aif - abn amro clearing · perspective on three key topics. 24 white paper jérôme lussan: ’how...

AIFMAGAZINE

‘ We don’t mind change. On the contrary, we see it as a rich source of opportunities.’

Powered by ABN AMRO ClearingFor professional and qualifi ed investors only

THE AMSTERDAM INVESTOR FORUM 2013 Jan Bart de Boer, Chief Commercial Offi cer ABN AMRO Clearing

Contents

4 ROUND TABLEAndrew Fisch, Graham Neilson

and Kyle Bass give their

perspective on three key

topics.

24WHITE PAPERJérôme Lussan: ’How to run

offfshore management compa-

nies and funds with substance

and corporate governance’.

27, 31 AAC FACTSOur Markets shares and

more facts about

ABN AMRO Clearing.

10 INTERVIEWJan Bart de Boer, Chief

Commercial Offi cer

ABN AMRO Clearing:

'Every change is an

opportunity'.

32AGENDA The Agenda of The

Amsterdam Investor Forum

13 February 2013.

18 ESSAYNassim Taleb: 'Why do I

believe that a certain class

of people has an incentive

to “look good” rather than

“do good”?'

15PROFILEAlternatives 4 Children

is a charity initiative of a

number of professionals

from the Dutch hedge

fund industry.

28REGULATIONSInfrastructure Regulation

(EMIR) and the US Dodd-

Frank Act.

2

DisclaimerThe information set out in this booklet has been prepared by ABN AMRO Clearing Bank N.V. (“AACB”) exclusively for the Amsterdam Investor Forum, is not intended to be comprehensive and is proprietary to AACB and may not be disclosed to any third party or used for any other purpose without the prior written consent of AACB. AACB does not accept any liability which may be based on content of this booklet. In particular, no representation or warranty is given as to the accuracy or any (fi nancial) information contained herein or as to the achievement or reasonableness of any forecasts, projections, prospects or returns.

AIF MAGAZINE_DEF.indd 2 04-02-13 12:01

3

Introduction

Welcome to the 2nd Amsterdam Investor Forum hosted by

ABN AMRO Clearing.

Herewith we present you the fi rst edition of the AIF Magazine, which

will take you, via interesting articles and interviews, to today’s

AIF-agenda on page 32. Please browse through the AIF magazine

and feel free to take your complimentary copy home. Enjoy reading!

No time for reading today however, as the AIF agenda indicates

that we have a busy and exciting day ahead of us. Today we will be

addressing a number of interesting topics, which we believe are

relevant in today’s challenging market.

We are very fortunate that four prominent keynote speakers will

share their view on Investing in Credit, on Fragility, on Macro

Investment ideas and even from “30,000 feet and 3,000 feet”…

Today you will be asked to give your vote, to fi nd out who will be

the 1st winner of the AIF Factor.

In addition, you will be updated on regulatory and due diligence

related matters and today’s esteemed panellists will share their

insights with us about Managed Accounts, CTAs and the Dutch

investment climate. The Battle of the Global Macro minds is going

to be today’s “Grand Finale”. We invite you to pose candid and

provocative questions, for which we thank you in advance.

We appreciate that you are attending the Amsterdam Investor

Forum and do hope you fi nd the content of both the Forum and

the AIF Magazine useful and timely.

Yours sincerely,

ABN AMRO Clearing

Rens Laan

Head Institutional Investor Services

20THE AIF FACTORSix pitches have been

nominated as fi nalists; they

compete to become the 1st

winner of the AIF Factor!

COLOPHON

ABN AMRO Clearing:

Joris Groot, Laura de Haan

Concept and realization:

Scripta Media: Jan Bakker,

Naomi Moezel, Coos Kouwenhoven,

Jacqueline Konermann

Art direction:

MAT Ontwerp, Maya Timmer

Photography:

Erik Franssen (Jan Bart de Boer)

Text:

Joost Bijlsma (interview

Jan Bart de Boer)


4 ROUND TABLE

WHAT WILL THENEXT

BIG PLAY BE?


5

Role of the Portfolio

From your perspective, what is the role of hedge Funds in a portfolio - should they be seen as diversifi cation strategies or as targeted return strategies?

Andrew Fisch: ‘Hedge funds can be used for diversification purposes as well as to target returns. The difference will be the selection of strategies and portfolio construction. Our diversified

fund has as one of its goals to be uncorrelated to markets. Hence it should be used as a diversifier to source returns that do not contain the same risk factors as other parts of ones portfolio. It is important to note that other forms of “Alternative” investments such as real estate and private equity are typically long only investments and do not offer such diversification benefits. Hedge funds can also be used to capture a certain theme or access returns traditional money management cannot. We invest in Divergent strategies that can profit from irrational markets, large dislocations or high volatility. These can effectively hedge a traditional or hedged portfolio.’

Kyle Bass: ‘The role of hedge funds in a portfolio is clear based upon multiple conclusions of research that stipulates that hedge funds offer superior risk-adjusted returns versus equities. They

should be seen as both diversification and targeted return strategies de-pending on their mandate. The phrase “hedge fund” has degenerated into more of an omnibus term for any type of investment partnership. Strategies differ dramatically across this amorphous “hedge fund” spectrum and char-acterization or descriptions as such need to be more idiosyncratic.’

Graham Neilson: ‘It is hard to find a fund pitch book that doesn’t refer to the investment nirvana of high target returns and diversification. The reality is bad press isn’t hard to find and

typically refers to low actual returns and no real diversification! In its most wholesome sense, hedge fund investing should be about returns. However, in a portfolio sense it is about both risk as well as returns. Some hedge fund strategies are designed and managed as diversifiers – purely long/short, market neutral, illiquid or option type strategies. Other strategies can reflect the blurring of lines between traditional long only investments and hedge fund activities. For example a hedge fund manager with a long bias fund should be seen as a targeted return strategy. So the role of hedge fund investing in a broad macro allocation really depends on the hedge fund strategy in question and whether the main bias is as a risk reducer or return enhancer. Understanding the strategy, the asset class and the approach is critical before being able to decide what the desired portfolio impact is.’

Didier Duret, CIO ABN AMRO Private

Banking posed a series of questions

to three keynote speakers of The

Amsterdam Investor Forum 2013 to get

their perspective on three key topics:

the role of the portfolio, the market environment and the changing operational

environment.

ROUND TABLE


6

ROUND TABLE

ROUND TABLE

Market Environment

We are in a world of what we call ‘fi nancial repression’. How are hedge funds coping? What trades or themes are still left to play and what will the next big play be?

Andrew Fisch: ‘Govern-

ments have taken away

some of the opportunity

sets hedge funds use but are also cre-

ating opportunity sets for the future.

Excessively low interest rates and the

artificial backstops that governments

have established on risk have taken

away return potential from spread

strategies where managers take ad-

vantage of risk premium by being long

underpriced spreads and short poor

risks. All risks are being discounted

regardless of their underlying funda-

mentals. It should be noted that these

spread based strategies have profited

tremendously during this process.

As equity markets peak in earnings

growth, the dispersion between good

and bad companies will become more

pronounced. That provides opportuni-

ties for strategies that use long, short

and relative value in equities, credit

and events as long as stability exists.

Looking forward, the beta move in

credit is over. The same environment

is providing an opportunity to get

Divergent exposure, exposure that

is either directly or indirectly long

volatility. Eventually the government

support will be removed or become

powerless to prevent some event that

drives rates up, spreads wide, equities,

currency or commodities strongly in

some direction. The next big play is

credit spreads widening and or rates

going up (bonds strongly down). Pa-

tience may be required.’

Kyle Bass: ‘Outside of

being 100% net long and

hoping Bernanke and his

brethren manipulate the inputs with

success ad-infinitum, I tend to think

that hedge funds will prevail versus

conventional long-only group think.

This period of time is clearly the single

most difficult investment environ-

ment that we have seen in the past 2

or more generations. Central Banks

are building Potemkin Villages of epic

proportions. They refuse to allow a

Schumpeterian flush that would oth-

erwise be very helpful to the market-

place. They continue to prop up equity

and debt prices while simultaneously

suppressing volatility. This Potemkin

Village will eventually collapse under

its own weight via the emergence of

runaway cost-push inflation. The next

“big play” will most likely emerge in

the rates and swaps marketplace. Very

few will be positioned to get it right.’

Andrew Fisch is Executive Vice President and Co-Chief Investment Officer of Fund of Funds at SSARIS Advisors (State Street Absolute Return Investment Strategies). His responsibilities include manager selection, research, due diligence and monitoring, and sits on the investment committee. SSARIS, an affiliate of State Street Global Advisors has three principal areas of business. Fund of Hedge Funds, Fund of Funds Advisory and Single Strategy systematic futures trading. SSARIS Fund of Funds invests globally in liquid long/short equity, relative value and global-macro strategies.Mr. Fisch has been in the hedge fund and alternatives industry for 27 years. Prior to joining SSARIS, he was a founding partner at Aurum Capital Management where he managed the Aurum Venture Fund (Venture Capital) and developed hedge fund of funds products. From 1989 through 1996 he was a portfolio manager for Swiss asset manager Controlfida. There he managed their long/short U.S. Equity Fund, enhanced with options and index futures. For the five years preceding his efforts for Controlfida, he worked for Victor Sperandeo at Hugo Securities as a proprietary trader for that firm¹s multi-strategy hedge fund.

Mr. Fisch has served on several corporate boards, and holds NASD series 24 and 7 licenses. He studied Economics at Hobart College and was admitted to Honors in Economics in 1981.


7

Graham Neilson: 'Repres-

sion has led to some of the

best returns across many

asset classes for some time – long may

it last! Hedge fund returns have varied

widely across strategies but more re-

cently credit related themes have dom-

inated. One would think investment

flows would pick up for alternatives to

zero cash and near zero government

rates, at the margin certainly. Outside

of the main euro issue, some major

themes are: compression, new illiquids

and growth versus rate risks. Com-

pression: spread compression is con-

sistent with policy and history – there

is less left but themes are still to play

out in certain areas of fixed income

which remains a distorted asset class.

New illiquid investments: related to

this compression phenomenon, the

shift of assets off banks’ balance sheets

continues and demand grows from

real money directly or indirectly via

hedge fund strategies. Growth versus

rates: the debate between growth and

market rate risk is likely to rumble

on. The structural demand for fixed

income is unlikely to be knee-capped

by 2-3 quarters of decent growth but

should provide decent tradable moves

in major markets.'

Operational environment

Are hedge funds leaving an exotic playing fi eld for a more level playing fi eld?

Andrew Fisch:‘There are some tools being taken away from hedge funds.

Some are small and some not so. Leverage limits could depress returns. Disclosure of shorts in Europe will prevent managers from having effec-tive research meetings with compa-nies. Limits on derivatives, restricts

investors ability to buy and sell risks to one another. These also restrict tradi-tional investors and companies from hedging their risks. In fact, regulation may create tail risks as investors try to find other methods to mitigate risk (recall portfolio insurance in 1987). It should be noted that when assets become extremely stressed, it is usu-ally only hedge funds that provide capital. One can only hope that his ability is not compromised. However, it is unlikely that hedge funds will be prevented from operating in a sub-stantially similar fashion as before.’

Kyle Bass: ‘This question

is a funny one to me. Are

we examining the cause

or the effect when ask the question

of levelling the playing field or hedge

funds leaving the exotic playing field?

With institutional investors requir-

ing weekly and daily liquidity, the

duration mismatch of more exotic

THE NEXT “BIG PLAY” WILL MOST LIKELY EMERGE IN THE RATES AND SWAPS MARKETPLACE. VERY FEW WILL BE POSITIONED TO GET IT RIGHT

ROUND TABLEE


8 ROUND TABLE

THE DEBATE BETWEEN GROWTH AND MARKET RATE RISK IS LIKELY TO RUMBLE ON

ROUND TABLE

Graham Neilson, Chief Investment Strategist Cairn Capital.

Graham is the Chief Investment Strategist at Cairn Capital after moving over from Credaris in April 2010 where he had been the Chief Strategist and Head of Risk. His responsibilities include leading Cairn Capital’s investment strategy and asset alloca-tion. Prior to joining Credaris in 2004 Graham was Global Head of Credit Strategy at ABN AMRO in London. Before ABN AMRO, Graham was a strategist and portfolio manager in the proprietary trading operation at HVB and a senior credit strategist at Bear Stearns, both in London. He began his career as an economist at Asia Equity in Hong Kong in 1993 where he worked for four years before moving to London. After moving to London, Graham’s role broadened out to cover fixed income, credit and currency markets.

Cairn Capital is an institutional credit asset management and advisory firm. We operate across all areas of credit including corporate bonds, ABS and loans ranging from investment grade to high yield with an emphasis on the European credit market. Our portfolio management expertise spans pooled investment funds and segregated accounts. Our advisory mandates have included analysis, valuation and monitoring of large pools of complex credit assets for institutional clients. In each case, we employ our fundamental credit understanding, technical capability and a willingness to innovate. Cairn Capital has built relationships with and manages assets for UK and global investors.

types of strategies become untenable

to the manager. UCITS (etc.) Have

such strict requirements that they

will inevitably cut out the more exotic

lending schemes, restructurings, and

many others. Returns will suffer dra-

matically as liquidity is forced down

manager’s throats. The University of

Texas Investment Management Com-

pany (UTIMCO) recently conducted

a study of incremental IRRs earned

in exchange for giving up additional

liquidity. The net result of the study

was that forgoing roughly 18months

of liquidity produced excess annual

returns of +150bps over the period of

the study. Therefore, more liquidity

is not necessarily conducive to better

investment results. As you invest in

these funds, the idiosyncrasies of each

manager (risk management, invest-

ment abilities, intuition, track record,

personalities, etc) become the most

important variables in order to de-

termine complete investment success

over a long-term time period.’


9

Graham Neilson: ‘Ex-

otic needs to be defined!

Regulatory pressure has

risen but this is not all bad for hedge

funds… The shift towards greater

regulatory oversight, transparency

and standardisation has been in place

for many years. Hedge fund invest-

ing grew and spread into the institu-

tional investor space and has been a

meaningful influence on markets and

economies so the evolution became

inevitable. Many hedge funds were

already in a good position to be able

to deal with that regulatory change.

ers and pension funds are less able to

invest directly. Some newer regulatory

changes are still to come to reality and

creating confusion such as Solvency 2.

However, this is also providing a match

between banks reducing exposure and

liability matchers needing longer term

higher yielding assets. This should

eventually work through, increases

investor knowledge as well as diversifi-

cation and decreases leverage in critical

parts of the market including real

estate lending. I don’t know if we can

call real estate debt exotic or niche but

some parts of it are relatively new!’

Re-regulating the industry is slow-

ing transaction flow, capital raising

is a slow game getting back to basics

of relationships but the incentive to

stick with managers is also higher.

Some areas have seen outright bans

such as sovereign CDS but this has had

little meaningful impact. Hedge funds

have been able to provide investors

with products in UCITS format and

were a large part of the growth in that

space. Arguably, the ability to generate

returns from some of the more “exotic”

areas of the market are now more left

down to hedge funds as banks, insur-

ROUND TABLE

Kyle Bass, Managing Member: Mr. Bass is the principal of Hayman Capital Management L.P. Hayman Capital Management, formed in December 2005, serves as the investment manager to private funds focused on global event-driven, residential mortgage-backed securities and asymmetrically priced “tail” opportu-nities. Previously, Mr. Bass co-managed private funds with strategies focused on sub-prime credit.

Mr. Bass is a member of the Board of Directors of The University of Texas Investment Management Co. (UTIMCO), which has aggregate assets of over $26 billion. Mr. Bass is a founding member of the Serengeti Asset Management Advisory Board and serves on the board of directors of the Troops First Foundation, Business Executives for National Security, and Texas Ranger Association Foundation. In addition, Mr. Bass is a member of the Advisory Council of the Comeback America Initiative, which is dedicated to pro-moting fiscal responsibility and sustainability. Mr. Bass has testified as an expert witness before the U.S. House of Representatives, U.S. Senate and Financial Crisis Inquiry Commission.

Prior to forming Hayman Capital Management, Mr. Bass worked as a Managing Director at Legg Mason, Inc. and a Senior Managing Director at Bear, Stearns & Co., Inc. Mr. Bass graduated with a Bachelor of Business Administration in Finance and Real Estate Finance from Texas Christian University in May 1992.Hayman Capital Management, L.P., is a Dallas-based investment manager founded by J. Kyle Bass in De-cember 2005. Mr. Bass is the managing member of Hayman Capital Management’s general partner and has more than 18 years of experience in the securities industry, including senior positions with Legg Mason and Bear Stearns. Hayman Capital Management provides investment advisory services to its proprietary global-macro fund complex. Hayman Capital Management’s investment professionals possess a broad spectrum of investment experience and expertise in debt, equity, commodity and credit markets.


10 INTERVIEW

Two of the basic requirements for anyone wishing to become a successful player in the fi nancial industry are a taste for volatility and a willingness to move with the times. As Jan Bart de Boer, Chief Commercial Offi cer ABN AMRO Clearing sees it, they have always been ready to respond to change, for example in the shape of new rules and regulations. ‘At the same time, every new product or service we’ve launched has always refl ected our core business principles of cost-effi ciency and robust risk management. That’s never changed.’

‘ EVERY

CHANGE IS AN

OPPORTUNITY’


11


12 INTERVIEW

TThe Dutch have traditionally set the pace in global

trade and finance. Indeed, The Netherlands rightly

regards itself as the cradle of international trade. Not

only was the Dutch East India Company, founded in

the 17th century as a trader in spices, the world’s very

first multinational company, it was also the first ever

public limited company whose shares were negotiable

on the open market. The principle of financing trade

has been in the Dutch banks’ DNA ever since, and

The Netherlands has remained a powerful source of

financial innovation – for example, it was the home

to the world’s first options exchange, which opened in

Amsterdam in 1978.

‘Effective, accessible markets are the lifeblood of in-

ternational traders like the Dutch. ABN AMRO is part

and parcel of the national tradition of trade and trade

finance,’ asserts Jan Bart de Boer, a member of ABN

AMRO Clearing’s board, at the company’s Amsterdam

head office. His point is borne out by a print hang-

ing on the wall of his office – a view of 17th-century

Amsterdam reproduced from an atlas by Frederick de

Wit. De Boer. ‘Professional Trading Companies account

for the bulk of our global customer base with a steep

increase in the number of alternative fund managers

using our services in the last 2 years”.

We operate out of 12 offices around the world on over

150 market places (exchanges, FX platforms, dark

pools, crossing networks and MTF’s), processing a huge

variety of transactions in shares, options, futures, FX

and other financial products. We handle around 16

million transactions a day on average, with the figure

climbing to 20 or 30 million on busy days. The volume

of business is still on the rise despite the recession!’ De

Boer reckons the company’s success is due largely to

its ability to innovate. ‘Just like our customers, we are

constantly doing our best to respond to changes and to

excel. We don’t mind change. On the contrary, we see it

as a rich source of opportunities.’

ADAPTING TO CHANGEThe subject of innovation has been virtually taboo in

the financial community ever since the financial crisis

first took hold in 2008. To a large extent, this has been

due to all sorts of new risky products being sold to

consumers. But De Boer is quick to dismiss the sugges-

tion that innovation has passed its sell-by date. ‘On the

contrary, we may need to think more about innovation

than we did in the past. After all, financial institutions

that fail to keep up with the changing times are placing

their own futures at risk. It was Charles Darwin who

taught us that it is not necessarily the strongest or the

smartest who survive, but those who are best at adapting

to change.’

And today is above all else a time of change – not simply

as a result of technical innovations and the advent of

the digital age, but also as a consequence of regulation.

Whereas the first wave of new regulations tended to

focus on the need to open up markets, after the financial

crisis, the emphasis shifted towards the containment of

risks and the desire to make products more transparent.

Leading to constant changes in the marketplace. As De

Boer sees it, the trick is to see the changing regulatory

environment as an opportunity rather than a threat.

‘You’ve got to respond to change quickly, by coming up

with new products and services. That’s something we’re

good at. We’ve always been fast adapters.’

De Boer cites as an example of a new regulation to which

ABN AMRO Clearing has adapted the new EU Markets

in Financial Instruments Directive (MiFID I), adopted

in 2007. De Boer: ‘In the old days, you had national

markets dominated by monopolists. French investors,

for example, could only buy French shares. This was

of course a highly undesirable situation.’ The state of

the trade in financial products was totally inconsist-

ent with the fundamental European principle of free,

open markets. Moreover, with their unnecessarily high

transaction costs, the European markets were much

less efficient than those in the US. De Boer: ‘So it hardly

came as a surprise when the European Commission

decided to put a stop to it. MiFID I paved the way for

competition between European exchanges and chal-

lengers and forced best execution obligations on brokers

to offer their customers the best possible terms. This

was a change we’re only too pleased to go along with.’


13

PIONEERING SPIRITABN AMRO Clearing has played an important role

in making the trade in equities and derivatives more

competitive. For a start, five years ago it was one of

the first shareholders in the start-up exchange Chi-X

which grew to become the biggest European exchange

by market volume. Chi-X has been the driving force

behind lower transaction costs in Europe. And Chi-X

is not the only pro-competition venture in which ABN

AMRO Clearing has played a part, as De Boer explains.

‘We’re also one of the founders of The Order Machine

(TOM). This is an alternative derivatives exchange that

works with a search engine called TOM Smart Execu-

tion, which performs instant comparisons of the prices

of investment products on different exchanges. The

idea is to enable investors to benefit from lower prices

than those charged on conventional exchanges. Among

the other members of TOM are BinckBank, Optiver,

IMC and – more recently –Nasdaq. Together, our aim

is to foster competition. Both Tom and Chi-X use the

services of a subsidiary of ours called EMCF, a central

counterparty for equity transactions that we set up five

years ago. It’s a brilliant illustration of how innovation

pays in the end.’

NIMBLEShould you conclude from the above that ABN AMRO

Clearing is ready to rest on its laurels after launching

all these new services, think again. Indeed, Jan Bart

de Boer makes clear that it’s just the start of things to

come. ‘Every change is an opportunity.’ ABN AMRO

Clearing is currently working on alternative products

and services in response to the new European Market

Infrastructure Regulation (EMIR), which is designed

to raise the transparency of the market in OTC deriva-

tives. ‘There’s a similar trend in the electricity industry,

where people are also calling for more central clearing.

That’s another market for which we are developing new

products,’ explains De Boer.

It’s the customers who keep the company sharp, De

Boer reckons. ‘Most of our customers are active players

in an ultra-competitive business. Like us, they’re pas-

sionate about what they do and they are nimble opera-

tors. Competition forces you to stay on the ball. Our

clients tend to think more in terms of solutions than in

terms of problems. And they expect their suppliers to

meet high standards of efficiency, control and speed.’

While some firms may see all these new rules and

regulations for financial markets as a threat, De

Boer regards them as a source of opportunities. For a

start, the calls for greater transparency and a sharper

customer focus are music to his ears. ‘We have a very

clear company profile. We’ve always been specialists

in the processing of transactions business, and that’s

not going to change. ABN AMRO Clearing Bank is a

special sort of bank, a provider of financial services that

doesn’t actually trade itself. We do business only with

third parties and are passionate believers in the need to

protect their intellectual property rights. It’s a bit of a

sine qua non, really, if your customers include trading

firms or funds pursuing a huge variety of investment

strategies.’

RISK MANAGEMENTWhilst recognising the need to go with the flow, De

Boer also believes in the importance of sticking to your


14 INTERVIEW

principles. Indeed, he reckons there’s simply no room

for compromise on that score. One of ABN AMRO

Clearing’s core business principles, he says, is keep-

ing costs down. ‘It’s in our genes. Cost efficiency is one

of our biggest motivators. Our business performance

depends on our ability to generate a high turnover and

that means keeping unit prices as competitive as we

can.’

Risk management is another core principle, De Boer

explains. ‘We are fully aware that our customers de-

pend tremendously on our ability to continue to deliver

a top-quality performance. That’s why we’re so serious

about protecting ourselves against operational and

financial risks.

De Boer believes that ‘understanding your risks’ is

absolutely vital in the clearing business. ‘We have a

very robust system of risk management. For 25 years

now, we’ve worked with stress based models that have

coped well during all kinds of markets events. Our risk

management systems are capable of instantly identify-

ing transactions and predicting their impact within just

a couple of seconds. That means, for example, working

out the risk of a customer making a loss within the next

30 days.’ De Boer points out that ABN AMRO Clearing

is also capable of offering risk management services to

its customers’ customers.

‘Managed account clients, for example, can use our

risk management data as additional tool to identify the

degree of risk to which their portfolios are exposed.’

PRIME CLEARING FOR FUNDS The combination of cost efficiency, sound risk man-

agement and a strong balance sheet means that ABN

AMRO Clearing has a great deal to offer investors, both

institutional and alternative. “Our Prime Clearing offer-

ing marries the best of both worlds” says de Boer. “We

combine our award winning custody services, ensuring

operational excellence and asset segregation possibili-

ties, with our globally leading clearing and financing

business”.

Our services have been developed for investors perform-

ing large numbers of transactions or operating on a

relatively large number of exchanges and market places.

Given our strong global futures and FX footprint we are

the ideal partner to Commodity Trading Advisors (CTAs)

and FX Funds. Our financing and securities lending ca-

pabilities make us a logical choice for long-short funds.

The ABN AMRO renowned commodities expertise add

value to commodity investors and our options knowl-

edge makes us a logical choice for volatility funds.

De Boer believes that all investment styles share one

common denominator. They all need safe partners who

are cost efficient. ‘It’s a tough time for investors hoping

to make returns.

Moreover, regulators have ratcheted up their require-

ments, the regulations on the central clearing of OTC

derivatives transactions are a case in point. Hence man-

agers and investors need to spend more on management,

compliance, reporting and so forth. In other words,

there are plenty of good reasons for finding a prime

clearing partner who believes in keeping costs down and

who’s reliable and willing to innovate.’

WE COMBINE OUR AWARD WINNING CUSTODY SERVICES, ENSURING OPERATIONAL EXCELLENCE AND ASSET SEGREGATION


Alternatives 4 Children (A4C) is an independent charitable foundation established in 2011 in The Netherlands with the aim to involve professionals from the Dutch (Alternative) Financial industry. A4C supports sustainable projects and raises money for charities involved in improving the living standards of children. The foundation is a private initiative of a number of professionals from the Dutch hedge fund industry.

PROFILE 15

MAKING CHILDREN

HAPPY


PROFILE

The mission of A4C is to improve and develop chil-

dren’s wellbeing with a focus on developing countries.

Providing long lasting alternatives to children in need

with a focus on education :

• Raise funds through the alternative investment net-

work

• Carefully select projects involved with education

• Help children get access to (a better) education

• Ultimately help populations become self sustainable

In providing alternatives to children, the focus must

ensure that children are provided the opportunities

they deserve by promoting education, safety and devel-

opment needs. This is the goal behind the projects, A4C

chooses based on the following 6 criteria:

1. Provide alternatives for children: focus on projects

who significantly improve the chance of children in

difficulties in the following areas :

• Education

• Healthcare

• Hygiene & clean water

• Housing and family support

2. Sustainability: focus on projects that show possibili-

ties of becoming sustainable in the long term

3. Independence: the support should lead to self-suf-

ficiency and not be dependent on permanent funding.

The support should contribute to an entrepreneurial,

self reliant project. A4C requires the selected projects

to show personal involvement and commitment by set-

ting objectives and realistic short plus long term goals.

Therefore, the aim of A4C is to support projects for a

maximum of 3 years.

4. Local anchoring: personal involvement of parents,

teachers and the local community, ensures the com-

mitment to the projects. This willingness is important

to ensure the durability of the schooling, a safe haven

environment for the children, as well as the independ-

ence from funding reliance.

5. Transparency: the projects should be fully transpar-

ent on the allocation of funding received from A4C.

They need to clarify objectives and short and long term

goals and A4C expects them to communicate regularly

with status updates in every way possible.

6. Small scale: small scale projects are selected to

ensure maximum added value and impact. This way

realistic goals can be set for the selected projects and

obtain a clear overview on how the funding is allocated.

By organizing fund raising events among the Dutch

(Alternative) Investments Community, A4C will raise

THE PRIME OBJECTIVE IS PROVIDING AN ALTERNATIVE FOR CHILDREN IN NEED

16


17

money for its projects. In 2012, three successful events

raised over EUR 100,000! With the funds raised it

enables A4C to fulfil her prime objective : providing an

alternative for children in need.

The following charity projects are currently

supported :

• the Edelweiss school in Bangalore, India

• the Scarab school in Mali

• Tiny Miracles in India

• Day For Change in The Netherlands

• Kamitei in Tanzania

In order to provide the required support, A4C needs

to build a relationship with the projects it supports by

listening, understanding and adapting to the needs of

the people and the local working environment.

ABN AMRO Clearing also finds it important to adapt

its needs to that of its clients, especially when those

relationships extend beyond the world of business

to embrace society in all its facets. This is why ABN

AMRO Clearing supports Alternatives 4 Children.

Tiny MiraclesOne of the projects A4C supports is Tiny Miracles, which is a Netherlands based charitable organization that was created by Laurien Meuters in 2010 with one goal : lift a community of 700 people in the red light district of Mumbai from “very poor” to “middle class” within 10 years. She spent some time for ABN AMRO in Mumbai, which is how she faced the living conditions there. She became acquainted to Professor Asha Rane who oriented her towards the Pardeshi community.

Unique about Tiny Miracles is that they operate with a small budget and intend to keep that way, controllable. They also work together with the community and are able to address the main challenges, to help them climb the social ladder : they have a “global approach” in the sense that they recognize education from the parents and the children, income, living conditions, healthcare,.. are all intertwined and need to be tackle all at once.How do they intend to reach their targets ? They have started with tackling all the main aspects of the Pardeshi community’s life as mentioned above. Their target is to keep on having funds to sponsor the education, healthcare, training, etc. until it becomes self sustainable (by 2020).

What is the value that Tiny Miracles provide? Tiny Miracle reaches about 200 children including 35 at school. In 2 years of activity only, they have been able to convince the community how beneficial it could be for them and start tackling some of the main aspects of their lives: education, healthcare, self confidence and joy !

If you would

like to join any

of the events or

also would like to

become a donor,

please visit :

www.A4C.nl or

send an email to

[email protected]


18 ESSAY

Those who have the upside are not necessarily those who incur the downside. For

example, bankers and corporate managers get bonuses for “performance,” but

not reverse bonuses for negative performance, and they have an incentive to bury

risks in the tails of the distribution – in other words, to delay blowups.

The ancients were fully aware of this incentive to hide risks, and implemented

very simple but potent heuristics. About 3,800 years ago, the Code of Hammura-

bi specified that if a house collapses and causes the death of its owner, the house’s

builder shall be put to death.

This simple tenet is at the origin of “an eye for an eye” and the Golden Rule in

ethics (“Do unto others as you would have them do unto you”). But, beyond eth-

ics, this was simply the best risk-management rule ever.

The ancients understood that the builder always knows more about the risks

than the client, and can hide sources of fragility and improve his profitability by

cutting corners. The foundation is the best place to hide risk. The builder can

also fool the inspector; the person hiding risk has a large informational advan-

tage over the one who has to find it.

Why do I believe that a certain class of people has an incentive to “look good”

rather than “do good”? The reason is simply the absence of personal risk. And the

problems and remedies are as follows:

First, consider policymakers and politicians. In a decentralized system – say,

municipalities – these people are checked by a feeling of shame upon harming

others with their mistakes. In a large centralized system, by contrast, the source

of errors is not so visible, and a spreadsheet does not make one feel shame. This

penalty, shame, in addition to other arguments, is a case for decentralization.

WHY DO I BELIEVE THAT

A CERTAIN CLASS OF

PEOPLE HAS AN INCENTIVE

TO “LOOK GOOD”

RATHER THAN “DO GOOD”?

MORE SKININ THE

GAME2013

IN


19

Second, we misunderstand corporate managers’ incentive

structure. Contrary to public perception, corporate managers

are not entrepreneurs. They are not what one could call agents

of capitalism. Since 2000, in the United States, the stock

market has lost – depending on how one measures it – up to $2

trillion for investors (compared to returns had they left their

funds in cash or treasury bills).

So, one would be inclined to think that since managers’ pay

is based on performance incentives, they would be incurring

losses. Not at all: there is an asymmetry. Money-losing

managers do not have negative compensation. There is a built-

in optionality in the compensation of corporate managers that

can be removed only by forcing them to eat some of the losses.

Because of the embedded option, while shareholders have lost,

managers have earned more than a half-trillion dollars for

themselves.

Third, there is a problem with academic economists,

quantitative modelers, and policy wonks. The reason why

economic models do not fit reality is that economists have no

disincentive, and are never penalized for their errors. So long

as they please the editors of academic journals, their work is

considered fine.

As a result, we use models such as portfolio theory and similar

methods without the remotest empirical reason. The solution

is to prevent economists from teaching practitioners. Again,

this highlights the case for decentralization: a system in which

policy is decided at a local level by smaller units – and thus is

not in need of economists.

Fourth, predictions in socioeconomic domains

do not work, but predictors are rarely harmed

by their forecasts. Yet we know that people take

more risks after they see a numerical prediction.

The solution is to ask – and only take into account

– what the predictor has done, or will do in the

future.

I tell people what I have in my portfolio, not what

I predict; that way, I will be the first to be harmed.

It is not ethical to drag people into these exposures

without incurring the risk of losses. In my book

Antifragile, I tell people what I do, not what they

should do, to the great irritation of the literary

critics. I do so not for autobiographical reasons,

but only because the other approach would not be

ethical.

Finally, there are warmongers. To deal

with them, the onetime consumer advocate and

former US presidential candidate Ralph Nader

has proposed that those who vote in favor of war

should place themselves or a descendent into

military service.

One can only hope that something will be done

in 2013 to implement some skin in the game

heuristics. A safe and just society demands nothing

less.

This commentary was adapted from Nassim

Nicholas Taleb’s most recent book Antifragile:

Things That Gain from Disorder.

Nassim Nicholas Taleb, Distinguished Scientific Advisor at Universa Investments L.P. and Distinguished Professor of Risk Engineering at New York University Polytechnic Institute. Nassim Taleb is considered the premier specialist of rare events (“black swans”) and has advised heads of states, top financial institutions, and various central banks on tail risks. He is the au-thor of Fooled by Randomness, The Black Swan, and Antifragile, which have been translated into over 32 languages. Nassim has held senior trading and managerial positions at investment banks, and he is currently a Distinguished Professor of Risk Engineering at New York University Polytechnic Institute and Distinguished Scientific Advisor at Universa Investments LP.


20 ROUND TABLEINTERVIEWAIF FACTOR20


WHAT MAKES YOUR FUND STAND OUT?SIX PITCHES HAVE BEEN NOMINATED AS FINALISTS; THEY COMPETE TO BECOME THE 1ST WINNER OF THE AIF FACTOR!

21

AND THE WINNER

IS....


AIF FACTOR

PITCH 1: LARRAINVIAL-VICAM CORDILLERA FUND

Five years ago, a Brazilian with a Phd in neuroscience

was training monkeys in a US University research lab.

A Chilean born concert pianist was becoming a French

trained macro economist. A 20-something American

ops analyst was pushing paperwork in Singapore, and

an applied mathematics postdoc hired from Berlin was

engineering electromagnetic resonances to forge an

invisibility cloak.

What do these people have in common? They are

sitting on a desk in Santiago, Chile. In front of 40

computer monitors, a mountain of processing power,

and thousands of lines of code. They run the best

performing Emerging Markets RV fund you’ve never

heard of, with an investment process as unique as their

backgrounds. Their fund is up 20% year-to-date. It

charges 0.80%/0.00%. Yet, they have just USD 70M in

AUM. They just hired two new quants that they cannot

afford…

…because they’re building something very special.

PITCH 2:SALUS ALPHA COMMODITY ARBITRAGE

‘The Commodities markets have been a minefield

recently, affected by a plethora of Government inter-

ventions, unpredictable weather, economic surprises,

political uncertainties, Chinese demand, Russian

roulette!

Despite of all this, if you still have exposure to com-

modities but you are questioning the reward versus

risk of directional trading or if you are fed up with your

returns being eroded by the expense of rolling your fu-

tures contracts, the Salus Alpha Commodity Arbitrage

Fund is the best and most accessible solution.

Salus Alpha Commodity Arbitrage provides systematic

trading of calendar spreads in a truly market neutral

way. All long positions are offset by corresponding

short positions to extract relative value. Spreads are

selected according to our proven proprietary portfolio

optimization engine.

Whatever your current needs, the Salus Alpha Com-

modity Arbitrage strategy has since 2004 provided

commodities investors with pure alpha returns and we

are proud to say, many good night’s sleep.’

PITCH 3: TALER FOCUS FUND

Who wants to have a free lunch every day for life?

Everybody I assume, permitting that the food is of good

quality and the meals are well diversified. We, at Taler,

create free lunches every day, the whole year round.

Are we unique in doing this? No, published thousands

of years ago, the Jewish Talmud suggested: “Let every

22

ABN AMRO Clearing has a long history in partnering with start-ups as well as established (alternative)

investment vehicles and in providing them with the needed integrated solutions for their execution, clear-

ing, custody and financing needs. As such, ABN AMRO Clearing decided to host The AIF Factor. The AIF

Factor gives Fund Managers the opportunity to pitch to the audience of the Amsterdam Investor Forum 2013

by giving a max. 3 min. (without slides) pitch. ‘This is a unique opportunity for alternative investment funds

of every kind to present to a who’s who of the Dutch alternative investment scene and some of the largest

specialist international investors. We are looking for submissions which are compelling, provocative and

show entrepreneurship – what makes your fund stand out,’ comments Jan Bart de Boer, Chief Commercial

Officer of ABN AMRO Clearing. We have received over 60 submissions and the following 6 pitches have been

nominated as finalists; they compete to become the 1st winner of the AIF Factor!

PPLLL

PPSS

PPTT


man divide his money into three parts and invest a

third in land, a third in business, and a third let them

keep in cash.” The idea of diversification entered the

Christian world at the beginning of the 18th Century

with the saying “Don’t put all your eggs in one basket”.

At Taler we harvest the returns but not the losses of

the financial markets through historically proven asset

allocation technologies which enable us to weather

the storms and continue serving up mouth-watering

returns.

PITCH 4:FOUNDATION CAPITAL

Foundation Capital is buying structured minority

equity stakes in asset managers (GP’s) managing the

world’s leading hedge fund. A new way for the alterna-

tive investment allocators to participate in growth of

industry and invest in big hedge funds.

This should be considered by a Private Debt/Equity

investors with investment horizon of 3-5 Years, with

immediate distribution of an annual cash Yield above

25%+, and substantial downside protections against

capital loss. Opportunity is:

a) to own equity in highly profitable hedge funds

managers and to greater return than investing in the

same funds, with a unique, transparent and diligent

access to these managers

b) Ideal timing to invest in hedge fund management

companies with recent crises became excellent stress

tests, clarifying which managers, strategies, and

infrastructures will succeed and at same time many

high quality GP stakes are available at relative lows

valuations due to supply/demand imbalance.

PITCH 5:CUBE GLOBAL OPPORTUNITIES

Crowding, beta, lack of performance…hedge funds

generally haven’t been living up to expectations. This is

not us! We believe that there are great opportunities to

be found in avoiding these crowds. We’ve been success-

ful in pursuing disruptive events that dislocate markets

and orphan assets. Our edge is to approach these op-

portunities without the emotional baggage of panicked

sellers. Our fresh perspective and analytical strength

allow us to objectively survey the damage done by the

rushed exit of the natural investor base. Because of

the disruption, often only strong hands remain. These

strong hands tend to provide downside protection,

and we unlock the upside as we find potential catalysts

required to unlock or create value. As we put the pieces

together, we develop a mosaic by which we navigate

the way forward to continue meeting our 15% - 20%

return target for our clients.

PITCH 6: UMNYAH LONG-SHORT

Umnyah Long-Short adapts one of the great principles

of Jesse Lauriston Livermore, described in “Reminis-

cence of a Stock operator” (1923):

“I never argue with the tape”

Umnyah believes in nothing else than price action. It

uses a combination of returns and volatility to identify

trends that are sustainable. And it does exactly that. It

is important to note we are not a day-trader shop, our

average trends, once identified last 50 days on average.

We then trade them, agnostic to direction, in Momen-

tum or Mean-Reversals.

Modern days brought access to data, ways to treat them

and abilities to construct market neutral portfolios

thereby avoiding Mr. Livermore realized volatility.

What is important at Umnyah, is that despite more

than 10 years of research, extended models, we give a

large and controlled importance to the fund manager

who ultimately validates the mathematics in the light

of unquantifiable information: intuition, spirit, com-

mon sense.

23

PFFF

PC

PUUUUU


24 WHITE PAPER

The Cayman Islands and the British Virgin Islands (BVI), according to

Q2 2012 statistics published by their regulators, have in total over 13,000

mutual funds between the two jurisdictions and, more importantly, over

2,500 management companies. But how many of these management

companies are really doing what they are supposed to do and truly

carrying out their functions as investment manager? This white paper

looks at the reasons for setting up an offshore management company and

how it should be managed from an operational and tax point of view.

Why set up an offshore management company?The choice of jurisdiction for a fund can often be straightforward; usually

one with a favorable tax and regulatory regime which will also ring bells with

intended investors is chosen. The natural choice for the related management

companies should be where the main management activities are based. However

management companies can benefit from being set up offshore, typically in a

tax free jurisdiction, and then delegate some of the key functions, such as asset

management, marketing or risk management to onshore service providers such

as sub-investment managers, where the “star traders” are based.

These points would usually be considered at the outset of any new fund set up, as

part of initial structuring planning. Investing in some straightforward and prac-

tical tax and structuring advice can massively benefit businesses in the long-term

and does not need to be costly or overly legalistic. What it allows is to consider

the best possible structure for the business from a tax as well as commercial

point of view Whether or not a management company offshore is a suitable

option should also be addressed as part of this initial review. This will have an

important bearing on investors as well as the tax authorities.

From a tax point of view, the management company, which can be in a typical

fund jurisdiction such as the Cayman Islands, can benefit from 0% tax on fees

made from the fund. This can provide some great financial incentive for many

business owners however it must be thought through carefully to ensure it does

not create a new risk related to tax avoidance.

How to Run Offshore Management Companies and Funds with Substance and Corporate Governance

THE IDEA OF THE

MANAGEMENT COMPANIES

CAN BENEFIT FROM BEING

SET UP OFFSHORE,

TYPICALLY IN A TAX FREE

JURISDICTION

OFFSHORE MANAGEMENT COMPANY


25

Offshore management companies are

not just set up for tax reasons contrary

to popular and political belief. They

can also provide great flexibility for

business owners. It permits ownership

outside the onshore jurisdiction which

may be attractive to many businesses

with international partners and evolv-

ing plans. It provides greater future

flexibility should the business undergo

any restructuring at any point.

Another reason to retain activities

offshore is linked to the fund. In

many countries where sub-investment

managers and traders reside, there is a

degree of legal ambiguity with regards

to the actual taxation of the fund vehi-

cle. The fund is indeed only truly tax

exempt if it meets certain criteria. One

of those criteria relates to the control

exercised over the fund. Since control

is deemed to occur mostly from the

board and the rights to vote that

pertain to the fund in question, many

structures seek to appoint foreign

directors (a topic we will focus on in

another white paper), but also seek to

place any voting shares (also known as

management shares) in the hands of

offshore persons. The offshore man-

agement company therefore can hold

the voting shares of the fund, and,

although not necessarily an arrange-

ment without conflicts of interest, it

does help ensure that the control of

the fund does not come within the tax

framework of the onshore jurisdic-

tion of the sub-investment manager.

This would be more difficult obviously

if the voting shares of the fund were

held directly by the partners onshore,

as can sometimes be the case.

Will an offshore management company not just be another costly entity to operate?Yes and no. What should be looked

at are the potential savings against

the costs that the company will incur

to support those savings. Are the

projected tax savings higher than the

projected costs, in the short-term, me-

dium-term and long-term? For most

businesses the answer here will be yes

but this must be done in accordance

with real commercial principles.

Businesses will need to consider

transfer pricing issues which relate to

the value of the services provided by

the onshore sub-investment manager

to the offshore manager. How much

of the total work in relation to the

service provided to the fund is carried

out by the offshore manager and what

is fair and reasonable? For some, an

acceptable level of service offshore

means that 80% of the fees paid by the

fund to the offshore manager are then

paid to the sub-investment manager

for their services. Thus 20% remain

offshore and this must be substanti-

ated. In fact, this applies whatever

the percentage that remains offshore.

What is important is the rationale for

the decisions which should be based

on an assessment of the services pro-

vided and how the assessment is docu-

mented and later on put in practice as

things may change over time.

How should an offshore management company be operated?To ensure the proper operations of the

offshore management company and so

as to keep it outside of the tax frame-

work of the onshore entity, where

the delegated services are carried out

and where most of the employees will

be based, the offshore management

Jérôme Lussan, is the CEO and founder of Laven Partners as well as the founder and a partner of Laven Legal Services. Jérôme’s background includes acting as a COO of a hedge fund and as a financial lawyer at Jones Day. Jérôme has a broad degree of expertise in the hedge fund and fund management industry and is an advisor to many international financial services firms specialising in operations, legal and regulatory matters. He is a member of the Law Society of England and Wales, the International Tax Planning Association and of the CFA Society of the UK. Jérôme holds an LLB from University of Edinburgh. He is also a regular speaker at conferences and has gained wide coverage in the industry media. In 2010 and 2011, Jérôme was named by Financial News as one of its 100 Rising Stars, and in 2011 and 2012 one of its 40 under 40 Rising Stars in Hedge Funds.Laven Partners is a global consulting firm with a focus on alternative investments.


26 WHITE PAPER

company should have substance. This

essentially means it should not oper-

ate as a so-called “shell” or a “mailbox

company”.

For example, under English law it is

important that any offshore company

has its central management and con-

trol in its jurisdiction of incorporation.

This is because a company incorpo-

rated in a jurisdiction outside the UK

may become liable to UK tax if the UK

tax authorities consider that the cen-

tral management and control of such

a company is actually being under-

taken in the UK. This is also relevant

to many other countries, including

Switzerland and France.

Therefore what conduct is sufficient

to evidence that the central manage-

ment and control of a company is in

the country of incorporation and not

onshore? The following factors are

commonly considered:

• where the actual activities of the

company take place;

• where meetings are convened and

decisions for day-to-day operations

are carried out;

• where the directors are tax resident;

• whether the directors operate

independently or at the request of a

person onshore; and

• where the shareholders holding a

majority stake are tax resident or

located.

The question is: today, how many of

the companies in the BVI and the Cay-

man Islands are operated in a manner

that would bear the tax authorities’

scrutiny? We have unfortunately

encountered many businesses that may

be at risk and have sought to advise in-

dustry professionals of the simple steps

that can be taken to limit such risks.

Case StudiesOffshore companies may be subject to

relevant Swiss taxes if their manage-

ment is effectively carried out from

Switzerland. In 2003, the Swiss

Supreme Court concluded that the in-

come from a BVI parent company was

subject to corporation tax in Switzer-

land as the place of effective manage-

ment was found to be in Switzerland.

In the case, an employee of the BVI

firm’s Swiss subsidiary was respon-

sible for day-to-day matters relating

to the operational management of

the BVI firm, notably, operating bank

payments and monitoring any related

transaction risks. This employee was

the sole signatory for the BVI firm

and the Supreme Court therefore

concluded that the activities by the

employee established the place of ef-

fective management in Switzerland. ¹²

The company therefore became liable

to pay corporation tax in Switzerland

on its income.

Meanwhile in the UK, in 2009, a

first-tier tribunal ruled that Laer-

state BV, a Dutch company resident

in The Netherlands, had its central

management and control in the UK

and therefore the company would be

liable to UK tax. In the case, the court

accepted the HMRC’s arguments and

found that the central management

and control of the company was exer-

cised in the UK. On the facts of this

case however, HMRC proposed and

the court agreed that the company

was run out of the UK although none

of the board meetings were held in

the UK, nor were any of the docu-

ments signed in the UK.

The case shows that it is imperative

for board meetings not only to be

conducted outside the UK but for

these meetings to be a proper forum

for discussion. Simply rubber stamp-

ing pre-defined decisions will not be

acceptable in the eyes of HMRC. It is

also important to maintain the correct

balance of non-UK directors.

² X. Oberson, H. Hull, 2011, Switzerland in

International Tax Law

² P. Altenburger, K. Krech, 2011, Host Country

Switzerland

ConclusionDue to the global structure of most

hedge fund businesses and some tradi-

tional fund businesses spanning across

a number of jurisdictions, manage-

ment companies and sub-investment

managers should be aware of the tax

risks they may expose themselves to,

by operating foreign based companies

out of onshore locations, whether

those locations are the UK, Switzer-

land, France and even Hong Kong etc.

This is particularly essential in the

current climate of regulatory reforms,

generally political angst against fund

managers and pressure and crack-

down on tax planning, not to men-

tion increased powers for certain tax

authorities.

© December 2012 Laven Financial Services

Limited

All rights reserved, and all moral rights are

asserted and reserved.

SIMPLY RUBBER STAMPING PRE-DEFINED DECISIONS WILL NOT BE

ACCEPTABLE IN THE EYES OF HMRC


FACTS ABOUT ABN AMRO CLEARING

12 Offices over 3 time zones

Over 90 markets covered

EUROPEEuronext (options) 44%Euronext (futures) 42%

ASIA PACIFICASX 48%

SEHK 29% OSE 39%

USCME 21%

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MARKET SHARES

Find us at abnamroclearing.com

27


28 REGULATIONS

GREATERTRANSPARENCY AND

BETTERFUNCTIONING

Introduction Only two years after the commitment of the G-20 Leaders in September 2009 at the Pittsburgh summit, European and US regulators have reacted quickly by proposing and finalizing the new EMIR in the EU and the Dodd-Frank Wall Street Reform and Consumer Protection Act (in brief “Dodd-Frank Act”) in the US. Both regulations aim to make derivative markets safer and transparent, as requested by the G-20: “All standardized OTC derivatives contracts should be traded on exchanges or electronic trading platform […] and cleared through central counterparties (CCP) […] OTC derivative contracts should be reported to trade repositories”.While the Dodd-Frank Act already passed the US Congress on 15 July 2010 and was signed into law by President Obama on 21 July 2010, the equivalent European answer to the G-20 Leaders’ request, EMIR, was only adopted on 4 July 2012 and entered into force on 16 August 2012.Following the adoption of the regulation, the baton has passed to the European Securities and Markets Authority (ESMA) which was requested to develop regulatory technical standards (RTS) and implementing technical standards (ITS) which


29

provides further detailed guidance. On 27 September 2012 the ESMA delivered daft technical standards to the European Commission (EC). On 19 of December 2012 the European Commission adopted nine regulatory and implementing technical standards. The technical standards will enter into force on the 20th day following that of their publication in the Official Journal of the European Union.Beside the common objective in general, there are significant technical differences between EMIR and Dodd-Frank Act.The tables summarizes the key regulatory features and compares them as provided for EMIR and the Dodd-Frank Act.EMIR and Dodd-Frank Act will revolutionize the OTC derivative market. The changes are diverse and several aspects will impact current operational business processes and procedures, but it will also change the parties involved in OTC transactions. For example, EMIR will require• changes in IT system(s) given the fact that the OTC execution, confirmation, margin calls and post-trading processing,

including reporting to the trade repository, will be completely automated; • changes in collateral management setup and margin calculation:

TIMELINE

EMIR

• EMIR was adopted on 4 July 2012 and entered into force on 16 August 2012

• Adoption of 9 regulatory and implementing technical standards on 19 of December 2012 by European Commission; entering into force on the 20th day following that of their publication in the Offi cial Journal of the European Union

• Further technical standards• Ongoing consultation

DODD-FRANK ACT

• Approved and passed into law already in July 2010

• In general it is effective after 360 days from enactment, but the drafting of rulemaking is likely to extend the application

• The CFTC/SEC is drafting specifi c rules for the 32 identifi ed areas

• Ongoing consultation

RELATED REGULATIONS

EMIR

• MiFID II / MiFIR • Basel III (CRD IV/ CRR)• IFRS

DODD-FRANK ACT

• Reg NMS• Basel III• US-GAAP

SCOPE

EMIR

• Wide Range of OTC derivatives covering different segments of the OTC derivatives market (e.g. interest rate, credit, equity, foreign exchange and commodities)

DODD-FRANK ACT

• Any OTC derivatives (“swaps”), as well as any agreement, contract or transaction that is, or in the future becomes, commonly known to the trade as a “swap”, including any security-based swap agreement

• Out of the scope: spot and forward FX swap, but the option is left open to the Secretary of the treasury to exclude FX swaps and forwards from the clearing obligation; some types of physically settled commodity transactions

COUNTERPARTIES

EMIR

• Clearing and reporting obligation will apply to fi nancial fi rms and non-fi nancial fi rms

• Exemptions: non-fi nancial fi rms below the clearing threshold

DODD-FRANK ACT

• Any person that engages in a swap transaction is subject to the clearing and reporting obligations


30 REGULATIONS

CLEARED TRANSACTIONS

EMIR

• Mandatory clearing for all eligible OTC derivatives (standardized OTC)

• Two ways to determine eligible OTC derivative contracts:

1. “Bottom-up” following the CCP (Central Counterparty) request

2. “Top-down” where ESMA, in consultation with the ESRB (European Systemic Risk Board), will identify the contracts eligible for clearing and for which no CCP has received authorization yet

• Criteria for ESMA’s decision: systemic risk reduction; liquidity of contracts; availability of pricing information; ability of the CCP to handle contract volumes; level of client protection provided by CCP

DODD-FRANK ACT

• Mandatory clearing of swaps determined as eligible by the CFTC (for “swaps”) and the SEC (for “security based swaps”)

• Criteria for identifi cation of swap, group of swaps or class of swap: amongst other things similar to EMIR, CFTC and SEC take into account the existence of reasonable legal certainly in the event of insolvency and the effect on competition, including clearing costs

EMIR

• Bilateral trading of bespoke OTC derivative products still possible

• Subject to signifi cant higher operational requirements and stringent capital and collateral requirements: whether possible use of electronic means for the execution and confi rmation; establish risk management framework and measures to manage and mitigate counterparty risk, operational risk guarantee portfolio reconciliation, daily mark-to-market of outstanding contracts; appropriate holding of collateral and capital to cover the risk not covered by the exchange of collateral

• CRD IV impact: higher capital charge for the non-cleared trades and higher rate for the exposure toward CCPs

DODD-FRANK ACT

• Bespoke OTC derivative trades can be traded

• Stricter supervision of swap dealers and major swap participants, including registration in the CFTC, position limits, higher capital and margin requirements

• non-cleared OTC derivative are likely to be subject to higher capital requirements

EMIR

• Cleared and non-cleared derivatives must be reported to a registered trade repository, no later that the working day following the execution, clearing or modifi cation of the trade

• It is possible for the counterparty to report OTC derivative trades information on behalf of another counterparty

DODD-FRANK ACT

• Each single “swap”, either cleared or non-cleared must be reported to a registered swap data repository immediately after the execution of the trade (“as soon as technologically practicable”)

• The standards that specify the data elements for each swap that shall be collected and maintained are prescribed by the Commission

• Implementation requirement of a robust risk management framework, All these changes should enhance transparency, mitigate counterparty risk as well as operational risk due to the use of electronic means.According to ESMA`s view, the first clearing obligation should become effective during the summer of 2014, even though it is still possible that the clearing obligation will start at an earlier date. The start date for reporting for interest rate deriva-tives and credit derivatives is 1 July 2013 if a Trade Repository has been registered before 1 April 2013 or 90 days after the registration of a Trade Repository. EMIR and the Dodd-Frank Act will significantly impact almost any business. Therefore, it is time to assess the impact in order to allow businesses to align their objectives, strategies as well as the underlying process, procedures and policies to avoid negative surprises which could lead to severe business consequences.

Sven Muehlenbrock, Partner, Head of Financial Risk Management, KPMG Luxembourg.

Dr. Joachim Hauser, Financial Risk Management, KPMG Luxembourg

NON-CLEARED TRANSACTIONS

REPORTING OBLIGATIONS


FACTS ABOUT ABN AMRO CLEARING

Created EMCF (European Multilateral Clearing Facility) in 2007; which contributed to opening up the trading and clearing landscape

Prime examples of strategic projects shaping today's clearing industry

HCH (Holland Clearing House) was created in 2011 as CCP to service TOM MTF

FOUNDING PARTNER OF THE FIRST EUROPEAN MTF FOR DERIVATIVES: TOM (THE ORDER MACHINE)

NO PROPRIETARY TRADING DESK

200 billion AUCOn average, we proces 16 million trades per day across the world - with spikes up to 20-30 million tradesCLEARING

OF 2 BILLION DERIVATIVES TRADES PER YEAR

Find us at abnamroclearing.com

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08.15 Registration

09.00 Welcome & Introduction of the Chairman

Chairman: Marc de Kloe - Head Funds and Alternative Investments ABN

AMRO Private Banking

09.15 Keynote Speaker: Andrew E. Fisch - Executive Vice President and Co-CIO

of Fund of Funds SSARIS

A macro tour of the world from a fund of fund perspective. The view from

30,000 feet and 3,000 feet.

09.45 Managed Accounts Panel: Understanding their potentials and pitfalls

Moderator:

Rob Mirsky - Partner KPMG

Panellists:

Nathanaël Benzaken - Managing Director Managed Account Platform Lyxor Asset

Management

Joelle Verdon - Principal Investor Relations Bluecrest Capital Management

Mark Geene - Senior Investment Manager Hedge Funds PGGM Investments

10.15 Keynote Speaker: Graham Neilson - CIS Cairn Capital

Investing in Credit - The Evolution of “Junk World”

11.00 Coffee & Networking Break

11.30 Regulatory Update: Thomas Deinet - Executive Director Hedge Funds

Standards Board

12.00 The AIF Factor - 6 Funds compete to become the 1st winner of the AIF

Factor

12.30 Lunch & Networking Break

13.45 CTA’s & Quant Strategies Panel: The ultimate must-have for non-correlated

returns and the what, why and how to allocate to CTA’s?

Moderator:

Erik Keller - Senior Hedge Fund Analyst ABN AMRO Advisors

Panellists:

Werner von Baum - Managing Partner LGT Capital Partners

Mikael Stenbom - CEO RPM Risk & Portfolio Management AB

Julian Shaw - Head of Risk Management, Permal Investment Management Services Limited

Graham Neilson

Andrew E. Fisch

Marc de Kloe

AGENDA


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14.15 Operational Due Dilligence / Best Practices: Jerome Lussan - CEO Laven

Partners

How to spot a fraud – a case study

14.45 Keynote Speaker: Nassim Taleb – Distinguished Scientific Advisor Universa

Investments

Fragility... what is it all about?

15.30 Coffee & Networking Break

16.00 The current Dutch investment climate

Moderator:

Margie Lindsay - Editor Hedge Funds Review

Panellists:

Marc de Kloe - Head Funds and Alternative Investments ABN AMRO Private Banking

Niels Oostenbrug - Head Alternative Investments MN Services

Michiel Meeuwissen - Senior Portfolio Manager Funds of Hedge Funds Kempen

Capital Management

Clayton Heijman - Director Privium Fund Management

16.20 Keynote Speaker: Kyle Bass - Managing Partner Hayman Capital

Management

Macro investment ideas on Japan, silver and the US housing market....

where to next?

17.05 Battle of the Global Macro minds

Moderator:

Didier Duret - CIO ABN AMRO Private Banking

Panellists:

Andrew E. Fisch - Executive Vice President and Co-CIO of Fund of Funds SSARIS

Graham Neilson - CIS Cairn Capital

Kyle Bass - Managing Partner Hayman Capital Management

17.30 End of Day Drinks and reception

Nassim Taleb

Kyle Bass

The Amsterdam Investor Forum 2013Wednesday 13 February 2013


34 NOTES


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AIFMAGAZINE

‘ We don’t mind change. On the contrary, we see it as a rich source of opportunities.’

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THE AMSTERDAM INVESTOR FORUM 2013 Jan Bart de Boer, Chief Commercial Offi cer ABN AMRO Clearing

aif - abn amro clearing · perspective on three key topics. 24 white paper jérôme lussan: ’how...

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