My name is Silvano Stagni. I am a seasoned risk, regulation and change consultant. I have worked in the financial services industry for many years. I speak several languages and hold a PhD. I now leverage the knowledge acquired and my experience in communicating with people at all levels to help:

· Financial institutions meet their regulatory requirements (impact analysis of new regulation, risk appetite statement, ICAAP documents, process and procedure manual),

· Companies acquire information to support investment managers and corporate finance departments (research and due diligence work), and

· Businesses inform customer and peers (white papers, research work, case studies, communication to investors).

Monday, 20 September 2010

Does your company need an evangelist ?

Guy Kawasaki's book 'Selling the dream' put the terms 'secular evangelist' on the map of business roles. A lot of companies need 'an evangelist' behind their products or services, especially those who launch innovative ideas.
An evangelist helps paint a picture around a product or service. It is a far cry from PR and spin, it is content that shows how an innovative idea will work. The difference between sales content and evangelising content is the same difference as between a conversation with somebody who is trying to sell you something and a friend recommending a good book or a good restaurant.
I help companies create evangelising literature, i.e. white papers, case studies, education material, etc. I am pragmatic rather than academic and use examples rather than get into a 'lecturing mode', I am very good at finding ways to explain concepts that relate to an audience. My professional experience in the banking world and in international business makes me very good at targeting business and financial people. My previous track record in interpreting and implementing new regulations proves that I can learn new concepts and mix with new environments very quickly. I have used that skill to learn how to relate to new audiences.

Wednesday, 7 July 2010

A Global Unit of Reference for World Trade

Is the concept of a reference (or reserve) currency fit for the scrapyard?

It looks like the UN thinks it is. In a report published at the end of June 2010 (“ World Economic and Social Survey 2010 – Retooling Global Development ” published by the Department of Economic and Social Affair) the UN calls for abandoning the US Dollar as a reserve currency because it has been unable to safeguard value.

The question to ask here is, would any other currency do a better job ?

International trade needs long term stability in its frame of reference. Any currency would eventually fluctuate (even the Yuan had to abandon a strict peg to the US Dollar). So the problem is not with a specific currency, the problem is with the idea of using a reference currency.

So far so good. Things start to get worse when the Special Drawing Rights is suggested. The report basically paints a scenario where the SDR is used as an actual currency. This would not necessarily safeguard value because the composition of the basket that defines the value of the SDR is politically rather than financial (or market) driven and the mechanism of establishing the weights of the basket is not completely transparent. In other words, it could be argued that moving towards the SDR as reference ‘tool’ to define value of international trades would not be dissimilar to having a currency called UN Dollar (Or UN Dinar, or UN Yuan or UN whatever you like).

Using a basket of currencies reduces the consequence of volatility but in the long run the definition of the basket needs to be transparent and the value of the basket needs to be periodically reassessed. Value is by its very nature volatile, you cannot ‘abolish’ volatility but you can manage it – or even better – reduce it.

In a white paper I recently wrote for the WDX Organisation (WOCU: the currency shock absorber) I showed how using a basket of currencies called WOCU reduces the effect of currency fluctuation by reducing volatility and therefore safeguarding value for both parties in a trade. The WOCU is transparent (its valued is determined by an algorithm based on the currencies that are legal tender in the top 20 jurisdictions by GDP), it is reassessed twice a year (and in the past 10 years the composition of the basket has changed in nature and in weight) and the reassessment is completely transparent and free from political interference (in so far as a government cannot cheat on the published GDP data).

The WOCU allows each party in a trade to fluctuate independently from the other one, it could be compared to the self-adjusting hub in a wheel axle where each wheel has an independent shock absorber. The rigidity of the SDR will make it more prone to ‘crack’ under severe shock.
One of the other points of the WOCU is that it is not a currency that can be bought or sold; it is a reference unit which is introduced without any contribution from central banks, government, etc. In a way it might work globally like the ECU did in Europe before it was replaced by the EURO in 1999. A ECU based banking facility meant an account (or a loan) where the value is defined in ECU but each operation used to take place in the local currency with the value fluctuating depending on the exchange rate of the day. So, for instance, a mortgage in ECU had its repayments determined in ECU but the borrower had to pay back Deutsche Marks (or Guilders, Lira, etc.) depending on the value of the Mark against the EURO on that particular day.

So why would this safeguard value better than any reference currency or the SDR ?

In the current system, prices of commodities reflect both the fundamentals of the specific commodity (supply/demand, geopolitical and environmental factors that may affect either the supply or the demand) and the strength/weakness of the reference currency (mostly the dollar), if the reference currency is replaced by a basket of currency (i.e. a reference unit the value of which is determined by a basket of currency) , then the value is kept more stable because there is only a very small probability that all the currencies in the basket move in the same direction (and if that happens the currency of the commodity producing country would follow anyway).

More specifically, why not the SDR ? The SDR is not transparent, politically determined (and therefore politics can interfere with it) and it is readjusted every five years and that does not make it flexible enough and therefore unable to cope with short term ‘jolts’ in the global economy. Transparency is a much bigger issue, the composition of the SDR has not changed in thirty years (the Euro replacing the Deutsche Mark and the French Franc is not really a change) in spite of changes in the world ranking of the major economies. In ten years of life of the WOCU idea the composition of the basket has changed considerably, with country leaving it (e.g. Taiwan and Argentina) , others joining (Indonesia) and countries leaving it and then coming back again (Switzerland), and the weight is readjusted. These changes are achieved through a transparent process of revision that takes place around mid-May and mid-November. This flexibility allows the WOCU to cope with short terms abnormalities (e.g. a very serious natural disaster affecting the economic viability of one of the top 20 economies) and changes in the world economic outlook (with the consequent change in the ranking of the top 20).

[For further information about the WOCU The author is a member of the WDX institute, has written the Wocu white paper mentioned in the article but has no permanent commercial affiliation with WDX Organisations Ltd, the entity that is currently promoting the commercial use of the WOCU]

Wednesday, 26 May 2010

More regulations or better regulators ?

One of the basic principles of compliance is that an investor need for protection is inversely proportional to his/her expertise. In other words, expert investors need less protection than retail investors or non-experts. And yet on both sides of the Atlantic politicians are bringing in regulations that have the apparent aim of protecting the expert investors.

Prudence in banking is mandatory; hedge funds were initially created by fund managers that thought they could achieve better returns by taking ‘informed’ risks. Dealing only with institutions and expert individuals (i.e. very wealthy) they are supposed to have a conversation about risk with peers when they talk to their clients. Their power to manipulate the markets is far less than everybody thinks it is and ultimately they are regulated by the same people who regulate banks.

Retail investors do not use hedge funds; on average they ultimately put their money in the hands of an investment manager. These professionals are handsomely paid because of their expertise, i.e. the ability to make "wise" investment decisions that will provide a better than average rate of return for the clients' savings.

If you have a pension you ultimately use an investment manager. If you are an investor you should have agreed a risk profile for your investments and your investment manager should stick to it; if that does not happen you can sue. So, why put together a set of rules that will make it more expensive to operate an investment fund and will limit the choice of investment?

Alternative Investments (i.e. Private Equity, Hedge Funds, etc.) hardly played any part in the events that led to the credit crunch and the massive bailout of banks. But they have been an easy target for populists attacks, in time of crisis massive wealth is guilty by definition (if I am in trouble why aren’t you?).

If regulators cannot properly monitor international flow of capital, shouldn’t we look at why they can’t and try to solve that rather than add more regulations to make matters more complicated than they need to be?

Money can easily be moved across borders, even more so when it moves electronically. Post 1929 crash, protectionism made things worse for everybody. In those days, they were protecting local goods, thereby stifling international trade. Now there is an attempt to build a financial ‘fortress Europe’.

How will it affect us in practical terms? What good are regulations if they are not properly implemented? Surely part of the blame of what happened rests on regulators where the staff sometimes did not fully understand the dynamics of the risks associated to some financial instruments. The more prudent thing would surely have been to look into the regulators before adding new rules to monitor. Unfortunately that was the more difficult option and politicians on both sides of the Atlantic failed to follow it.

Investors will have less choice and the new regulations will increase the cost of compliance and ultimately the retail client will end up paying for it.
Will they make the market less volatile? Will they promote prudent risk management? The jury is out on that. Personally I do not think so.

Will they be effective? Greed and ambition are huge motivators for the best and the brightest. In this case, greed and ambition will be the greatest motivators to find ways around these regulations.

Will they protect us from financial instability? I doubt it, for every Bernie Madoff there are dozens of hedge fund managers that have delivered better return for investors. (Please let us remember that there had been a lot of warning signs that something was not quite right in the Madoff Empire). The industry has been a convenient scapegoat. A lot of those who lacked judgement have been left more or less unscathed it is true but ultimately the regulations are only good or bad in so far as the regulators are good or bad; unfortunately the track record of the regulators has not always been shiny.