While the New Year brings with it some promise of an improvement in the global economy and policy, it might be an exaggeration to suggest that 2013 will turn the global macro environment around. As we begin the year, we have to acknowledge the continued existence a number of fundamental issues that have plagued us in the recent past.
The economy of Asia Pacific is not as strong as it was a few years ago, although the Chinese economy shows signs of resistance and should be able to maintain some of its momentum over the months ahead. Japan has an important opportunity to address some of the difficult issues that have plagued its economy and led to stagnation. India must come to terms with the need for ongoing reforms and can no longer afford to open up its economy in fits and starts.
Many of the smaller economies have good reason to be more optimistic in the coming year as they count on increasing regional trade and overall development. Hong Kong and Singapore will continue to reinforce their role as regional financial centres, especially as they make the adjustments necessary to deal with the new central clearing environment for over-the-counter (OTC) derivatives globally and attempt to take business away from larger centres such as London and New York.
The US and Europe
Reviewing the prospects for the leading economies around the world, we have to agree that the brouhaha around the so-called US fiscal cliff has been one of the main centres of attraction for the financial markets as we have moved into 2013. The ‘love to hate’ affair between the Republicans and the Democrats captivated the entire world and finally reached its climax, with the Senate approving the deal worked out with President Obama, followed by the House of Representatives engaging in heated discussions and attempting last-minute negotiations before approving it by a large majority..
If the deal had failed to pass there would have been severe repercussions, not just for the US economy but also the global economy. Going over the fiscal cliff would have halted the improvement in the US economy of the past year and it would struggle to come out of the downturn. There have been promising noises made about US industrial production, employment, and housing prices in the past few months; all of which would count for nought if rising taxes and falling expenditure were to impact growth prospects. Against the backdrop of an uncertain European economic landscape, a backward move from the US would mean that the global economy would take much longer to recover.
Moving on to the European economy, there has been some improvement in Greece’s position and the government has recently been praised for the manner in which it has undertaken austerity measures. But the underlying structural weakness in the European economy persists and there is still an over-dependence on the German economy to bring about a turnaround.
Another economy which could have been pivotal to growth and renewal in Europe was that of the UK. However, it is currently going through a crisis of identity as the British government focuses its energies on renegotiating its relationship with the rest of the European Union (EU). To an outsider, the UK’s current approach seems to be one of wanting to enjoy all the advantages of a common market without having to pay the price to do so.
As has been repeatedly mentioned, its European partners are very close to losing their patience altogether with their UK counterparts. Even if David Cameron manages to renegotiate and win the deal that he is interested in, it might be a pyrrhic victory for his country as it will surely lead to an isolation of London as a financial centre from the rest of the EU in the long run. Even if leading EU countries such as France and Germany do not oppose their markets being served from an ever more politically distant London, over time their financial markets and companies would realise that coping with increasing EU regulations might be easier if they keep their financial business closer to home, as opposed to sending it to London or New York where they would have to comply with another set of extensive regulations.
On the issue of regulation, an important change being brought about in 2013 is the effect on collateral management of various regulations being implemented almost simultaneously, including Basel III, the Dodd-Frank Act in the US, the European Market Infrastructure Regulation (EMIR) and Solvency II. Their collective effect is to make it more difficult to trade the same kind of volumes that market participants have been used to in the past. Collateral optimisation is going to become key for all firms trading in the financial markets. Buy-side participants will have to be more active collateral risk managers and the role of clearing houses will also come into scrutiny with regard to collateral segregation and also portability, in case of broker default.
For treasurers in Asia, an important development will be the unprecedented availability of advanced risk management platforms to firms and banks of all sizes, at a time when these are becoming more important to the success – and indeed survival – of market participants. Sophisticated risk management is no longer the playground of just the leading global banks, or buy-side and corporate treasuries.
This trend will allow regional firms in Asia to prepare themselves for the challenges ahead. The growing importance of asset classes such as currency and commodities can also be seen in this context, as rising volatility in these markets will require better risk management capabilities on the part of market players. While 2013 might not be the year in which firms are able to leave the downturn behind and ready themselves for a period of growth and certainty, it could certainly be one in which they become better prepared to handle the complexities of a volatile global economy.
Besides risk management, improving technology is also going to play a crucial part in the trading arena, with smaller and medium-sized firms using more sophisticated trading platforms to trade and clear in the global markets. Buzz phrases such as HFT (high-frequency trading) and big data are expected to have much more direct relevance for the regional players in Asia Pacific, as these firms will be able to tap into the various offerings of leading global vendors in these areas. So we can expect 2013 to be the year in which recent technological improvements in the financial industry become accessible to its smaller players, which will help them compete on a more level playing field with their much larger global counterparts.
In summary, the economic environment is still turbulent and there is only a remote prospect of any dramatic and widespread improvements in the coming months. There is going to be a hint of weakness in the US economy and problems will continue to plague Europe. The Asia Pacific economy will be in a stronger position, but as recent experience has shown, its fate still is closely intertwined with that of its leading global counterparts. So, at best, we expect there to be only gradual improvement in the economic and political environment.
The main benefits that 2013 will bring is with regard to the practices and technologies that Asian firms have access to, which will give them a better opportunity to compete with global firms. So there certainly will be opportunity for firms that are able to exploit new and upcoming risk management and trading technologies to get an edge in the market. It could also be a good time for firms that have not paid attention to their risk management platforms and trading and clearing infrastructure to look at the technological and regulatory requirements for competing in a more globalised, democratised and centralised trading environment.
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