Coffee, collaboration and curiosity in the pursuit of research

The African Institute of Financial Markets and Risk Management (AIFMRM), a postgraduate institute in the Faculty of Commerce at the University of Cape Town (UCT), hosted two pioneering events in July – the much anticipated fifth edition of the annual Financial Mathematics Team Challenge, and a new, intensive research collaboration called, The Factory. Both events are designed to boost the culture of research in the university by nurturing a new generation of scholars.

“We consider research to be the vehicle for everything that we do,” says Professor David Taylor, Director of AIFMRM.

AIFMRM is a postgraduate teaching and research facility that drives investigation through inviting debate, discussion and collaboration on industry-relevant issues. In so doing, it aspires to develop the next generation of African academics dedicated to rigorous, finance-related research.

“There is a skills shortage in the financial industry, and of course Bachelors graduates get scooped up after graduation as they are a rare resource. However, this means that talented students may not continue their studies. Taking a long-term view, if we lose potential Master’s and PhD students, then ultimately who will be the researchers and lecturers of the future?” asks Dr Andrea Macrina, Director of the Financial Mathematics Programme at University College London (UCL) and Adjunct Associate Professor in AIFMRM.

AIFMRM endeavours to nurture this precious chain of educators and foster South African intellectual capital by exposing students to the value of research through experience.
The institute has pioneered two initiatives to engage talented, hard-working students in research. The first of these is the annual Financial Mathematics Team Challenge (FMTC), jointly hosted by AIFMRM and UCL, and co-created by Professor Taylor and Dr Macrina.

During the FMTC, teams of postgraduate students have seven days to solve problems posed by either academics or industry practitioners. Each problem has mathematical, computational and theoretical components, and includes analysis of real-world data. Teams are made up of local and international students at Master’s and PhD level. According to Dr Macrina, this mix is exceptionally beneficial because it removes prejudice and assumption, and leads to genuine collaboration based on respect, contribution and peer-learning.

Now in its fifth iteration, the FMTC has borne great success and achieves a high level of output from the students. “The work achieved in this time frame is equivalent to a Master’s dissertation, and many of the challenges have gone on to inspire research publications,” says Professor Taylor. He adds that “not once has a team failed to solve their problem.” This year, three of UCT’s Quantitative Finance PhD graduates were previous FMTC participants. “We have witnessed the depth of their development,” says Dr Macrina, “and this speaks to the deeper challenge of transformation – home-grown academics are integral to the development and transformation of South Africa.”

A testament to the FMTC’s success is that it will be replicated in Brazil in August this year. AIFMRM has been exploring how to apply this blueprint elsewhere for some time. A previous participant of the challenge, a Brazilian PhD graduate from UCL, was so inspired by the effect of the FMTC on young South Africans that he leapt at the chance to do the same in Brazil. A delegation from UCT and UCL will be travelling to Rio to serve as mentors.

The success of the FMTC motivated the second of AIFMRM’s research initiatives. The Factory, piloted in Cape Town from the 2nd to the 13th of July, is an innovative research exercise during which teams work intensively over 10 days to produce academic articles of a standard that can be submitted for publication in leading, peer-reviewed scientific journals.

“As far as I know, this is the first time a project like this has been attempted. There is nothing quite like it elsewhere,” says Dr Macrina. He adds, “I thrive on collaboration.”

The Factory first assembled and then supported teams of researchers, which included a mix of local and international participants across various stages of their careers, to collaborate on a paper, thus facilitating the transmission of skills and creating lasting networks across the scientific community.

Dr Macrina explains that a passion for research and genuine curiosity is what binds the teams. “They have been collaborating across the globe via Skype and email for the last six months and are meeting at The Factory to complete a draft of their paper.”

The Factory brought in an expert reviewer to help both teams improve the quality of their work during the process and thereby increase their chances of publication. Dr Marc Henrard, Head of Quantitative Research at OpenGamma and visiting professor at UCL, provided two rounds of expert scrutiny and feedback to the teams.

Completing an academic paper in such a short time frame is a Herculean task. When asked how participants fared under such intense conditions, Dr Macrina laughs and says, “Well, we bought a very nice coffee machine beforehand.” Both he and Professor Taylor have high hopes for the process and look forward to seeing the final papers in print.

Innovative programme aims to boost local capacity in research

Teams of Financial Mathematics researchers from as far afield as Australia, England and Denmark arrived in Cape Town on the 2nd of July for an intensive academic collaboration. The programme, dubbed The Factory, is unique in its aim to produce academic papers of a standard that can be submitted for publication in leading peer-reviewed scientific journals within just ten days.

“This is the only time a programme like this has been attempted, and as far as I know, there is nothing else quite like this elsewhere,” says Dr Andrea Macrina, Reader in Mathematics and Director of the Financial Mathematics Programme at University College London (UCL) and Adjunct Associate Professor in AIFMRM at UCT.

The Factory is the creation of Dr Macrina and Professor David Taylor, Director of the African Institute of Financial Markets and Risk Management in the Faculty of Commerce at UCT. “This initiative furthers AIFMRM’s aims of deepening skills capabilities in the financial industry, driving research and developing the next generation of African academics in the field,” says Professor Taylor.

Six months ago, The Factory began assembling, and supporting teams of international researchers combine their expertise and experience in collaborative academic research. Teams worked via email and Skype and then arrived at The Factory to tackle the complex outstanding issues requiring many hours on end in front of a whiteboard. The goal was to complete a draft of their papers in just ten days – a difficult task which would usually stretch over months.

The two Factory teams included a mix of international and local academics. “We combined researchers across different stages of their careers – from PhD students to those with five years of experience, to some with ten or more years in an established research career – to facilitate skills transfer through collaboration,” says Dr Macrina.

An essential element is that both teams included at least one young South African researcher to expose local scientists to condensed, academic and industry-specific research in a hands-on environment.

The Factory brought in an expert reviewer, Dr Marc Henrard, to help both teams improve the quality of their work and increase their chances of publication. Dr Henrard is Head of Quantitative Research at OpenGamma and a visiting professor at UCL. He regularly publishes work in international journals and is a frequent speaker at academic and practitioner conferences. He provided two rounds of scrutiny and feedback to the teams.

Professor Henrard’s research focuses on interest rate modelling, risk management and market infrastructure, which is within the scope of both papers being written at The Factory. He says, “What is important about this initiative is that The Factory teams are answering questions that practitioners in the field would really like answers to.”

“Factory participants posed the right questions – taking a particular problem in the market and thoroughly examining the fundamentals that no-one has taken the time to do properly. This dedicated research will give the industry the building blocks to work on, for example, when it comes to setting the interest rate for mortgages,” says Dr Henrard.

Dr Henrard commended the work that AIFMRM is doing to boost local research capacity and answer tough questions. “I am impressed by all the activity at AIFMRM – the number of challenges, research projects, grants and a great deal of collaboration, which is extremely positive. The institute is engaging in real-world problems and coming up with good ideas and solutions,” he says.

While in South Africa, local industry was keen on the opportunity to gain from Dr Henrard’s expertise. He presented a masterclass for market traders, risk managers and quantitative analysts at ABSA in Johannesburg, examining the challenges seen in Europe and the US and the implications for the South African market.

UCT’s top financial mathematics students take on a global challenge

Now in its fifth year, the Financial Mathematics Team Challenge (FMTC) has once again combined the talents of students and industry practitioners to find unique solutions to a selection of the finance industry’s most pressing problems.

Held in Cape Town from the 29th of June to the 7th of July, the FMTC saw four teams compete for the coveted trophy by providing the best solution to an industry-relevant problem. Teams comprised of Master’s and PhD students from leading global institutions such as University College London (UCL), Oxford University, ETH Zurich and UCT were given seven days to work on their solutions, followed by two days of presentations, before the winners were chosen.

The winning team – which included two Master’s in Mathematical Finance students from UCT – worked on a problem posed by StepStone, a private markets firm in Zurich. The team members used the language and mathematical techniques from public markets to solve an optimal investment timing problem from illiquid private markets. The solution provides an initial step towards estimating the correct sequence and time for staged investment.

“FMTC brings international researchers to Cape Town to give them a glimpse of the dynamic environment that is developing at UCT in the African Institute of Financial Markets and Risk Management,” says Professor David Taylor, Director of AIFMRM in the Faculty of Commerce at UCT.

Co-founder of the FMTC, Dr Andrea Macrina – Director of the Financial Mathematics Programme at UCL, believes collaborative research strengthens the scientific community, promotes peer-learning and yields creative and unexpected solutions. “If industry can’t figure out the solution, then students look for improved answers that are mathematically robust,” says Dr Macrina. The intense challenge produces work that is similar in scope and complexity to that of a Master’s dissertation. This year’s teams worked on topics in portfolio optimisation, interest rate modelling, hedging long-term risk and private equity.

Dr Lisa Powers, Vice President of Research at StepStone, who served as co-mentor for the challenge, said that the winning team produced incredibly consistent work in a short time. “From building two calibrations in two days, to the depth and clarity of their 51-page report, they did amazing work and managed to beat some really strong competition,” she says.

Dr Powers believes the FMTC has enormous practical value in preparing students for the working world. “Working with people, whom you may not know, to solve a complex problem and then communicating your findings in writing is similar to a business development cycle that I see daily in my work,” she says.

Co-mentor, Martin Larsson, Assistant Professor in the Department of Mathematics at ETH Zurich, says, “I think our team won due to their strong individual skillsets and their willingness to work as a team. They demonstrated that the whole can truly be greater than the sum of its parts.”

Johannes Wiesel, a PhD student at Oxford, agrees that strong teamwork is a winning formula. As team leader, he says, “There were interesting group dynamics. Some people were good at programming, others at theory, and I hope that I managed to exploit their strengths in a positive way so that everyone could contribute at a high level.”

Two UCT Master’s students on the winning team, Cole van Jaarsveldt and Bandile Mbele, found the challenge tough but hugely rewarding. “As UCT students we represented our university and I believe that we were exemplary ambassadors,” says van Jaarsveldt. He adds, “FMTC introduced me to the world of private equity that I now have a passion for and plan on researching in the future.” The challenge has inspired him to apply for a PhD at Oxford.

Mbele says the challenge was way beyond anything he had been exposed to at undergraduate or Master’s level, but he highly recommends it to other students. “Without this challenge I would never have seen how private equity firms actually work, and understood the dynamics involved through analysing real-life data.” Mbele feels the challenge has opened his eyes to postgraduate opportunities in research and has built valuable networks for the future.

Save water, vote safely or trade cattle – all with the help of blockchain

Blockchain technology isn’t just about trading cryptocurrencies – it can make everyday life better. The winners at the continent’s largest blockchain hackathon last week proved this, delivering solutions that can incentivise water saving, facilitate cattle trading, increase transparency in voting and corporate governance, and more.

The designers of a unique water saving solution that uses blockchain technology to incentivise users to use less water were the winners of a special prize at the continent’s largest blockchain hackathon held in Cape Town last week.

The Unlock The Block Blockchain Hackathon 2018 was hosted by the African Institute of Financial Markets And Risk Management (AIFMRM) and Linum Labs, and culminated in Cape Town’s first ever Blockchain Symposium. Almost 80 participants from around the world attended.

The special prize was awarded to project SudoTesla, designed to transfer water tokens via the Ethereum network to a smart meter. The tokens are allocated by the designated utility and users are compensated for water that they save.

The special prize awarded to the team, led by Michael Sanne of South Africa, included a month at Absa’s Rise facilities at the Woodstock Exchange in order to further develop their project. Sanne said he hoped it would be possible to bring such a project to fruition one day, even if it was challenging. “Water is a scarce resource, and this solution aims to help manage that resource”, he said.

The overall first prize was split between two teams: the first being BlockPoll, who built a blockchain voting system facilitating better governance in companies, as well as transparency and security in elections. Judge Co-Pierre Georg, Associate Professor at AIFMRM, described their solution as “incredibly slick”.

BlockPoll’s team, consisting of WhenMoon?’s Brandon Kenley Verkerk, Christopher Maree, Iordan Tchaparov and Kavilan Nair, say the design’s main advantages are that it’s decentralised, immutable, and easily auditable. Moreover, they add, it’s easy to use, secure, and open source.

The other winning team was Proof of Steak by Yuna, which Georg described as “a really awesome tech solution to a true African issue”. The team, consisting of Kungela Mzuku, Kyle Roos and Una Singo, allows farmers to use their cattle as collateral on a block-chain, enabling peer-to-peer lending. The team described this as a “uniquely African” and “contextual approach” which would “allow anyone in the world to invest in your cow”. Farmers register their cattle on the blockchain, which functions as an immutable ledger, and investors provide funding to the farmer.

A further special prize for innovation was awarded to team EWAN from Berlin, who built a curation market application.

Prior to the event, Linum Labs’ Devon Krantz said beyond the immediate value of cryptocurrencies, blockchain technology held great potential for “changing systems that already exist”.

“The event has shown us two things, firstly that the applications of blockchain technology in improving people’s lives in Africa are immense and second, it is much easier to build those applications than many people think – we just need to work together,” added Paul Kohlhaas, Founder of Linum Labs.

“This is a historic moment in time,” Georg said at the event. “Our economy will soon embark on a fourth industrial revolution.” Economic leadership would lie in the provision of scarce skills, he said. “There is therefore a need to think outside the box. Something clicked in our minds. This led to the hackathon.” Collaborations and partnerships of this kind, he added, would continue to address the need for scarce skills.

The Unlock the Block blockchain Hackathon was a 10-day long event during which participants learned some of these scarce skills, including how to develop blockchain applications. The first five days were dedicated to a digital “boot camp”, during which participants were exposed to overarching fintech trends and the blockchain tools needed to develop decentralised applications and protocols. Topics covered included Bitcoin, Ethereum and other cryptocurrencies, and sessions were led by industry experts.

At the end of the hackathon, participants were given three days to develop their own blockchain application. The Symposium occurred on the final day.

The Hackathon was sponsored by both South African and international businesses, including Absa, Microsoft, Old Mutual, Status, Foundery, Consensys, Citi, Pick ‘n Pay, UCT and Rise.

Cryptocurrency regulation: current issues, future challenges

Regulators face substantial challenges when evaluating the risks associated with cryptocurrencies. While cryptocurrencies hold significant promise for economic growth in Africa, there is a strong case for cryptocurrency regulation.

The evolution of cryptocurrencies means there is potential to be “incredibly surgical” in terms of regulation and the enforcement of transparency, but regulators are still facing resource constraints and other limitations in their efforts to get on top of this revolutionary new technology.

This is the view of Professor Andrei Kirilenko, Director of the Centre of Global Finance and Technology at the Imperial College of London. Kirilenko was speaking at a panel discussion arranged by the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town earlier this month.

According to Kirilenko, a world-leading fintech expert and the former chief economist of the U.S. Commodity Futures Trading Commission (CFTC), the very nature of cryptocurrencies – that is, the fact that they are digital – means their footprint and reporting capabilities are built in, even if these are usually well covered for individual safety and privacy reasons.

This means if regulation were compulsory, transparency and reporting could potentially be easier using digital currencies than otherwise, he argued.

The use of cryptocurrencies has rapidly gathered momentum in recent years. Currently, there are over 1,100 in circulation, which serve different purposes. The best known of these is likely to be Bitcoin; others include Ripple, Litecoin and Ethereum.

In Kirilenko’s view, an ideal environment was created for cryptocurrencies following the 2008 global financial crisis. Rapid technological development, in conjunction with a mass talent exodus, the failure of previous systems and the affordability of computing, meant fintech was given the space to flourish.

“This means it is only a matter of time before they are so widely used that their regulation will be non-negotiable,” comments Dr Co-Pierre Georg, Senior Lecturer at AIFMRM and Director of the UCT Financial Innovation Lab.

The challenge of regulation

As things stand, however, regulation is struggling to catch up with the rise of cryptocurrencies. And because cryptocurrencies differ from each other and do different things, this raises complications regarding regulation, said Dr Georg.

Kirilenko added that despite an appetite for regulation, it has been deprioritised in many areas of the world, because the resources required for regulation require justification to taxpayers and there are frequently more pressing problems. As such, cryptocurrencies are often dealt with on a case-by-case basis.

At present, he explained, there is no law in any jurisdiction that says the regulation of cryptocurrencies is compulsory. However, under individual country laws, cryptocurrencies may not be used to enable prohibited activities. “There are multiple aspects to [the regulation of cryptocurrencies],” he said. “Suppose I’m a regulator. What do I regulate?”

Undermining laundering or misappropriation would mean focusing on anonymity, he said, while concerns about governance would require asking whether assets were potentially vulnerable to asymmetric information, theft or fraud. If it’s a ledger, the regulator would focus on reporting requirements or transparency.

There are “different ways to touch that elephant”, said Kirilenko. “There are different pieces of regulation. If you are going after one, some or all of them, you have to know what would be your main mandate – whether it is a monetary policy mandate, for instance.”

If the central bank issues cryptocurrencies, he said, then it becomes necessary for the regulator to work within the monetary policy mandate. But if he or she is taxpayer-funded, there must be justification for setting resources aside to do that.

A sound reason to devote resources to regulation would be that without it, money could be lost, stolen or open to fraud, dishonesty or abuse. Consumer protection could also come into play. “It is not impossible to imagine initial coin offerings are fraud or borderline offerings and that someone would take the coin and disappear,” he said.

A further justification for regulation could be price determination. But that, he argued, could concern investors. It would be essential to ensure fair prices.

The current state

“These questions have been asked by regulators around the world,” said Kirilenko. “The answers at this point are: we are not sure, we don’t know. We don’t know under which mandate to work, or what part of it to regulate.” To date, most regulators, typically those working in banks, have established groups to examine these issues, he said. This ensures that if an organisation is ever caught off guard, they have some recourse to provide answers.

Consumer protection agencies have also had limited involvement to date, he added, though this could change if a large number of consumer complaints arose.

In larger jurisdictions, organisations dealing in cryptocurrencies can approach regulators and ask to be certified as regulated, which the regulator may approve or refuse. This has occurred in several recent cases, noted Kirilenko.

A few examples include the Securities and Exchange Commission’s refusal to regulate Bitcoin in March 2017, on grounds that “significant markets for Bitcoin are unregulated”. In July, the US Commodity Futures Trading Commission announced that by a unanimous vote of the Commission, it issued an order granting LedgerX, LCC registration as a derivatives clearing organisation under the Commodity Exchange Act. Under the order, LedgerX would be authorised to provide clearing services for fully collateralised digital currency swaps.

By August, CBOE Holdings announced an agreement providing Chicago Board Options Exchange and its affiliates an exclusive global license to use Gemini’s Bitcoin market data for bitcoin derivatives and indices.

“Regulators are not actively pursuing regulation, but they have to react to market participants who come to them and ask them to make a determination on their ability to participate in these markets,” said Kirilenko.

The way forward

Kirilenko believes cryptocurrencies have a great future in funding development, with high potential in financing new ventures and innovation. This, he believes, is because markets themselves are evolving from previous priorities. In this case, legal, transparent and ethical use would become increasingly important.

Derivatives on cryptocurrencies have a “very significant” future, he said, due to their potential to raise capital finance, finance talent in the digital fintech economy, and bypass existing capital markets that are too costly to participate in. “They are also more tailored towards servicing the part of the economy that is different from the economy traditional markets were developed to service – machines or to hire people,” he said. “Financial markets latch onto innovation.”

Meanwhile, calls for regulation globally have been gaining momentum. At the start of November, Australia announced digital currencies could soon be regulated for the first time on grounds that it was “absolutely needed”.

The South African Reserve Bank’s current ‘sandbox’ approach to cryptocurrency regulation is prudent, adds AIFMRM’s Co-Pierre Georg, since many questions around how to regulate cryptocurrencies without stifling innovation remain open. The SARB will have to take a stand, though, on whether it will support the issuance of a central bank-backed cryptocurrency at some point in the not too distant future.

Otherwise, concludes Georg, South Africa risks being left behind as other countries boldly forge ahead and reap the benefits of this highly innovative sector.

The US, Europe and the UK have all moved towards regulating cryptocurrencies, with several US states passing bills that could see regulation passed into law.

In July, the South African Reserve Bank (SARB) said it would begin testing cryptocurrency regulations.