‘The world needs financial risk specialists now more than ever’

When Ralph Rudd looked for a job after completing his PhD at UCT, there were many opportunities and possibilities, but he was finally drawn to Iceland and the position of Assistant Professor in Financial Engineering at Reykjavik University.

Ralph Rudd could probably not have travelled further north from South Africa for his new job at Reykjavik University in Iceland, just south of the Arctic Circle. The quantitative mathematician, born and raised at the tip of the African continent in South Africa, travelled to the island capital with his wife in 2021. Here, they had to get used to having only five hours of daylight in the middle of winter – and almost 24-hour sunlight in summer.

But this was only a small part of the adventure for Ralph. He was drawn to his new position in the relatively new field of financial engineering at a university that is rated among the top young universities in the world.

“These are such uncertain times globally, taking into account the COVID-19 pandemic, the climate crisis, the conflict in the Ukraine and its consequences for trade, economic stability and energy security across the globe,” says Ralph. “More than ever, the world needs financial risk specialists and accurate financial modelling and data analysis.”

He lectures on Reykjavik University’s MSc in Financial Engineering, an intensive and interdisciplinary programme combining financial expertise, engineering knowledge, mathematical and statistical tools and programming. The degree was designed in partnership with the Sloan School of Management and the Operations Research Centre at MIT.

Ralph, previously a senior lecturer at the African Institute of Financial Markets and Risk Management (AIFMRM) at UCT, has always enjoyed new challenges. In 2017, while doing his PhD in Quantitative Finance at UCT, he helped to pioneer a numerical method along with Professor Tom McWalter, and they presented their findings at a prestigious international conference in Barcelona, Spain.

He is still closely involved with AIFMRM, helping to supervise master’s dissertations and wanting to organise exchange programmes with students from Reykjavik University. He believes the institute is among the finest in the world. “The MPhil specialising in Mathematical Finance is rated in the top 100 programmes worldwide, as ranked by Eduniversal. It is an exceptional programme, and I say that as someone who has interacted with mathematics graduates from around the world.”

He says the employment offer rate of AIFMRM students is over 100%. “There is an extremely high demand for them, and most get more than one job offer.” He ascribes this to AIFMRM’s emphasis on practical, real-life interactions with financial institutions to help find innovative solutions and involving students with financial companies for maximum exposure to industry.

He recalls a story from his PhD studies when he and a colleague were invited to a leading financial services firm. The company presented them with a list of 20 to 30 issues they were struggling with. They asked Ralph and his colleague which areas they thought they could help. “We looked at each other and then told them that, basically, we could help them with every one of their problems.”

The institute’s commitment to its students is exceptional, says Ralph. He recalls how AIFMRM rallied to help students, especially during lockdown following the outbreak of COVID-19 in early 2020. Providing mobile data and assisting with physical relocation, as well as providing online counselling, were among many AIFMRM interventions to ensure students were able to cope with the rigorous demands of their academic programme along with the personal and emotional strain of studying online during a pandemic.

Ralph maintains close ties with Professor David Taylor and his former colleagues at AIFMRM, but he is fascinated by working in a field that is so new that there is no widely accepted definition of what it is yet. “Financial engineering includes financial mathematics and quantitative finance. But what it really is, is applied problem-solving. It is building models, doing simulations and considering all aspects of, say, building a nuclear power plant. Financial engineers from the Reykjavik University’s programme can walk out of university and be qualified engineers, or they can work on Wall Street.”

He is a passionate teacher and loves breaking down complex issues. Now that he has started to settle into his new professional role, he is also beginning to work on research ideas in collaboration with AIFMRM colleagues.

“For anyone wondering if a course like the MPhil in Mathematical Finance is for them, I want to say, once you have money, life is easier. With a master’s degree in finance, you will always be able to earn good money.” But there is an important social and psychological benefit to studying at AIFMRM. Ralph experienced it himself while working on his PhD, a time of his life during which he was often frustrated and felt isolated. Support from Professor Taylor and colleagues at AIFMRM helped him to keep going. “What I really see in AIFMRM graduates is the transformation. AIFMRM pushes them to do more than they thought they were capable of. They realise how robust and resilient they are, and for me, that is the primary contribution of this programme.”

Researchers develop innovative finance approach to help banks fight global warming

An adjunct professor from the University of Cape Town’s (UCT) African Institute of Financial Markets and Risk Management (AIFMRM) has collaborated with other academics on a novel and easily-implementable way for banks and financial institutions to step up their role in driving sustainable finance and combating climate change.

Earlier this year, University College of London (UCL) mathematician, Dr Andrea Macrina, was busy cooking a birthday dinner for his wife when the phone rang. It was one of his collaborators, asking if he had a few minutes for a quick conversation about their research. Two hours later, he was still on the phone, and his wife had taken over the cooking of her own birthday dinner.

“I was very apologetic,” recalls Dr Macrina, who is also an adjunct professor at the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT). “It didn’t feel right at all, and my heart was very heavy. I had spoken to my wife about this research project, and she knew how excited we all were.” In fact, he and co-authors Chris Kenyon and Mourad Berrahoui worked through the Christmas and New Year period, taking very few breaks over the festive season, to complete their research to be put in the public domain in early 2022.

Their paper called the Transparency Principle for Carbon Emissions Drives Sustainable Finance has already drawn much interest from the financial services industry. It was presented publicly to academics, peers, and figures in the financial sector at the AIFMRM-QuantsSA Research Seminar on 10 March 2022.

“This research is very exciting,” explains AIFMRM Director Professor David Taylor. “The alignment of financial market incentives and carbon emissions disincentives is key to limiting global warming. This research provides a new way of designing financial instruments according to the enabled carbon flows and is compatible with existing bank systems. So, it does not call for new systems or software to be introduced.”

In layman’s terms, the researchers developed a new way to structure financial products, like loans, to include information about the enabled carbon emissions. This means adding a number quantifying the enabled carbon impact that institutions can use to calculate financial risk associated with carbon flows. By asking for more carbon-related disclosures and entering them in the terms sheets, banks can use these to compare cash flows and carbon flows and apply them to evaluate financial loans provided to fund projects, for example.

By accounting for the enabled carbon emissions of projects like new coal-fired power stations, disincentives could arise to build such power plants, encouraging more cost-effective and environmentally friendly alternatives or new designs that offset the carbon emissions. “Accounting for carbon emissions allows the banks to determine the financial requirements to balance costs arising from the enabled carbon flows which will radically change project costs, decreasing the risk that assets become stranded (unusable),” says Dr Macrina. This will lead to projects being restructured to include negative emissions technologies and, in their paper, the researchers offer new suggestions for mixed financial-physical solutions to minimise costs.

“Sustainability and the focus on climate change are key issues for financial market participants,” says Professor Taylor. “WWF International, among many other global organisations, has emphasised the crucial need for financial organisations and systems to play their part in reducing carbon emissions. Innovative research like this suggests actual and implementable ways in which financial institutions can play a bigger and more active role in reducing carbon emissions.”

With energy and power generation crises hitting not only South Africa but also various countries worldwide due to oil price uncertainty following Russia’s war in Ukraine, the approaches banks and financial institutions take toward financing future power plants have become even more relevant than ever before.

Dr Macrina and his co-authors in the paper introduce a carbon equivalence principle, which can be used to quantify how green a project is. Dr Macrina says they prefer not to use the term “green” as it is too narrow to describe emission impact. “We find labelling something as ‘green’ can be very limiting and inadequate as ‘green’ projects can still have a big carbon impact that is not acknowledged.” He explains, “A building may qualify as being ‘green’ due to certain building practices and materials used, but once you take into account the power sources it uses, you see its carbon emissions actually may no longer make it ‘green’.”

By considering instead enabled carbon emissions, a more accurate representation is gained. The researchers call this the Carbon Equivalence Principle (CEP) and they believe it enables greater incentive alignment between sustainability and normal financial management.

Dr Macrina says this also paves the way to cutting down on greenwashing, where organisations and activities claim to be environmentally friendly but do not accurately account for the carbon impact of their projects, products, or practices. Environmental organisation Greenpeace defines greenwashing as: “A PR tactic used to make a company or product appear environmentally friendly without meaningfully reducing its environmental impact.”

As pressures increase on organisations to be more ESG (environmentally, socially, and corporate governance) compliant, there have been calls on the financial services industry to adapt systems to more accurately reflect what the carbon footprint of a project, like a coal-fired power plant, will be. “Our paper talks about the transparency principle because it allows financial systems to truly reflect the environmental impact,” says Dr Macrina.

“Finance is the means by which so much is enabled and achieved. From construction to manufacturing, production and even service delivery. These must be financed and if we can innovate financial systems and find new ways to structure financial instruments, we can make a more meaningful contribution to the role finance plays in incentivising environmentally friendly practices and projects and how physical and financial risk is managed.”

AIFMRM student wins prestigious competition

A student from the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town has won an elite FNB DataQuest competition – where data science was applied in a banking industry environment.

For Rachel Swallow, entering the FNB DataQuest competition was all about an opportunity to practise what she had just learnt in class the week before. She never thought she stood a chance at winning, which allowed her to have some fun with the challenge without feeling any pressure.

“I loved the competition,” says the 23-year-old, currently studying towards an MSc specialising in Data Science (Financial Markets stream). This interdisciplinary degree is offered in collaboration with the departments of Statistical Sciences, Computer Science and Information Systems, but is administered and convened by the Department of Statistical Sciences. “It was so interactive and brilliantly set up with breakout rooms and smaller groups as well as lecturers on hand for any question we might have.”

The competition was part of a four-day event held from 17 to 20 May 2021, combining masterclasses, lectures and the competition. Over 200 participants could select to take part in one of three challenges. These included Money Management, Collections and Ongoing Risk Management. Rachel says she chose the latter because it seemed the most interesting and she had just learnt about it. The task required her to identify the customers, using the dataset provided, who are less likely to default on loan repayments and find a way of ensuring the probability of default of the population is less than 10%. Participants had to come up with a solution and pitch it to a panel of judges.

“The Institute is very proud of Rachel’s achievement,” says AIFMRM’s Director, Professor David Taylor. “The FNB DataQuest event is an excellent space to push boundaries and find unique solutions. It is really useful to those interested in a career in data analytics and combines an engaging competition with wonderful learning and networking situations.”

Participants had four days of lectures as well as online meetings with other teammates and fellow students. Lectures included presentations by industry leaders on topics like the future of analytics, design thinking, data visualisation and analytics and the financial context. Coaching sessions, as well as one-on-one meetings with experts and team members, were encouraged, allowing participants to “meet” others in industry and other universities.

“It was really cool,” says Rachel. “Even though it was a virtual event, everything went so well and the talks were fascinating. In class, we don’t always get to see how theory is applied and used. The sessions were very interactive, and we got to engage with others on a personal level.”

The competition changed Rachel’s prospects too, and she has subsequently signed on for the FirstRand quant programme in 2022. Even though she used to think she would go into medical technology – as a type-1 diabetic, she experienced first-hand the benefit of technology and how apps could improve people’s lives. This led to her undergraduate degree in Mechatronic Engineering. The competition, however, opened her eyes to the options posed by the financial data science world. “It is a bit different, but here too, I can see how data science can help people make more informed decisions.”

Rachel says, “AIFMRM is a fantastic institution. I can’t recommend it highly enough. I did not come from a financial background but the class, the lecturers, and all the resources and support provided are excellent. Everyone is invested in your success, from giving you interview skills to making sure you can pitch well at presentations. It all goes into a very well-rounded professional.”

For producing the winner, AIFMRM and the Faculty of Science split R50 000. Rachel, as the winner, received R25 000 – which the future financial expert is prudently saving.

MCom team wins trading simulation – again

A student team from the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town again won the FNB Securities Challenge in 2020. The MCom students competed head-to-head with Wits and Stellenbosch teams in a trading simulation using a live FNB Securities trading simulator. They had a hypothetical US$100 000 in real-time foreign exchange and global stock markets, with the goal of achieving the highest return over three months.

AIFMRM’s Dr Abhik Mukherjee said, “We are delighted that the AIFMRM team has now won twice in a row, but the emphasis has to be on the process. The competition allows them to follow the financial press and to observe in a relatively tangible way the immediate impact of their decisions. The simulation challenges students’ assumptions, making it an exceptional learning experience.”

FNB Portfolio Manager and Stockbroker Richard Levesque agreed. “The 2020 intervarsity trading competition was certainly the most challenging one to date, as the COVID-19 pandemic severely impacted the global economy. Global market volatility spiked considerably, which presented teams with an abundance of opportunity. Under very difficult conditions, the teams did incredibly well. And congratulations to the AIFMRM team on winning.”

Team member Calum Murphy said that the team had been very confident in their ability to develop a strategy that would result in superior performance. “It also proved to be an education in appreciating risk in a time of crisis as it coincided with the downturn in global markets as oil prices crashed and coronavirus was declared a pandemic.

For Tlotliso Jonas, preparing for the competition took the form of plenty of additional studying and learning about online trading. “I am shy and generally not good at interacting with people, but it helped me make some improvements to my interpersonal skills such as communication.”

Michael Brakspear said the competition had been a lot of fun as well. “It made me experience some true emotional highs and lows, so I can only imagine how exhilarating it would be to do it professionally with real money at stake. I can definitely see myself taking a further interest in trading and targeting it as a career choice.”

Each winning team member won R4 000 worth of FirstRand shares in an FNB Securities account – with their very own local JSE stock broking account.

The shift to online learning

AIFMRM acted swiftly in response to the outbreak of COVID-19 and the subsequent lockdowns of sectors of the economy at the end of March 2020. Acting Director of AIFMRM in 2020, Obeid Mahomed, said it helped that AIFMRM identified a difference between emergency remote teaching (ERT) and online teaching (where more time to plan and resources were available).

“In addition to the time pressure, we also had to work with UCT’s directive of ‘low-tech’ ERT to ensure that students with limited access to data were still able to participate effectively. We alleviated some of this pressure by purchasing mobile data for students and opening access on the learning platform, Vula,” said Mahomed. We assisted some students in areas of poor internet coverage in relocating to Cape Town.

In addition, each lecturer developed their innovative teaching style, basically creating bespoke content. The next issue was interaction. Synchronous or real-time interaction for all programmes was not possible as this would have been too data-intensive and hi-tech. Group work and collaboration amongst the students was encouraged as much as possible.

Across the board, feedback from students showed that they were surprised and impressed by how they were able to continue studying in 2020. They particularly mentioned the assistance given by lecturers as well as the psycho-social support provided by Billy Enderstein. She was available 24/7, on email as well as mobile, to check in with students and offer advice. “For many students, the experience was gruelling at first and more difficult than with face-to-face classrooms,” she said. “I also posted a lot of supportive information about online learning. Students especially needed guidance on pacing themselves as the intensity of online can be overwhelming.”

It has also been instrumental in AIFMRM’s preparations for the 2021 academic year, again in a virtual format. “Our experience, innovations and resources from emergency remote teaching during 2020 enabled us to evolve our online teaching solutions and interventions,” explains Mohamed.

Many students are also better prepared in 2021 as they experienced emergency remote teaching during 2020 in their undergraduate degrees. “They understand the requisite technology, are aware of potential adversities and overall are more resilient,” says Mahomed. “Our improved online learning solutions combined with recalibrated student expectations resulted in a successful start to the new academic year.”