Potential Changes To The Euro: Are You Prepared? - Jeff Bellavance, CFA Scott A. Wybranski, CFA
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Potential Changes To The
Euro: Are You Prepared?
Jeff Bellavance, CFA Scott A. Wybranski, CFA
Vice President President & CEO
State Street Global Advisors Meradia Group, Inc.
Let’s Get Started
Intended discussion points:
Background on the Euro
Perspective on a breakup and possible scenarios
Industry’s assumptions and potential problems
Operational issues
Preparatory work already done by SSgA
Recommendations
How many of you have done preparatory work already
or know of significant preparations made by your company?
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© 2012 Meradia Group, Inc.
Background On The Euro
Understand the history of the European Union
How it created the debt crisis and why the Euro is likely
doomed
How European banking contributes to the crisis
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© 2012 Meradia Group, Inc.
History Of The European Union
The European Union is really the latest of a centuries old effort to
create an empire that unites all of Europe
Different visions for the European Union stemming from WWII
The common desire for free trade
Nationalist v. Federalist movements – Then and now
Robert Schuman Frederic Bastiat Charles de Gaulle
1886 – 1963 1801 – 1850 1890 – 1970
“If goods do not cross borders,
armies will.”
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The European Union Brought About A Debt Crisis
TWO
The creation of MAIN An engine
moral hazards PROBLEMS of inflation
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European Banking Contributes To The Crisis
TARGET2
Reduces the likelihood of meaningful reform
Political issues
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© 2012 Meradia Group, Inc.
Perspective On A Euro Break-up
The rapid deterioration in the economic and
political climate in EU countries has
dramatically increased the chances of a
possible exit from one or more countries or a
complete break-up.
We are unsure if or when an event will occur
and if it will be orderly (planned) or disorderly
(unplanned).
Who thinks this will happen in 12 months?
What kind of lead time are you expecting? A quarter? A month? A weekend?
Who expects business to be disrupted as a result?
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© 2012 Meradia Group, Inc.
Possible Euro Scenarios (Planned Or Unplanned)
Weaker economy exit:
No break-up Greece and/or other
PIIGS countries
Stronger economy exit:
€ Break-up and
Germany and/or France dissolution of EU
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© 2012 Meradia Group, Inc.
Views From Our ‘Roundtables’
Next 12 months
Most believe Greece will exit
PRESENT SITUATION
Next several years
Additional PIIGS country will exit
Italy too big to fail (So was Lehman…)
Nationalistic movements lead other Complacent
countries to withdraw operational response
from the companies
Next 5 to 10 years and US regulatory
Full break-up or exit of one of the larger agencies
countries more likely
Contingency planning is
considered time NOT wasted
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© 2012 Meradia Group, Inc.
What Are Some Of The Underlying Assumptions?
Primary assumptions:
9 A ‘mega’ corporate action
9 Markets will change the currency on existing securities
9 New ‘country’ and ‘currency’ ISO codes will be used
9 Draconian capital controls (including shut-down of global
markets, closed banks, closed borders, fixed FX rates)
9 Event would be announced after US markets close and
prior to a weekend
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© 2012 Meradia Group, Inc.Learning From The Past
Major events can be unanticipated. Market chaos would have been worse
September 11 if US markets had already opened.
Systems needed modifications to accommodate the redenomination.
Turkey Lead time helped.
Argentina Imposed capital controls may limit movement of assets possibly for years.
Existing Fair Value models (sources) didn’t work. Decision matrices don’t
Arab Spring anticipate all potential variables.
Lehman Bros. Highlights market interdependencies and exposures.
Japanese markets never closed but were subject to wild swings.
Japanese Tsunami Valuations were available but were they usable?
Market data providers may not attempt to price wildly fluctuating securities
Iceland at all – May be looking at stale security and index prices.
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© 2012 Meradia Group, Inc.Practical Concerns: What do we do
• What do we do as an Investment Manager and a Performance team
– Move Money
– Trade assets
– Settle trades
– Measure how we perform
– Communicate our results
CMINST-7238Performance: Practical concerns
Whom are we reliant upon?
• External Business Partners/Markets
– Greek Authorities
– European Monetary Union (EMU)
– Athens Stock Exchange
– Custodian Banks
– Trading Brokers
• Internal Business Partners
– Accounting teams
– Corporate Actions team
– Market data team
– IT team – Information Technology
– Client Reporting
CMINST-7238Performance: Practical concerns
What information are we reliant upon?
• As Performance and analysis practitioners we rely upon:
Data!, Data!, Data!
• Externally sourced data
– Prices
– Conversion rates to new currency
– Exchange rates to base currencies
– Corporate actions
– Benchmarks
• Internally calculated data
– Market Values
– Transactions (for the event)
As we are all well aware, any issue or problem with the data will
flow through to Performance!!!
CMINST-7238Performance: Practical concerns
Who is reliant upon us?
• Portfolio Management
• Client Reporting
• Marketing
• Product Management
• Senior Management
• HR - Portfolio Manager Compensation
Timely and accurate performance reporting is critical to
the organization!
CMINST-7238Estimated country weights in MSCI EMU® as of
July 31, 2012
• Germany +/- 30%
• PIIGS +/- 20%
– Portugal < 1%
– Ireland +/- 1%
– Italy < 8%
– Greece < 1%
– Spain < 10%
• Other countries +/- 50%
– Austria
– Belgium
– Finland
– France
– Netherlands
Source: MSCI
Weights are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.
CMINST-7238An Uncertain Event! What will happen?
• New ISO*/country codes?
• New Sedols/Cusips?
• End of day pricing the day of the event?
• Will global markets close?
• Settlement of open trades or receivables in Euro or new base currency?
• Redenomination of Par value?
• Conversion rates to new currency or currencies?
• Exchange rates to new base currencies?
• Timing of Benchmark change? How will benchmark providers react?
• Euro futures or Swaps redenomination?
• Tax Free exchange or at Market value?
*International Organization for Standardization
CMINST-7238Systems Integration
• Market Data systems
– New ISO Codes, Currency Codes, Cusips
– Classifications of securities (if new cusips or sedols)
- Sector
- Country
– Benchmarks
• Accounting systems
– Open trades redenominated
– Redenomination of Par value for Fixed Income
– Tax free exchange or at market value
• Performance systems
– Potential changes to custom models for attribution
– Classification of securities for models
– On the fly conversion from cost to market value transactions
• Client Reporting
– Communication of the Euro breakup
– Potential tracking against the benchmark (passive strategies)
CMINST-7238Potential short term issues to think about
• What will happen if global markets close
• NAV Pricing issues for Mutual funds or ETF’s
• Benchmark availability at T+1, T+2 or even T+5
• Tracking vs. the benchmark for Index funds
• Client reporting timeliness
– Most important for clients with aggressive deadlines
• Security level contribution to return
– If new cusips are set up
– Transactions are done at cost rather than market value
CMINST-7238Longer term questions to think about
• Will other countries follow leaving the Euro?
• What would happen to the Euro if other countries such as
Germany leave?
• Will Greece or other countries leave developed markets?
– Emerging status
– Stand alone status
• Leaving the Euro is one challenge
– Leaving developed markets is an entirely different event for performance!!!!
CMINST-7238Practical Concerns (Summary)
Overriding concerns, whether internal or external, have to
do with:
Valuation
Exchange rates
Time
Boiled down, this translates to LIQUIDITY
Based upon what we've discussed so far,
who thinks your organizations are doing enough now?
How confident are you in the preparations and testing
in your software and vended service providers?
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© 2012 Meradia Group, Inc.What has SSgA done to prepare for an event?
• Working Group established to identify gaps and to design solutions
– Accounting, Market Data, Performance, IT, Client Reporting
• Thoroughly test all systems to ensure “new currency codes” and other
transactions can be processed seamlessly
• Established a Project plan (checklist, workflow, timeline and respective
owners) for the end to end process execution
• Establish a call tree to communicate the event at the announcement
from the EMU or Greek authorities
• Weekly monitoring of Greek positions
– # of funds
– # of unique securities
– Total # of positions across all portfolios
– Custodians holding these positions
– Total MV of exposure
CMINST-7238What can you do to be prepared?
• Have a Plan!!
• Have reoccurring meetings with all internal departments to
communicate potential issues and elevate concerns
• Thoroughly test all systems for integration of a new currency or
security identifiers
• Communicate, communicate, communicate
• The industry is always changing, performance events and regulation
are a part of the normal course of business for performance teams
• Past experience shows that if we plan proactively, we will all succeed
The views expressed in this material are the views of Jeffrey Bellavance through the period ended September 12, 2012 and are subject to change based on market and other
conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future
performance and actual results or developments may differ materially from those projected.
CMINST-7238Recommendations – Regulators
Consider:
General guidance on industry
DILEMMA
preparedness
Articulate planned response in US
Can the SEC
Collaborate with industry tell the industry
participants to prepare for
Freezing 40-Act fund subs / reds the Euro break-up
temporarily if fair prices cannot be without having
established any impact on
Temporary close of US markets the market itself?
Resulting breaches to IMA agreements
Trades in flight, as of trades
Use of fair valuations
Flexibility on ability to strike a NAV
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© 2012 Meradia Group, Inc.Recommendations – Industry Vendors
Increase communication and transparency:
Software / Service Providers
Scenario testing
Updates
Rollouts
Known issues, etc.
Market Data Vendors
Approach and expectations
Pricing intentions for ‘enriched’ data?
ISO Committee
Timing of New ISO Codes
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© 2012 Meradia Group, Inc.Recommendations – Industry Firms
Get ready:
Participate with peers and vendors – Not ‘just talk’
Promote greater awareness of risk and potential impact
Define areas of risk and test for multiple scenarios
Update business continuity plans
Review policies – Especially
valuation policies
COMMUNICATE
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© 2012 Meradia Group, Inc.Recommendations – Summary
REGULATORS MARKET VENDORS INDUSTRY FIRMS
Guidance on Communicate and Participate with peers
preparedness collaborate and vendors
Articulate planned Transparency to Promote awareness
response in US preparations testing Test multiple scenarios
Collaborate with and updates Update BCP’s and
industry Build clear policies
expectations
ISO code generation
What ideas and recommendations would you add?
What are the consequences of faulty or delayed transition?
Do we think there is greater impact since we are no longer talking about just Greece?
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© 2012 Meradia Group, Inc.Biography
Jeffrey Bellavance, CFA
Jeff is a Vice President at State Street Global Advisors and is a Senior Manager in the Performance
Measurement and attribution group in the Boston office. He is responsible for a team of managers
and analysts providing performance and attribution analysis for all of the U.S. Equity, REIT, Asset
Allocation, Tax efficient Market Capture, Active International Equity and Emerging Markets asset
classes.
Before joining SSgA in 2000, Jeff was an Accounting and Operations supervisor with Putnam
Investments where he was responsible for all of the International Commingled Fund products and
was involved with the accounting migration of Y2K, the Euro currency conversion and the
conversion to a new accounting platform. Jeff has been working in the financial services industry
since 1996.
Jeff holds a Bachelor of Science degree in Business Management from the University of
Massachusetts, Dartmouth as well as an MBA in Finance from the Boston College Carroll Graduate
School of Management.
Jeff is also a member of the Boston Securities Analyst Society and the CFA Institute.Meradia is a specialized consulting firm providing strategic advisory and implementation
services to the Financial Services industry. Meradia helps our clients plan and execute
changes to leverage the past, analyze the present and anticipate the future.
Meradia provides unbiased advice for business and technology projects along with the
practical ability to implement ideas and concepts. We deliver a unique combination of
technical expertise and an understanding of our clients’ organizations to strategize,
implement and lead change initiatives.
Scott A. Wybranski, CFA
President & CEO
610-738-7787 Office
610-639-7960 Cell
swybranski@meradia.com
www.meradia.com
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