Some of what were perceived to be the riskiest securities of the pre-financial crisis are back. The Collateralized Loan Obligation (CLO) market indicators are pointing to a profitable resurgence and growing inventory for these instruments.

CLOs are special purpose vehicles (SPVs) with securitization payments in the form of different tranches. CLOs allow private equity firms, hedge funds, and some banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risk associated with lending.

CLO issuance totaled $26.5 billion during just the first quarter of 2013¹.  In 2007, the perception was that the CLO market would default like global CDOs and MBS, however the returns actually remained stable. Now it appears that analysts’ predictions are coming true and CLOs are roaring back to prominence in the structured product space.

What are the differences between CLO 1.0 and today’s CLO 2.0?

Before 2007, CLO funds were a fundamental part of the financial matrix. The financial crisis swept away a raft of overleveraged funds and the rest were branded toxic. Investors became more sophisticated, as did the requirements on issuers.  While Wall Street and most financial firms were watching their asset backed investments head into a tailspin, there were members of the industry who got busy, working collectively to standardize the asset type with the terms in the indentures, and trading and settlement documents and processes.  What has emerged has been dubbed as CLO 2.0.

The complexities of tracking the class, size and expected ratings of a deal are not new, just a little easier.  S&P recently rolled out a weekly report to track CLO ratings in various stages². Looking at information such as underlying loans, liability, exposure and pricing as well as deal size is still a challenge for firms who do not have dedicated resources.

Today, many large loan issuers and investors have started to dust off their CLO experience and are watching anxiously from the sidelines for the first half of 2013 and will likely reenter later this year.  One major difference between 2007 and 2013 is the average investor now has access to a true “data warehouse” and a system for compliance, portfolio management and reporting that can handle the nuances and data that revolve around the CLO market.

A new, important feature of CLO 2.0 is the “10 day testing” provision for completing a trading plan.  A trading plan enables managers to execute a series of trades over a 10-day period and run all compliance tests on the result of all the trades grouped together.  This additional flexibility allows managers to take advantage of a group of investment opportunities that they would miss if traded individually.  CLO 1.0 required that each trade be evaluated individually, as opposed to in the plan, leading to onerous and duplicative work to adhere to the indenture terms.

For managers to take advantage of the additional flexibility and investment opportunities afforded by a CLO trading plan, the manager must be able to model the hypothetical plan trades as a single “order.”  This requirement will dictate the selection of a robust Order Management/Compliance system.

In this new era, re-pricing rather than restructuring for the CLO is attractive due to the upgraded protection in the form of ratings stability, priority of payments on new notes and other provisions. The CLO equity holders are better protected and the administration of the CLO is significantly more economical.   The risk measurements on the CLO are more normalized and the playing field is a bit more level.

The CLO 2.0 has emerged a safer haven for most than its predecessor, now that the standards have been boosted.  That access has its upside.  There will likely be more players vying for greater returns and in turn will create greater liquidity.  The spotlight on CLOs may turn this once black knight into the opportunity that boosts portfolio returns.

1 – Wall Street & Technology May 2013

2 – S&P

Just as Form PF transformed the alternative investment segment by adding a massive operational burden and forcing firms to reassess their risk management practices, new CFTC regulations are reshaping the clearing industry. By adding a slew of rules intended to increase customer access to clearing, facilitate processing of trades, and strengthen risk management at the clearing member level, the CFTC has introduced a major technological hurdle which even its own systems may be incapable of handling, particularly in light of the well documented problems the commission’s computers recently encountered when they crashed repeatedly while attempting load heavy volumes of swaps data.

So is this a high stakes case of cure the disease and kill the patient? Are these attempts to mitigate systemic risk only creating a new element of operational risk?

While there’s no shortage of opinions regarding whether more or less regulation is needed, the one thing we can all agree on is that any new rules and requirements should be well thought out beforehand. However, despite this bit of common sense, the SEC continues to compile mountains of data from hedge funds, liquidity funds, and private equity funds with no clear indication of how it will use that information to monitor risks to the U.S. financial system. Similarly, the CFTC is asking clearers to institutionalize a series of poorly defined sanity checks without determining if those requirements were realistic in the first place. Although the Commission has twice postponed implementation of the new rules, it does not seem as though a major rethink will occur. Instead, we just have to hope that the next attempt to protect the financial system won’t do more harm than good.

Eric Hazard, Intermarket Communications

Guest Contributors: Eric Hazard and Jade Faugno, Intermarket Communications

In the immortal words of Heraclitus, “change is the only constant,” and once again the financial services industry – and those who communicate about it – will find ourselves evolving with the ever-changing technological landscape.

On April 2, the U.S. Securities and Exchange Commission (SEC) issued a report clarifying the extent to which companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD).  The SEC’s decision to allow the use of social media technology for the distribution of news ushers in a new era for corporate communications.

As some of the most successful firms quickly figured out, Twitter and Facebook are valuable for their ability to connect consumers directly with the source. For financial services institutions, the benefits of social media extend even further.  Not only will increased use of social media open up additional channels of conversation with clients and prospects, but it will foster greater transparency vis-à-vis products and performance.

Jade Faugno, Intermarket Communications

In the same way that shareholder conference calls have ceded popularity to webcasts and posts via company websites, social media platforms will raise the level of investor inclusion in an ever-evolving definition of “fair disclosure.”  While we think it’s unlikely that press releases and proper SEC filings will fall by the wayside, we do anticipate socially savvy companies turning increasingly to Facebook and Twitter to disseminate important news in an effort to remain consistent in their branding.

While this may cause some dislocation for existing distribution channels – such as newswires -  increased disclosure on social media sites will provide greater transparency to investors and the consuming public, as Facebook and Twitter offer an effective “push” medium to large audiences. Those most interested in the news from a public company will self-select to receive relevant updates and will get them in real-time.  Not to mention, Facebook and Twitter pages are free and open to all – and in the case of the latter, publically available whether or not one elects to register for an account of his own.

Newswires aren’t the only ones who have voiced reservations. The argument has been made that people will now be forced to sift through tweets from Charlie Sheen and Kim Kardashian to find material updates from the companies in which they invest.  But by the same logic, investors should take issue with having to rifle through newsstand shelves to separate the earnings info in Bloomberg Businessweek from the latest celebrity gossip in People Magazine.  We hardly think that’s the case.

In fact, we can look to Bloomberg to see how the model can work successfully. The wise folks behind the terminal have already offered a solution for the anticipated issue of “fluff” intruding upon an otherwise valuable feed of corporate news by introducing select tweets into the workstation.

The key word here is select, of course, and it stands to reason that there will be filters and alerts in place to help investors capture the material and leave behind the noise.

As a result, Bloomberg terminals have become the latest technological tool to assist people in organizing the social sphere into meaningful streams of information, but they’re certainly not the first.  PR pros are already familiar with TweetDeck and HootSuite, and the investment community might soon come to rely on these solutions as well.

While it remains to be seen how enthusiastically the industry will adapt, the SEC’s announcement provides an opportunity for communications professionals to lead by example on social media. While it will likely take financial services firms some time to become familiar with the nuances of Twitter and Facebook, those already in the know can demonstrate the positive impact proper social media procedure can have on a company’s reputation and image. As social media channels are championed per the SEC’s guidance, we are likely to see greater adoption of them for engaging with the public on a broad scale. The openness and transparency fostered by this freer flow of information will help to demystify financial services firms and may signal a new dawn of communications in the industry.

In an age when financial services institutions have seen their images tarnished and public trust of the corporate sector is at an all-time low, having the SEC validate social media channels – some of the most direct vehicles for external engagement – might help big firms adopt a more human exterior and work towards gaining or regaining consumer confidence. All told, this is a victory for the industry and those tasked with delivering its messages to an investor audience.

Attend the FTF SMAC (Social Media and Compliance) conference, September 18, 2013, to hear more about how regulation is impacting social media in financial services.

Broker-dealers include firms that serve institutions and those that serve retail trading needs as e*Trade, TD Ameritrade and Charles Schwab.

Some of the functions fulfilled by a broker-dealer include guidance in trading via investment advice and publishing investment research. Broker-dealers are also responsible for keeping track of all accounts. This encompasses knowing how much money is in the client accounts and overseeing all transactions to ensure that clients are not engaging in any illegal activity.

Brokers-dealers must register with the SEC in order to legally buy and sell securities for clients’ accounts. In addition, broker-dealers must join a self-regulatory organization (SRO) that oversees the actions of the broker-dealer.

Recent dynamics on financial services businesses – such as small margins, political pressures and an influx of new regulations – have stretched technology resources to, and in some cases beyond, breaking point. However, with IT spend forecast to have an average Compound Annual Growth Rate (CAGR) of 6% or so over the next 5 years – why is a technology sale becoming even more difficult than ever before?

There is huge scrutiny on Financial Services businesses in the current climate and how they operate, spend their (and sometimes taxpayers’) money and treat their customers. From a technology perspective, it must feel like a war is being waged on these businesses. With enormous existing demands to maintain creaking legacy systems, often patched up rather than fully re-platformed, through to immediate and mandatory new regulatory requirements with, at least initially, very pressing and fixed timelines. There are often several battles taking place on various fields and it’s difficult to see the direction that the war is taking. The generals have to constantly evaluate their strategies and tactics to try to secure overall victory  only in the knowledge that their decisions are always going to be scrutinised with the benefit of hindsight and that every decision is potentially career threatening.

The supplier community needs to be sympathetic to these pressures and provide confident and compelling reasons to help their customers buy. Solutions looking for problems to solve are not going to be welcome nor will be a dogmatic philosophical approach to how to win the IT war. The CIO in today’s world makes a full range of decisions based on their precise needs at a certain moment in time and will not be wedded to a “one size fits all” dogma. Much of the debate will centre on agility and specific, specialised skills and needs versus a centralised or control agenda. For example, every major decision may have any, or all, of the elements below:

• Build or buy?
• Centralise or decentralise?
• Outsource or keep/bring in-house?

For those of us in the supply side, we need to be articulate, consultative and compelling in how we solve real and specific problems. We need to be clear on the methods and approaches that work to solving the problem. We need to be able to offer a range of delivery models. We need to be sympathetic and more agile to respond to the pressures of the CIO and we need to be subject matter experts not just technologists. This may mean greater awareness of the details of regulatory requirements and the operational challenges that technology is being asked to solve. One thing seems clear though, the pure technology play has had its day.

Jim Muir of AutoRek will be speaking at FTF’s upcoming ReCon London conference on May 9th.  Jim will provide insight on how to recognize emerging financial control problems, and debate how the market will evolve from a pure “technology” sale.

Attend ReCon London for timely discussions, networking & a Drinks Reception with the Industry’s Thought Leaders!

Corporate governance encompasses the interests of all parties involved in an enterprise such as its shareholders, suppliers, financiers, consumers and the overall community in which the firm exists. Therefore, corporate governance involves all components of a company’s management team.

The corporate governance framework generally consists of three main points of focus:

• The contracts between the company and it’s stakeholders in terms of distributing responsibilities, rights and rewards;
• Procedures for reconciling conflicting interests;
• And the procedures for proper supervision and the transparency of information, serving as a system of checks and balances.

The lack of proper corporate governance became a prominent issue after companies such as energy trading firm Enron went bankrupt in 2001 due to an internally inspired accounting fraud.

After the Enron and other corporate crime scandals, the U.S. Congress passed the Sarbanes-Oxley Act (SOX) in 2002 in order to restore shareholder and consumer confidence. The act, implemented by the SEC, is intended to create more transparency in terms of a company’s accounting methods and other key practices. More specifically, the SOX regulations require a firm’s executives to certify the accuracy of financial information and require boards of directors to take a more active role in governance.

Gresham Computing will be speaking at FTF’s ReCon London conference on 09 May 2013.  Click here if you would like more details on the event.

If you are an end user (bank, asset management firm, investment management firm, hedge fund, etc) and would like to request a complimentary pass, click here.

DMA services enable buy-side firms to send orders to exchanges and other trading venues via the memberships and trading infrastructure of sell side firms and other providers of trading systems and services. Although a third party is involved, the DMA process generally allows buy-side firms to exert a great deal of control over how their trades are executed.

The DMA process can help buy-side firms trade faster and at a lower cost while mitigating errors via automation. They can also sidestep the creation of an IT infrastructure and network links to multiple trading venues. DMA also minimizes information leakage because all trades are conducted anonymously using the DMA provider’s identity as a form of cover.

More recently, DMA has been combined with algorithmic trading, which is a rules-based trading that governs venue selection, order execution, timing and volume. The combination of DMA and algorithmic trading technologies has fostered the development of multiple trading strategies.

In a recent FTF News blog Eugene Gyro wrote about the use of social media sites in the wake of SEC clearing the way for public companies to use social network sites for announcements.  You probably think about social networks as a mechanism to deliver information and are mindful of the regulations and restrictions for your firm (or for you personally).  However, have you thought about social networks as a way to build your circle of influence and pipeline of potential clients?

Think of LinkedIn® as your electronic rolodex.  Consider this: LinkedIn has surpassed 200 million registered users worldwide.  Chances are good your clients, potential clients, referral partners, vendors and other key contacts can be found in LinkedIn.  As their careers’ progress, and some move to new firms, you can remain in contact using LinkedIn’s built-in functionally without having to remember current email addresses or contact information.  For new contacts, you also have a convenient way to connect using their InMail functionality.

So, the key question becomes:  how can you find and engage with the right contacts?  One of the best approaches for building online influence is to utilize groups on LinkedIn.  For instance, let’s say your firm’s head of distribution wants to identify and engage with RIAs that may be potential clients.  There are numerous advisor-focused groups to join.  Group members can post discussions and engage in virtual conversions with each other.

There is common etiquette to be aware of when using these groups.  My recommendations are:

Do

• Be a thought leader by providing links to relevant educational material
• Use group participation as a chance to learn by asking questions.  Follow and respond to comments
• “Listen” to the discussions to deepen your understanding of trends and key problems
• Read individual group rules to understand what to post and what not to post

Don’t

• Pitch your product or service directly
• Use this as a means to “SPAM” members you don’t know with invitations to connect
• Use the discussion section for self-promotion. This information should be reserved for the promotions section.

Below are lists of several groups on LinkedIn to get you started.  There are many more.  Simply search for “Groups” by using key phrases or keywords to find others that are relevant for your role.

Sample Advisor-focused groups

1. RIA Marketplace
2. Financial Advisor Magazine
3. Advisor Perspectives

Sample Peer Networking Groups

1. Boutique Asset Managers
2. Wall Street Middle and Back Office
3. Trade support / middle office & operations network

For more information, LinkedIn’s help center addresses frequently asked questions about groups.  And there is a searchable, alphabetical group directory you can use.

Want career information, recruiting advice, referral tips?  Join the ByAllAccounts LinkedIn group and start building your network.

To hear more from ByAllAccounts attend FTF’s SecOps Boston seminar on April 25th at the Millennium Bostonian.  ByAllAccounts will be presenting on how to evaluate outsourcing options for back office asset management operations.

In order to facilitate the safe and efficient trading of derivatives, ISDA has created a standardized contract, known as the ISDA Master Agreement, for those firms that wish to participate in private derivatives transactions. In fact, although the ISDA Master’s Agreement was established for financial institutions, it is also used by many non-financial, multi-national corporations.

In addition to the standardized contract, ISDA works with policymakers around the world to achieve a greater understanding of the complexities of the privately negotiated derivatives market especially as global markets embrace new regulations for cleared and executed OTC instruments. ISDA also promotes best practices for risk management.

ISDA has more than 815 members from institutions in 60 countries. Members of the association include market participants such as corporations, service providers, government entities, investment managers, and exchanges that rely on or facilitate OTC derivatives.

The association’s members are classified into three categories according to ISDA by-laws: primary members (dealer firms); associate members (service providers); and subscribers (end-users).

Only ISDA members are entitled to receive the association’s legal opinions on the enforceability of the netting provisions of the 1992 and 2002 ISDA Master Agreements, which cover credit risk and capital requirements in jurisdictions subject to BIS capital regulations.

The association has obtained netting opinions for more than 55 jurisdictions and continues to commission more netting opinions for its members. ISDA also obtains collateral opinions for its members and has obtained more than 45 of them, which are updated annually.