Author: AIFMRM Admin

Financial experts from around the world have warned that the lack of knowledge about new technologies, cyber securities, cryptocurrencies and mobile money among regulators could have critical consequences for consumers worldwide.

“Issues around banking and credit, including payments are very important to people and feature daily in the life of most consumers. These things impact consumers significantly,” said Bernard Sheridan, chairperson of the Financial Consumer Protection Organisation (FinCoNet) during a meeting hosted by the African Institute for Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT).

FinCoNet is an international organisation that was established in 2013, comprising of supervisory authorities responsible for financial consumer protection. Among its members are: the Financial Conduct Authority in the UK, the Financial Consumer Agency of Canada, the Financial Services Agency in Japan, the Netherlands Authority for the Financial Markets, the Central Bank of Spain and the Financial Services Board in South Africa.

The organisation held its annual meeting in Cape Town between 12 and 16 October and on the final day, convened an international seminar at UCT with local and global financial experts, which looked at regulatory changes in South Africa and the complexity in retail financial markets.

“Modern technology has fundamentally changed the financial system,” said Co-Pierre Georg, Senior Lecturer at UCT and Acting Director of the AIFMRM. “This event has emphasised the importance of reforming the training and education of market participants and regulators to cope with this change.”

He added that consumer protection was a strong focus point of both AIFMRM and FinCoNet. Most of the sessions at the seminar also looked at how people are increasingly more at risk financially as markets, financial systems and banking systems become more complex and sophisticated.

Cybercrime is a growing problem worldwide. Results from a study by marketing research firm Columinate revealed that South Africa is the third highest cybercrime hotspot in the world, with 50% of credit card fraud happening online. The Office for National Statistics (ONS) in England and Wales also published the results of a survey in October that showed alarmingly high levels of online crime, with up to 5.1 million incidents of online crime involving 3.8 million victims in the past 12 months.

The survey estimated that there were 2.5 million “computer misuse” incidents, where a victim’s computer was infected by a virus.

During a panel discussion at the FinCoNet seminar, international experts Paolo Tasca from the Deutsche Bundesbank, Maria Lucia Leitão from the Banco de Portugal and Gert Luiting from the Netherlands Authority for Financial Markets (AFM) as well as local experts, discussed the challenges regulators face regarding new technologies, cyber crime and online transactions.

Luiting said there was currently no universal global regulation for new financial technologies, with each country taking its own approach. “But fintechs are not bounded to jurisdiction, they can do business anywhere,” said Luiting. Caroline da Silva from the South African Financial Services Board pointed out that some criminal activity is more difficult to follow online as the use of multiple servers and accounts makes it harder to trace money being exchanged.

The panel warned that the future would increasingly feature more online and mobile technologies, with sophisticated apps and services, while customers on the other hand, would not necessarily be more sophisticated or literate financially. This could place them even more at risk to criminals.

“Currently, the risk for financial crime is very high,” said Tasca, adding that money laundering and illegal money transfers could be easily done across networks. He also said activities were easy to hide from authorities.

“But there is a positive side,” said Tasca. “If regulators start to intervene and learn the technology they can do much better than they are doing now. Because the beauty of this technology is that every transaction can be traced, it can be followed from one hand to the other. It is not like cash.  As soon as regulators understand these technologies better we can address this criminal activity.”

The world is not ready for the next financial crisis, which could hit us sooner than most people realise. “It is not a question of whether there will be another financial crisis like we saw in 2008 following the US sub-prime mortgage debacle. The question is when and where,” says Professor David Taylor from the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT).

Taylor was speaking at the screening of the new documentary film Boom Bust Boom in Cape Town this week. The documentary, described as a “fresh take on global economics” is presented and co-written by Terry Jones of Monty Python fame.

The documentary is a combination of light-hearted humour and serious commentary. It features interviews with actor John Cusack, journalists Paul Mason and John Cassidy, along with world-renowned experts Andy Haldane, chief economist at the Bank of England and Nobel Prize winners Daniel Kahneman, Robert J Shiller and Paul Krugman.

Co-producer and writer, Dutch activist Professor Theo Kocken also attended the event.

“The film was born out of 25 years of frustration with the business world,” he said. “We needed to make people aware of the nonsense going on in the financial services industry. And we wanted to do it in a way that was light-hearted and easy to understand for the layman,” Kocken says.

But the film’s message is serious, containing explicit warnings about human nature and the predictability of the world falling victim to another economic disaster, even as economies around the world appear to be recovering from the last recession.

“Whenever you hear someone say an economy is strong and robust, a red light should be going off. Stability leads to instability, we know this now,” Kocken says.

According to Taylor, there are many systems around the world that are at risk of setting off a financial scare.  And South Africa, with its large private, corporate and public sector debt burden is at risk. He says China may initiate the next economic bust due to the slowdown of its improbably high growth rate in recent years.

“People are always talking about booming growth, but there is not enough talk about what level growth is sustainable or even real. Very rapid growth often indicates euphoria and increases the risk of a consequential crash. Should a financial crisis occur in China, it would seriously affect South Africans,” he says.

The film shows with startling clarity how prior to each major global financial crisis – economic experts and even presidents spoke confidently about economic growth and stability. Only two weeks before the 2008 global recession, former US president George W Bush told Americans in his State of the Nation address that the US had a robust economy that was the envy of other industrialised nations around the world.

Boom Bust Boom was released in early 2015 and has been screened selectively around the world. Kocken plans to release the documentary on Netflix and hopes to air it soon on television. Eventually, he would like it to be a free resource that people can access on the Internet.

Kocken says his main aim is to spark debate and discussion especially amongst students and academics, hoping to change the way economics is taught at university, to include more about the history of economic crashes and the way economies “really” behave, as opposed to the models of rational behaviour that students are usually taught and which are demonstrably untrue.

“Financial crises affect all life on our planet. All financial crashes are essentially the same. People believe they are wiser or that circumstances are different to prior times, but in essence, it is all about human nature. We tend to forget the previous catastrophe and think it won’t happen again. But it will. And the next one could be worse,” he says.

The financial industry is crying out for graduates who have a multidisciplinary skill set and are able to think both practically and strategically.

“At the moment, it can take anywhere between 18 months to two years for graduates joining the industry to get up to speed,” said Nicolaas Schutte, CIB Risk COO of Barclays Africa. “This means that organisations have to invest considerably in training to get new recruits to a high performing state.”

Schutte was speaking at the launch of the new Master’s degree in Risk Management of Financial Markets at the University of Cape Town (UCT) last week. The degree, which will be offered for the first time in 2016 through the African Institute of Financial Markets and Risk Management (AIFMRM), has been designed specifically to plug this gap.

AIFMRM lecturer, Obeid Mahomed said he and colleagues at the institute spent more than a year talking to industry to identify skills gaps in order to design an academic intervention that matches their needs as closely as possible.

“Most graduates come to the job market with a lot to learn as technical specialists in either accounting or mathematics. This means that financial institutions are putting a lot of effort into upskilling and training staff in areas such as business context and regulatory frameworks. We have created a degree to equip professionals with a combination of expertise that will set them apart,” Mahomed said.

He said thinking around risk management has evolved significantly following the global financial crisis of 2007/2008 and that there remains a growing need for savvy risk managers able to understand and navigate increasingly complex financial markets.

Finance expert Sven Ludwig, senior vice president, risk management and analytics EMEA, at US software giant SunGard, recently wrote that financial systems were becoming more complicated around the world, with many experts warning that an increase in regulations and tighter financial controls would result in greater complexity in the financial world.

“Though many industry participants are under the impression that the banking industry is becoming simpler, the opposite is the case. Moving forward we foresee a battle of sophistication,” said Ludwig in his white paper Impact Study 2015 – survival guide for banks: the battle of sophistication.

According to Mahomed, training professionals in financial sophistication is one of the aims of the new degree. The degree is uniquely interdisciplinary, spanning the fields of finance, mathematics, computing, regulation and governance.

“From a financial markets perspective, for example, since the prices of liquid financial instruments are determined by demand and supply, they do not obey precise rules of behaviour with well-established analytical solutions.”

“Consequently, we often have to resort to numerical techniques to solve financial problems. With the unpredictability of human behaviour driving economic phenomena, the study of economics is far more complex than the study of repetitive phenomena in the physical sciences,” Mahomed said.

The degree also has a novel structure in that it is a professional master’s degree. Students will be assessed through a series of research projects, as opposed to the traditional dissertation requirement. Mahomed believes it will provide the necessary edge for professionals in the competitive and complex financial global landscape.

“It teaches a combination of maths, finance, and regulation and it is put together in a way to provide realistic expertise, which is what is needed to achieve success in this industry at present and in future,” Mahomed said.

“Graduates from this programme are likely to always be in demand. Such a multidisciplinary, transferable skills set will ensure that there will always be a position for them in most financial organisations,” Schutte agreed.

After ten days of intensive effort and teamwork, a UCT-strong team of postgraduate students walked away with the trophy at the 2^nd annual Financial Mathematics Team Challenge (FMTC).

The event, hosted by The African Institute of Financial Markets and Risk Management (AIFMRM) in association with the University College London (UCL) saw five teams of mixed masters and doctoral students from three top global universities competing for the grand prize. The demanding challenge, which is one-of-a-kind in the southern hemisphere, is designed to hone the skills of financial mathematics students by exposing them to real-world challenges with industry relevance, and pitting them against talented peers from across the world.

“The participating international universities this year are all ranked highly. UCL and ETH Zurich, offer Financial Mathematics programmes that are ranked among the top in the world,” said David Taylor, Director of AIFMRM and one of the initiators of the challenge. “And the MPhil in Mathematical Finance at UCT was recently ranked 50^th in the Eduniversal Best Masters Ranking for Financial Markets.”

Taylor said the FMTC is partially modelled on the international undergraduate competition, the MITACS Industrial Math Summer School, and was primarily created to help expose UCT students to their global peers – and vice versa.

“We wanted to bring international researchers to South Africa, and to give them a glimpse of the dynamic environment that is developing at UCT in the African Institute of Financial Markets and Risk Management. An indispensable ingredient had to be that the participating students would work in teams and be exposed to a healthy dose of fair competition,” said Taylor.

This is the second time that the challenge has been staged and Taylor said they were gratified to see that interest in the event has grown, with almost double the number of students taking part in 2015. Five teams of four students and their mentors worked for seven days on a research problem posed by academics and industrial partners in research areas including: expected shortfall and multi-currency contracts; margin optimisation for central counterparty clearing; commodity models and unspanned stochastic volatility; pricing of long-dated swaptions; and valuation of callable floating rate notes with write-down. It took a full two days for the teams to present their solutions.

Each team was mentored by academics and practitioners from France, South Africa, Switzerland, and the UK to ensure that they had the right support and to bring out the best in each participant.

“I was worried at first that I would be completely out of my depth,” admitted UCT MPhil  student Divanisha Pillay. “But I shouldn’t have worried about that because you get a lot of guidance along the way and you would be surprised by what you can contribute.”

Dr Andrea Macrina, a senior lecturer in the UCL Department of Mathematics, who alongside his colleague Taylor established the FMTC in 2014, said that for many of the international students who choose to make the trip during their own MSc project time, it is a big investment both in terms of time and money – as the event is only part-sponsored.

“But the feedback that we get from the students who take part is that it is a good investment,” he said.  “The time pressure and opportunity to learn from others ensure that they improve their skills and gain new knowledge to help them to be more efficient with their own MSc research projects in Financial Mathematics at UCL.”

“I learned a lot from the other people on my team,” agreed Sara Svaluto-Ferro, a PhD student at ETH Zurich, who led the winning team. “Working together, cooperating, exchanging skills. I think this is the most important thing we gained from the challenge.”

Svaluto-Ferro’s winning team, comprising two students on the UCT MPhil in Mathematical Finance: Graham Ziervogel and Chris McPetrie, and one recent graduate of the programme: Melusi Mavuso, were judged to have the best solution for their problem on multivariate risk measures for margin computations.

“The ongoing concern about systemic risk since the crisis has prompted the need for risk measures at the level of sets of interconnected financial portfolios and institutions,” explained Taylor. “Two important applications are the computation of capital regulatory requirements for banks and the computation of the margins in the context of centrally cleared trading. But, with risk measures, the gap between practice and theory is wider than in any other area of finance.”

Macrina said the quality of the final presentations and reports was of a very high standard across all five teams, and that he is now looking forward to seeing the competition gain in quality, stature and popularity.

“Now we know that the students love it and that the quality of the work it produces is really high, we are already looking forward to next year,” he said. “While we don’t plan for the competition to get much bigger in terms of the number of participants, we will continue to push for the highest standards and outcomes.”

The African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT) secured a five-year grant from the Volkswagen Foundation for research into international capital flows.

The project forms part of an international collaboration with top academics from universities in Germany, the United States, China and Japan. Total funding for the initiative amounts to R10.7 million (€770 000) with UCT receiving R1.5 million (€110 000).

“We are delighted by this sizeable sponsorship from the Volkswagen Foundation for this very significant global study,” said Professor David Taylor, director of the African Institute of Financial Markets and Risk Management (AIFMRM).

Dr Co-Pierre Georg, senior lecturer in the Faculty of Commerce at UCT and AIFMRM is one of the project’s co-principal investigators, as well as research coordinator.

“Sponsorships like these are very important, without them we couldn’t study many pressing questions in the financial world,” Georg said.

He said what set their proposal apart was its focus on emerging economies.

“Very little research on developing countries is done outside the traditional development economic focus,” he said.

According to Georg the significance of this project lies in the international collaboration with leading economists from universities like the Goethe University Frankfurt and Research Center SAFE in Germany; The Leonard N. Stern School of Business at New York University in the USA; The Wang Yanan Institute for Studies in Economics, Xiamen University, China and Waseda University, Japan.

The fund will enable UCT to sponsor two PhD students for three years, provide travel expenses, as well as computer equipment.

The rest of the international team will use the funds to undertake a comprehensive study on how new monetary policy tools like quantitative easing (QE), which industrialized economies introduced following the 2007-2009 global financial crisis, affect South Africa and other emerging markets.

The study in particular looks at how much of the current economic recovery can be attributed to monetary policy intervention and which tools were the most effective. The team will look at QE from a finance perspective, so the impact of these policy actions on financial market prices, as well as on financial institutions’ risk and credit supply.

The study will also explore whether there are spillover effects to financial institutions and markets in emerging countries, like India, China and other countries in Africa. The researchers also plan to look into the effects on central banks if they were to reverse their currently extremely lax monetary policy stance and how this would affect financial stability in emerging markets.

“These questions are among the big global challenges in finance today. Timely research into the massive international capital flows to emerging countries triggered by lax monetary policy in industrialized countries is one way to prepare appropriate policy responses for when the tide is turning,” Georg said.