The Reality Of Investment Risk
In less than two months’ time, on January 3, 2018, the European Union’s (EU) Markets in Financial Instruments Directive II (MiFID II) will become law, introducing enormous changes to the operational processes at buy-side and sell-side organisations. MiFID II is an EU-centric regulation but its reverberations will be felt globally, meaning Asia-Pacific (APAC) financial institutions need to check that they are in total compliance with the new rules. The real estate market collapses when interest rates rise because mortgages are more expensive, leading to a decline in demand among homeowners and investors. A classic example of the disastrous impact of rising interest rates on housing is the bursting of the U.S. housing bubble which started in 2006. It was largely accelerated by a sharp rise in variable mortgage interest rates, followed by the federal funds rate, which rose from 2.25% at the beginning of 2005 to 5.25% in late 2006.
The tightening phase should gain momentum this month, with the vast majority of economists polled expecting a quarter percentage point rate rise, largely due to a tight labour market and robust economic growth in 2017. This will represent the third interest rate hike in 2017 and will take the benchmark federal funds rate to a range of 1.25% to 1.5%.
InflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index. + read full definition means higher consumer prices. This often slows sales and reduces profits. Higher prices will also often lead to higher interest rates. For example, the Bank of Canada may raise interest rates to slow down inflation. These changes will tend to bring down stock prices. Commodities however, may do better with inflation, so their prices may rise.
There has been enormous hype about major technology players – who possess massive amounts of data on their clients – making a tactical move into distribution. These include the likes of Amazon, Facebook or Google, the latter of whom has actually undertaken research into whether establishing an asset management business would make economic sense. Interestingly, only 22% foresaw these players as a threat in the Calastone study.
The ISDA Master Agreement also contains an Illegality” termination event, which is triggered when it becomes illegal for a party to make or receive payments or deliveries or otherwise to comply with obligations under the Master Agreement in question; however, we consider it unlikely that this termination event would be triggered in relation to existing trades by Brexit. If specific termination events had been built into an agreement to deal with, say, the investment manager of a transacting fund losing the right to do business in a relevant jurisdiction, Brexit could result in the early termination of a number of transactions.