businesses and processes within a firm, or across the entire industry. The benefit is to recreate and represent any individual securities transaction or lifecycle event in an entirely consistent and replicable way, deriving exactly the same cashflow outputs. This immediately creates the potential for interoperability not only between firms’ various internal systems (quoting, transaction execution, reconciliations, settlement, risk management, regulatory reporting, data analysis), but also between different firms and market infrastructures (trading venues, OMS/EMS, CSDs, CCPs, Trade Repositories).

ICMA has partnered with ISDA in developing the CDM for bond and repo markets to give a common foundation for developing new technologies such as cloud services, smart contracts and distributed ledger.


Have you tried our mentoring programme yet?

The mentee - The mentoring programme lasted from July to December. There were never hard deadlines set for the programme to end, it allows for a lot of flexibility.

When I first entered the mentoring programme, I knew the direction that I wanted to head in but needed guidance on how to get there. I already had an offer to join a team, and I wanted to make sure it was the right one and that there would be room for progression. I got a permanent and better job on the back of the programme thanks to the guidance of my mentor. It was about driving forward intentionally and making the most of the experience.

My mentoring experience provided the reassurance I needed to know I was on the right path. It also helped me see that I needed to look at things more holistically and talk for instance to the senior directors in the bank. Some steps I would have not taken on my own. 
An SSA banker

The mentor - The ICMA mentoring system is a great way to connect people looking for some career guidance with experienced professionals who might be able to offer some useful advice. I have connected with around six people already and completed a number of mentoring tasks, seemingly to their satisfaction. It’s not all been about careers per se, but sometimes it might be dealing with office situations, or navigating the politics.

It has been a great learning experience for me also, an opportunity to speak with younger people across different parts of the industry, hearing their thoughts and learning of the challenges they face. Based on my observations so far, this is an effective and confidential way of connecting people with advice to people who need some guidance but might not know where to turn.

During the many decades in the business, one thing that has always struck me is the lack of practical career and work advice available. HR departments are typically ill-equipped to deal with the complex and highly bespoke nature of modern City or financial services career paths. Helpful advice from peers or those above is erratic and inconsistent for much of the time. The demands of a complex career, office politics, the need to impress and many other factors often make seeking advice in-house risky and hard. There has long been a need to identify and make available a pool of independent, relevantly experienced people who can provide dispassionate analysis and advice on a confidential basis.

The ICMA Mentoring Website offers access to just such a pool. It has a large number of mentors signed up, each has a profile to help in the selection. I would urge other potential mentors to sign up for what is an incredible experience.

There are many points in my own career when it would have been immensely helpful to discuss a looming issue with someone who might have helped guide my thoughts. I can only admit now that my career was based on a lot of trial and error. Just being able to talk through a scenario with an experienced professional can be immensely helpful in clarifying the issues and narrowing the best choices.
Tim Skeet, Bank of China

Sign up for ICMA's Mentoring Platform


Future Leaders Events

Join us for a Future Leaders networking evening in London on 21 November to hear Daniel Klier, Group Head of Strategy and Global Head of Sustainable Finance, HSBC; Richard Cohen, General Counsel and Head of Strategy, Nivaura; and Chetan Tolia, Head of Digital Business Transformation, Strategic Development Lab, FX, Rates & Credit, UBS Investment Bank discussing their own career experiences and how to stay relevant as investment banking changes. There will be a chance to meet ICMA board members and other senior industry figures at the drinks afterwards. Find out more

Save the date
13 December Inaugural ICMA Future Leaders event in Hong Kong, “How to thrive in your capital market career”


Who are the ICMA Future Leaders?

ICMA Future Leaders are the ‘next generation’ of market professionals, membership is open to all ICMA members. You can meet colleagues from the fixed-income community at Future Leaders’ events throughout the year in major financial centres around the world.

ICMA Future Leaders is led by a steering committee of 20 individuals in the early stages of their career from across  ICMA’s regions. We’d like to welcome two new committee members: Waldemar Redinger, Commerzbank from the German region and Alberto Maria Villa, Unicredit CIB from the Italian region.

Contact: futureleaders@icmagroup.org to Get involved!


New course

With yields low, rates expected to stay low but then eventually rise, and many credit spreads at historically tight levels, construction of fixed income portfolios requires careful balancing of risks. ICMA Executive Education has launched a new course on Portfolio Construction that will help portfolio managers, investment consultants and client-facing asset and wealth managers develop a range of techniques used to construct fixed income portfolios. This one-day course has been developed and is taught by Lindsey Matthews, Head of Investment Risk and UK CRO at UBS Asset Management and previous Head of Risk at UBS Delta.

Register now for the course in London on 25 November.

View the full suite of ICMA courses.



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