UBS ROGUE TRADING SCANDAL (by Akmal Hijazi)

In September 2011, UBS was hit with a crisis and announced a loss of $2.3bn. This resulted from unauthorized trades made by Kweku Adoboli, a director of the bank’s team at the Delta One derivatives desk in London. Delta One’s products are a class of financial derivatives which have an option delta of (or approximately) one. The option’s delta is the measure of sensitivity of the derivative’s value towards movements in the price of the underlying asset, where a change in value of the underlying asset would mean a change in the price of the derivative. Having an option delta of approximately one implies that Delta One’s products are extremely volatile in the market.

The losses resulted from unhedged speculative trades on various S&P 500, DAX, and EuroStoxx index futures. These losses were masked by falsified transactions that showed bets on the opposite direction of his actual trades. Mr. Adoboli reportedly created fictitious trades using ETFs with his intimate knowledge of settlement. He also exploited the possibility of a firm to receive payment before a seller has confirmed delivery to the buyer, allowing the seller to show the cash has been received in their books.

Mr. Adoboli is facing four charges: two accounts of false accounting dating back to 2008 and two accounts of fraud.

Sources:

http://finance.fortune.cnn.com/2011/09/27/the-fine-line-between-bad-luck-and-rogue-trades/

http://www.guardian.co.uk/business/2011/sep/22/kweku-adoboli-faces-fourth-charge

http://online.wsj.com/article/SB10001424053111904106704576578591624722276.html

TAKAFUL – A GLOBAL MARKET RIPE FOR GROWTH (by Maziah Stapah Salleh)

Takaful is a Shariah (religious law of Islam) compliant insurance. The word ‘Takaful’ is derived from an Arabic word which means ‘joint guarantee’, whereby a group of people agree to jointly guarantee among themselves against a defined loss. Participants contribute a sum of money into a common fund, which will be used to mutually assist the members against a defined loss or damage.

Takaful is founded on the co-operative principle and also on the idea of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful (Insurance) fund and operations to the certificate holders. The contributions collected from the certificate holders are considered as donations and they constitute the Takaful fund from which all claims are reimbursed. At the end of each financial year, after deduction of expenses, any remaining cash surplus will not be retained by the Takaful Operator or its shareholders, but returned to the certificate holders in the form of cash dividends or distributions. In this respect, Takaful business is different from the conventional insurance in which the certificate holders, rather than the shareholders, solely benefit from the profits generated from the Takaful and Investment assets.

In recent years, the phenomenal success and growth in Islamic banking and investment models have encouraged a growing interest in the Takaful business. This allows providers to offer insurance protection to large numbers of people who still remain uninsured on the basis of religious faith.

Today, the Takaful way of insurance has grown into a widely accepted instrument in many countries. Even a few years ago, there were only a small number of Takaful operators. By contrast, today, Takaful coverage has grown substantially in many Muslim countries, with a large untapped potential in countries with large Muslim communities. Takaful models can be distinguished by the way contributions are managed, surpluses are distributed, funds are allocated, and fees are deducted.

Growth forecasts for Takaful vary, but the consensus amongst most market forecasters is for the current level of worldwide contributions written by Takaful insurers, estimated at roughly $2.0 to $2.6 billion as of 2006, to soar to $7.0 billion or more by 2015 This is well becoming a reality, for the forecast of $2.1 billion¹ in contributions by 2010, which was published by Asian Insurance Review a decade ago, has already been surpassed. However, when compared with the $3.7 trillion level of global premiums for conventional insurance, the enormous growth potential for Takaful becomes obvious.

To find out more follow the link below:

http://www.ft.com/cms/s/0/706ed304-de0b-11e0-a115-00144feabdc0.html#axzz1ax1BHn3s

QUANTITATIVE EASING (by Aainaa Baharuddin)

The Bank of England recently announced a £75bn cash injection into the economy. Why? It is to boost the economy by pushing up demand. Since the interest rate is already set to a low, this is another way to have a long term effect at ensuring the interest rate stays low. How does this boost the economy? When interest rates are low, borrowing from banks will be cheaper, mortgages will be less of a pain to settle and household savers will be discouraged to save and will spend it instead. The latter has a negative side to it really but the main point here is to spend and spend so the economy can balloon up with cash.

How does it work? Currently, the Bank of England will buy bonds or gilts from banks. From basic economics, a high demand in bonds will increase the price. There is an inverse relationship between price of bonds and the yield or interest rate earned on the bond. Hence, a high price will drive down the interest rate. Since borrowing, saving and mortgage interest rates depend strongly on the interest rates on bonds or gilts, this will mean the interest rates will be sustained at a low amount. This is however the long term effect.

In a shorter effect, more cash for banks will mean there will be enough lending at a considerably low interest rate. Putting cash in the hands of banks and people will mean there will be more demand for assets. When this happens, the economy takes a turn for the better.

More to read from the link below, which leads to an article by theguardian comprising of important aspects and critical analysis of this economic policy.

Read more:

http://www.guardian.co.uk/business/2011/oct/07/quantitative-easing-what-is-it

GOING FURTHER: MSc ACTUARIAL MANAGEMENT (by Gaetano)

The first batch of the MSc Actuarial Management course at Heriot-Watt commenced last month. The course is targeted at student actuaries who already have exemptions or passed all CT exams of the Institute and Faculty of Actuaries.

The Actuarial Management course offers exemptions from CA1 (Actuarial Risk Management) and CA3 (Communications) as well as the ST exams, including ST9 (Enterprise Risk Management). This leaves graduates with only three professional exams remaining: CT9 (Business Awareness), CA2 (Model Documentation) (both of which are assessed by a two-day practical course in most cases) and one SA subject.

With this level of exemptions, successful graduates of the course can aim to get through all professional exams within one year.

Quoting Professor Angus Macdonald, head of AMS, regarding the new MSc course “We are delighted to be adding this prestigious programme to our long-running programmes in actuarial science, which have established the Department's excellent reputation worldwide."

A full list of modules studied can be found at: http://www.ma.hw.ac.uk/ams/teach/courses1112/index.php

MIXED REACTION TO FURTHER SOLVENCY II DELAYS (by Gaetano)

There has been mixed reactions to a confirmation done by the Financial Services Authority that the implementation date for Solvency II has been further pushed back by one year to January 2014. Solvency II is a European Union directive imposing more robust capital requirements for insurers and replaces 38-year-old legislation. Scott Paton of PA Consulting said "This is a great opportunity for firms to look again at how they can improve the quality of their application." However, not all responses were so positive. Jim Bichard, insurance partner at PWC, said the decision “Is likely to be met by disappointment from many of the largest insurers, especially those pushed to the back of the queue”.

Solvency II had originally been set due for a 2012 implementation but the process has been delayed to allow insurers and regulators more time to prepare their models.

Read more:

http://www.ft.com/cms/s/0/2fa30abe-ee98-11e0-9a9a-00144feab49a.html#axzz1aTS4VBDU

http://www.theactuary.com/actuary/news/2114333/fsa-solvency-delay-an-opportunity