By Terry Ewin, Vice President EMEA, IPC
‘Never let a good crisis go to waste’ is a phrase that has been widely peddled this year by many industry associations, management consultancies, and organisations on how the global pandemic has presented several opportunities for new and meaningful change.
Although the impact of COVID-19 has caused extreme market volatility and led to many companies quickly uphauling their operations and enacting their business continuity plans, the crisis does also offer organisations the time and opportunity to rebuild. This has the potential to influence financial trading firms greatly, as until 2020, it was unheard of for traders to leave highly regulated trading floors and work from home instead. Yet, when faced with no other option in the face of national lockdowns around the world, financial firms had to pivot and interestingly, remote working was a huge success and vital operations were able to continue.
In recent weeks, a light at the end of the tunnel was revealed to the world when news circulated that an effective COVID vaccine is within reach. Although it may take months, perhaps even another year, before any vaccine can be widely administered to the population, banks and brokers alike need to consider what life will look like post-pandemic and how their technology strategies may need to adapt.
The three stages of a crisis
There are three distinct phases when it comes to a crisis – the emergency phase, the transition period, and the post-crisis period.
In the emergency phase, firms were in critical crisis management mode and plans were activated to ensure business continuity. Banks and brokers perform a critical function to society, and they had to ensure operations could still resume and continue to service their clients. Overall, both large and small European banks and brokers were able to handle this phase relatively well, which is largely because communications technology has now reached the point where productive work from home strategies are in place. Cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders around the world to keep working throughout the lockdown restrictions. At IPC, we know that clients were able to make a relatively smooth transition to remote working operations owing to cloud adoption and through utilising technology solutions.
The transition period is where we all are with the current coronavirus pandemic. This stage is where financial companies can start to work out how best to manage the worst effects of the ongoing crisis, whilst also considering longer-term changes once the crisis comes to an end. Even with a coronavirus vaccine seemingly on the horizon, no one can say how long it will be until we enter the post-crisis period. With European governments advising their countries to prepare for “a hard winter”, there is still a lot of uncertainty as to when businesses can return to pre-pandemic operations.
Even with restrictions across Europe being eased, companies will not necessarily be rushing back towards more on-site trading. For example, many banks are starting to look at hybrid operations where traders come in for one or two days a week and work from home for the rest of the week. This will mean fewer people in offices so social distancing practices can be followed. Along with this, there will of course be a continued reliance on remote working technology solutions.
Finally, there is the post-crisis period. Until a vaccine has been distributed among the masses, this stage is very unlikely to occur in the near future. However, many analysts predict that there will be a strong rebound in the economy once the vaccine does arrive and while it may not exactly be V-shaped, the resiliency that has been displayed by the financial markets this year indicates it will be healthy.
The silver lining of this crisis
No one will deny that the coronavirus pandemic has not been catastrophic in many areas, but nonetheless, European trading firms should be seeking to take advantage and emerge from this crisis in a position of strength, which will be the silver lining. In order for this to be achieved, there needs to be increased participation in large, diverse communities that give companies the opportunity to showcase real differentiation from their competitors.
By utilising successful community networks, financial market participants gain access to an established, diverse and global financial ecosystem. This ecosystem includes an array of counterparties for price discovery, liquidity and execution – such as broker/dealers, inter-dealer brokers, exchanges, dark pools, hedge funds, asset managers, institutional investors, trade lifecycle services and market data providers. Essentially, the information that financial firms require to find liquidity, as well as the ability to access it.
To further take advantage of the situation and support a new reality of flexible working, technology infrastructure may need to adapt and advance. An example of this is that we may see a rise in investments for high-speed fibre connectivity in traders’ homes and greater utilisation of soft turrets and cloud delivered solutions.
At IPC, we anticipate that many firms will be looking to reprioritise their IT and business continuity budgets having now witnessed the damage and extreme circumstances that are possible without sufficient planning. It is of course crucial that financial firms are prepared for any crisis, so this refocus on spend may well manifest itself in the form of further investment in cloud migrations, as well as ensuring that legacy trading infrastructure is adequate to handle possible surges in volatility and volumes under exceptional market conditions.
There is a great emphasis being placed on voice trading, and financial firms may consider investing in infrastructure that supports more seamless client and sales experience Chat and Voice channels by leveraging AI/ML-drive technologies. However, considering the cost restraints that many IT departments may be facing at this time, financial firms will need to prioritise certain projects and spending over others to strengthen the business.
Despite the positive news of there being a near-effective coronavirus vaccine, many banks are still predicting and expecting there to be a permanent change to their offices, business operations and infrastructure. Our understanding of ‘normal’ could be completely redefined, so by investing in a long-term remote working strategy and leveraging robust and flexible technology, European trading firms can crucially ensure they maintain their resilience while at the same time taking advantage of the crisis by transforming their operations to be equipped for a post-pandemic world.
FOMO, FOLO, AND THE VOLATILITY CONUNDRUM
Katharine Wooller, Managing Director, UK, Dacxi
‘There is a lot of surface noise in the cryptocurrency space and most of it is the psychobabble of investor sentiment. One week it is the sound of everybody rushing towards a feeding frenzy. The next the wailing and gnashing of teeth as those near the surface (the ones most exposed) get spooked and rush the other way, falling over each other in the race to escape.’
I wrote the above paragraph on June 11th as the introduction to an article I was asked to contribute to a national newspaper.
The piece was essentially about what drives the roller-coaster of cryptocurrency prices – a pattern I have often referred to as ‘exquisite volatility’.
IT’S EASY TO OVERTHINK IT
Day to day volatility is something that market analysts and crypto critics alike are obsessed with on a day-by-day basis. In my view they overthink it. The main thrust of my argument in June, with crypto prices tanking, was that ‘buying the dip’ is a tried and tested strategy. At that time Bitcoin was priced around £25,000. Over the next few weeks, it then ticked down even further to £21,762 on July 20th.
At time of writing, about a month later, it’s around £32,680 or US$44,700. If you follow certain online forecasts, pundits are now suggesting Bitcoin could push the $100,000 barrier before the year is out. But, as I said above, it’s easy to overthink things, and sensational predictions make headlines.
IT’S INVESTOR SENTIMENT THAT REALLY DRIVES PRICES
Cryptocurrency in general is currently trying to find its identity. Is it a currency or is it a commodity? Is it something you ‘trade in’ or is it something you use to ‘trade with’ – i.e., use to buy other goods? Currently short-term prices are being driven by traders not users – nothing wrong with that, the function of any market is to allow people to buy and sell and make a profit through matched bargains.
The value of any commodity is only what somebody is prepared to pay for it, or what they can sell it for. On a speculative basis, rising values are driven by fear of missing out (FOMO) when the price is on the way up, which ramps the price up. Downward values are driven by fear of losing out (FOLO) when the price starts dropping and the feeding frenzy turns into a selling frenzy.
Interestingly, traders measure their success not by what they can afford to buy with their crypto wallet, they measure success in terms of converting gains back to their local fiat currency – which rather misses the point of why Satoshi wanted to create a DeFi world in the first place.
THE RISK OF GAMING THE MARKET
The fact is that most traders are gaming the market. The risk is that there are some really big swinging crypto traders out there who can influence the market. Playing ‘coin’ like a computer game has inherent risks – rather like trying to predict when a murmuration of starlings over Brighton pier will change direction. I believe that as the market continues to mature and cryptocurrencies follow their destiny to become the enabler of decentralised finance on a global basis, the margins for traders will inexorably tighten.
At Dacxi we take the long-term view. We are firmly ‘buy-and-hold’ investors who, having looked at crypto’s growth curve and analysed the true sense of purpose of DeFi, don’t over-react to the short-term metrics. Dacxi is a wealth building platform and experience has taught us that very few people get rich quick – and more than a few of those that do, get poor again just as quickly.
For most of us building wealth takes a measured view and a measured time frame. From my point of view there’s nothing at all wrong with that!
HOW CHANGES TO PROVIDENT FUND ANNUITISATION AFFECT APPROVED LUMP-SUM DISABILITY BENEFITS
By Dolana Conco – Regional Executive – Alexander Forbes Retirement Consulting
New tax rules on the annuitisation of provident funds and lump-sum payouts made at retirement took effect on 1 March 2021. Fund members should be aware of additional implications for approved lump-sum disability benefits.
On retirement, members of these funds who were under age 55 on this date (known as T-day) may still take amounts which accrued prior to 1 March 2021, plus the fund return, in cash. Members over age 55 on T-day will have access to all amounts in the fund in cash when retiring from that fund. This is referred to as “vested benefits” as opposed to “non-vested benefits” where annuitisation rules apply to amounts above R247 500.
Approved lump-sum disability benefits paid by a pension fund
The approved (provided by the fund) lump-sum disability benefit in a pension fund was previously included as part of the fund benefit. It was normally treated in its totality as an ill-health early retirement benefit from the fund. The cash amount was limited to a maximum of one-third of the benefit, while the balance was used to buy a pension.
Approved Lump-sum disability benefits from provident funds
Those under the age of 55 will have the same limitations on their lump-sum disability benefit and how this is treated in terms of annuitisation as applies to pension funds.
- Members over age 55 on 1 March 2021
The lump-sum disability benefit will be part of the vested benefits in the provident fund of which the member had membership on T-day. This means that the member can receive this payment in cash, after tax.
But if the member transfers to a new fund after T-day, and is then disabled, any lump-sum disability benefit paid out of the new fund will be a non-vested benefit. This means that annuitisation rules will now apply.
- Lump-sum disability benefits under 55
Only amounts which have accrued before T-day fall into vested benefits. If a member is disabled after T-day, the lump-sum disability benefit payable will not fall into the vested benefits. The payment will be treated as a non-vested benefit. This means that the annuitisation rules, where the total benefit exceeds R247 500, will now apply to the lump-sum disability benefit.
While the above may be an unintended consequence of the annuitisation rules, we should take a step back and reconsider the real intention of reform.
Various stakeholders in the industry introduced and agreed upon reform as it became evident that current regulations were failing the member. Almost 50% of members retire on less than one-third of their final average salary, which renders a large part of people poor and dependent on the state. This is unsustainable and needs to change.
Reform has brought in different forms of laws to increase the savings culture and provide certain incentives – like a tax deduction if a member saves more, up to a certain limit.
With the lump-sum disability benefit now subject to annuitisation, funds need to consider this question: Would an income structured benefit still meet the intention and expectations by members, the fund and the employer in terms of their incapacity procedure?
The trustees and employer will have to revisit why the approved lump-sum disability benefit was selected in the first place. Was this to ensure that there would be a lump sum to:
- meet the cost of additional care or adjustments to the home to assist the disabled employee, or
- provide cash support ultimately to members who are found to be totally and permanently disabled?
If the above intent of providing a lump-sum benefit still stands, the trustees and the employer may need to consider changing the tax status of this benefit from approved to unapproved. This will ensure that the initial intention and expectations are still met.
Caution is made that changing to an unapproved benefit would mean that the employee would need to pay fringe benefit tax on the monthly premium. However, the benefit would be paid as a tax-free lump sum separate from the retirement fund for total and permanent disablement.
These discussions must therefore include decision makers on the employer side to:
- help facilitate the messaging to the employees
- manage any payroll impacts
- align with their incapacity procedures
Any benefit structure implemented must be well considered to best suit the needs of the members. This could enhance the financial well-being of employees and lead to the best retirement outcomes.
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