Tuesday, May 05, 2009
Throughout the whole, sorry credit crunch story, many column inches have been devoted to how greedy bankers should get their comeuppance, while policymakers have been rubbing their hands with glee about the prospect of finally tipping the balance of power in their own favour. I’m afraid they’ve all been missing the point. Yes, there has been a shift of power as a result of the crisis but this has been within the financial markets, not external to it.
Where historically, the principal focus has been on equities, the crisis has forced a greater profile for the less obviously newsworthy asset classes such as FX (foreign exchange) and fixed income securities. I can illustrate this point by sharing a conversation that I had a few years ago while interviewing an in-house press officer at one of the world’s biggest investment banks. When I asked him about how he divided up his time between business lines, he replied “90 per cent on corporate finance and sweet FA on FX”.
I’d love to meet that press officer now. He’s probably out of a job or avidly reading this week’s copy of FX Week trying to get to grips with what a currency pairing is. If one good thing has come out of the financial crisis, it has to be that the lesser known areas of investment banking are finally having their day.
Why do I care? Simply because I’ve spent the last ten years of my PR career trying to get journalists to write not as much about equities and to focus more on the lesser known, lesser understood but equally important areas such as foreign exchange and even, heaven forbid, derivatives. Of course journalists have to write about those topics that are of most interest to their readership but I would hazard a guess that as a nation of avid holiday goers or as employees of international companies, currency fluctuations have more of a financial impact on most of us than the movement of stock markets.
Even derivatives have a much wider relevance than most of us think. According to Pension Protection Fund data, pension shortfalls are reaching record highs of £228 billion, but it’s still a little known fact that this would be £30-50 billion worse but for the use by UK pension funds of OTC interest rate and inflation swaps to hedge their liabilities. Of course, it’s not the job of retail investors to hedge liabilities or to understand how they might work, but they should be aware that these products exist and what benefits they can deliver to an investment portfolio.
Another area of financial markets brought to the fore by the credit crunch, is what is delightfully described as financial plumbing. Simply put, this is the very valuable infrastructure which supports the financial markets and which within a financial institution is represented by the middle and back office functions. As a result of my personal crusade, when I talk about STP, there are now a few more journalists who understand that I mean Straight Through Processing.
The crisis has demonstrated, amongst many other things, that when a financial institution like Lehman collapses, having an accurate understanding of what positions or exposures are being held and with which counterparties, becomes vital. And during times of heightened market volatility and high volumes, automated trade processing with minimal human intervention (or straight through processing for those of you who are still in the dark) becomes paramount. In fact, the plumbing has become so important that there is a whole unit of the EC in Brussels that has been asked to focus on implementing a central counterparty for Credit Default Swaps. The consequence of this is that the media has now started to cover in detail, the issue of central clearing and OTC derivatives.
Instead of spending time dancing on the graves of investment bankers, we should be acknowledging that, at the very least, we will all emerge from this crisis with a wider view of what the financial markets do and what benefits the more esoteric areas of the industry actually deliver.
Melissa Rowling
melissa.rowling@greentarget.net