Keeping the lifeboat afloat

Not the quietest of weeks for the Pension Protection Fund.

The Fund was set up four years ago in response to growing clamour from pensioner lobby groups to provide compensation for people whose DB pensions fail to pay out when the sponsoring employer goes belly up. The initial funding comes from a levy charged by the PPF on all DB schemes, the level of which is determined by each scheme's exposure to risk – the greater the exposure, the higher the levy.

Earlier this week, it was reported that Transport for London is seeking a legal review of the levy imposed by the PPF. TfL claims the levy is "unreasonable", and other DB providers with similar concerns about the unfairness of the levy will no doubt be awaiting the outcome with interest.

And today it emerges that the Fund's deficit more than doubled in the year to March 2009, from £517 million to £1.23 billion, prompting – according to the Telegraph – "questions about the viability of Britain's pensions lifeboat".

Before anyone presses the panic button, however, it's worth bearing a couple of things in mind. Firstly, as PPF Chief Executive Alan Rubenstein recently pointed out, the PPF is currently paying out around £7m a month to its 13,000 beneficiaries, and while these numbers will increase in the coming months, the Fund already has some £3bn in assets, so "let's not pretend there are not extreme scenarios out there that could see us run out of money, but that will not be happening in the foreseeable future".

And secondly, Mr Rubenstein and his colleagues are smart enough to have learned from the American experience. The US equivalent of the PPF, the Pension Benefits Guaranty Corporation was set up in the mid seventies, and has amassed an eye-watering $33 billion deficit. Even so, the debate in Washington is around how to fix the PBGC, not how to get rid of it. What politician, after all, would want to be seen as the individual who allowed a lifeboat to sink?

AF

(You gotta) fight for the right to (counter)party

Who would have thought that white-boy hip-hop could hold a mirror up to the financial markets...no, not me either. Firstly, we've got the Beastie Boys fighting for the right to a (central) counterparty and then InterContinentalExchange (ICE) leading the chorus of Vanilla Ice's 90s anthem "Ice Ice Baby". Post-Lehmans ("PL" – that's right we're coining a new acronym right here, right now) the concept of counterparty risk came to the fore – it always existed, it's just that people didn't really expect giant banking institutions to fail.

Not for the first time, the market was spectacularly wrong. Either way, the successful transfer of trades PL overcame a major hurdle in the clean-up operation and marked the clearing and settlement operations that underpin many markets as one of the few success stories of last year. This was not only true of equities but also the centrally cleared futures and OTC interest rate swaps, which were swiftly reallocated without loss to counterparties and without disruption. On the other hand, Lehman's unregulated credit default swaps and non-cleared interest rate swaps brought chaos to the market. The case for centralised clearing and the danger of defaulting counterparties was duly presented and the debate has rumbled on behind the scenes ever since.

Now, counterparty risk and centralised clearing have again been cast centre stage, with moves afoot on Capitol Hill to institute sweeping changes to the structure and regulation of the massive OTC derivatives business. Citadel's influential CEO Kenneth Griffin has been quick to weigh into the debate and called for the overturn of the 'merchants of status quo' and the worth of the centralised clearing model. Granted, his motives are probably not entirely altruistic – after all, this is the same Citadel that has a joint venture with the CME to clear credit. Self-interest aside, clearing is definitely back on everyone's lips – from exchanges to regulators to banks to hedge funds.

ICE, the futures exchange group, has been swift to react to the new world order and forged ahead in the race to clear credit default swaps. The group announced yesterday that nearly all new CDS contracts would be cleared centrally by the end of the month. This is impressive stuff and as Hal Weitzman writes in today's FT: "ICE has taken a strong lead amongst exchanges". This is probably a wise decision and as Jeremy Grant relayed earlier in the week: "governments and regulators in the US and Europe have made wider use of clearing – particularly in the over-the-counter derivatives market – a pillar of reform of financial markets." ICE has stolen a march on their competitors and given their relationships and collaboration with the main CDS dealers has reportedly cleared more than 43,000 index trades in Europe and the US with a notional value of more than $3,5000bn.

This is a big, lucrative market and Jeff Sprecher, ICE's chief executive, has been in an understandably buoyant mood of late. Does this signal a return to confidence in the credit derivatives market? Perhaps so...in which case – ICE ICE Baby indeed.

JS

Playing ketchup

M&S has reported sterling figures this morning. Great news for me, I am a share holder (albeit of about 2 shares) but that isn't the half of it..........

The best news I have heard so far this week amongst the doom and gloom of the usual business stories and the continued injection of cash into ailing banks (but that is another story) is that Marks and Spencer is to expand the sale of branded goods from a select number of stores to more than 600 stores across the UK. I am hoping this includes my local.

For years I think M&S have been missing a trick. You see the M&S own branded ketchup just isn't quite up to it. And the fact that you could buy a ready meal of the highest quality and a t-shirt at the same time was beginning to lose its appeal. I made the move from M&S to Waitrose so that I could get different brands but now I am going back and fast.

According to Mysupermarket I will also save some pennies. M&S is cheaper than Waitrose on 1,200 lines although Waitrose has retaliated by saying it is 6% cheaper on the other lines – we'll see. The battle for market share between these two quality food outlets has begun but I know where my loyalties lie........

LW

Ucits or lose it: life on the hedge

Right now Ucits are hotter than Brad Pitt and Angelina Jolie in a sauna as hedgies fire off new funds into the market left, right and centre. About 75 to 100 Ucits funds are estimated to have been launched to date, a figure that rises to around 300 when Ucits hedge funds are taken into account. The sudden craze is partly due to high profile hedge fund names such as Man Group, Brevan Howard and GLG Partners launching replicas of their existing hedge funds in the Ucits III format. Some have claimed that hedgies are tapping into the Ucits space in a bid to trump the draft EU directive on Alternative Investment Managers due to come into force next year, whilst others say that hedge funds are keen to expand their investor base. But some industry pundits have urged caution that the conversion of complex hedge funds into Ucits funds could expose smaller investors to hidden risks.

Hedge funds will need to change their business model in order to survive..."transform or die" is a cry often heard in the press. But does the entry of hedge funds into the regulated, onshore Ucits space not threaten the traditional offshore unregulated hedge fund model? Could this be a sign that the traditional hedge fund model is becoming obsolete?

NB

Why don't you just switch on your television set....?

Why isn't more PR effort focused towards broadcast media? From their behaviour it would seem that many PRs and their clients believe that broadcast is not a worthwhile medium. But the reality is that broadcast media dwarfs print media in terms of audience size and breadth. Around 65% of UK adults rely on TV news as their primary source of news, BBC One’s 6pm News and ITN’s 6.30pm News have 10 million viewers each night between them, and around 2.2 million people are listening to BBC Radio Four's Today Programme at 8am each morning. Compare this to the circulation of the Telegraph (around 800,000 at the peak of the MPs' expenses coverage) or Financial Times (around 400,000 and falling) and you begin to wonder why more PR teams are not focusing more effort on broadcast than on print.

There are many TV and radio programmes with large audiences that have financial content which requires expert commentators to appear as guests on the show. The most obvious is the 6.15am markets report on the Today Programme each morning, where a leading fund manager gives his or her view on the company news of the day – around one million educated, home owning, people mostly over the age of 40 are listening. If you could sell advertising during this slot ads would cost a six figure sum, but perplexingly the BBC find it difficult to find a pool of more than about 20 fund managers able and willing to speak for free. Wake up to Money (Five Live from 5.30am to 6am) has a similar slot and around 250,000 financially minded listeners tune in each morning to hear Andrew Verity and Micky Clarke's dulcet tones.

So how might PR teams go about taking advantage of the largely undervalued medium of broadcast? Clearly a different approach to print media is needed as press releases become largely redundant and the whole process really revolves around having a good expert commentator available for all those guest speaker slots. For this it is necessary to have a spokesperson who is articulate and able to explain complex issues in a way that the layman can understand. Once chosen specialist broadcast media training must be undertaken to fully prepare them. Equally important is that the spokesperson has to be willing and able to do any slots, anytime, at short notice – starting on smaller programmes before progressing to flagship ones and being aware that turning down opportunities (even at a few hours notice) means that they are unlikely to be offered a second opportunity.

If this can be achieved then you are ready to start putting them forwards and finding opportunities for them to appear on the TV and radio. It can take a little while to gain some initial momentum, but once underway you will quickly begin seeing and hearing your company name appear on the airwaves and reaching large audiences.

RT

Beer and Mortar

House prices are rising again. Oh wait a minute, they've still got 17 per cent to fall. Ah, but we're alright because a 'survey of estate agents' has told us they are confident about the market again. (Who'd have thought?). Property and personal finance correspondents must be getting giddy by now as ratings agencies, building societies, the Land Registry and the Royal Institute of Chartered Surveyors continue to churn out their daily contradictory housing market research.

But just as we were getting bored of the 'are they or aren't they' debate, the regulator this week announced its latest initiative to prevent a re-run of the irresponsible lending that fuelled a large part of this decade's housing market boom. As part of its mortgage market review the FSA has proposed that mortgage applicants must disclose exactly what they spend in a typical week when they apply for a mortgage. And yes, that includes admitting to how many pints of beer you drink on a Friday night.

Now I'm not afraid to tell my mortgage lender how much I spend on shoes and wine – and thankfully I haven't taken up smoking since I last applied for a mortgage - but it's hardly a carrot for those all important buyers trying to get onto the housing ladder. Nor is it likely to revive the market by encouraging the banks and building societies to increase the number of home loans they offer – something that the government is trying to encourage. Sounds like another contradiction to me.

But there's mortar life than house prices.

LW

Too big to fail?

Mervyn King's impassioned address to Scottish business organisations yesterday has been described as a declaration of war on the banking industry which is fair enough considering his decision to paraphrase Sir Winston Churchill.

King's cri de coeur has been brewing for some time. Regulators and policy makers around the world have recognised that in pulling the financial system back from the brink we have created a new predicament. Previously, banks may have suspected that central banks would bail them out if they got into trouble but recent intervention has now proven that banks can indulge in risky business without risking salvation from the taxpayer.

King said that "The 'too important to fail' problem is too important to ignore" and that "The massive support extended to the banking sector around the world...has created possibly the biggest moral hazard in history". The powerful rhetoric employed in his speech shows how much is at stake if regulators waste this opportunity with ineffective reforms.

Little over a year ago, when Lehman's employees were looting office buildings and the rest of us were contemplating what it would be like to live through another great depression, there was a sense that these events would mark a sea change in financial services. Reform was long overdue and the industry as we then knew it would be a much different beast in the future. A year hence though, what has actually changed? With the return of bonuses and the recovery of risky assets, there is little sense that any lessons have been learned or that the culture of financial services has much altered.

King's speech may have focussed on banking but it speaks to a much bigger problem. Now the industry is back on its feet and making money the impetus for reform has been lost. Self-interest once again dominates discussions and the topic of regulatory reform is being turned into a showcase for politicians. Policy makers must recognise that more regulation is not necessarily better regulation and engage in open and honest dialogue, not polemics and posturing.

The battle over how best to address the 'too big to fail' quandary is a worthy fight but is just one conflict in a much bigger war that must be waged if we are to avoid another crisis of this scale.

NS