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Hopefully, communication with the regulator will not harm you or your business

Tradenet Capital Markets Ltd. for offering and selling security-based swaps to over 5,000 retail investors without registration and for failing to transact its swaps on a registered national exchange.

According to the SEC’s order, Tradenet sold investors packages of materials that claimed to be for the purpose of educating investors about day trading but also paid investors a portion of net profits from simulated trades conducted in a funded trading account provided as part of the packages. As set forth in the order, Tradenet charged from $500 to $9,000 for the educational packages that included the simulated trading accounts.  According to the order, investors whose portfolios increased in value received payouts equal to a percentage of the simulated net profits, but if the value of the portfolio decreased by a certain amount, the funded trading account was closed. The SEC’s order finds that the contracts to provide funded trading accounts were security-based swaps under the U.S. federal securities laws. The SEC’s order further finds that no registration statement had been filed for the swaps, and that the swaps were not sold through a national securities exchange.

Tradenet provided its customers “Day Trader Education Packages” that included a simulated “funded account” in which they could “trade” securities. The participants received a portion of the upside, and their downside was capped as their accounts were closed if they fell below predetermined thresholds. Some purchasers of these packages appear to have voluntarily purchased successive packages, and participants appear to have transacted with Tradenet voluntarily and with clear information about the terms of the deal. While Tradenet’s product offering had an educational component, it was primarily about the simulated “funded account,” which could not have been offered to U.S. retail investors under the existing rules

However, the some believe that there is room in our regulatory framework for creative investor education programs that give investors the opportunity to simulate trading in various financial products and assembling an investment portfolio. Gamification of educational experiences can promote learning, and the use of awards or prizes—even cash prizes—can provide incentives to take the game seriously and thus increase the educational value of the experience.

Firms, schools, and entrepreneurs who are interested in offering genuine learning opportunities to investors through simulated trading experiences with financial incentives but are concerned that their design may raise issues under the securities laws should engage with the Commission to explore how they could offer it in a manner consistent with the rules

If you need to renew your insurance please shop around. It’s for your own benefit!!!

The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. For example, if the customer bought the policy online, they would be charged the same price as a new customer buying online. Firms would be free to set new business prices, but they would be prevented from gradually increasing the renewal price to consumers over time (known as ‘price walking’) other than in line with changes in customers’ risk. For existing consumers, their renewal price would be no higher than the equivalent new business price.

Firms use complex and opaque pricing practices that allow them to raise prices for consumers that renew with them year on year. While some people shop around for a deal, many others are losing out for being loyal. Firms target price increases on consumers who are less likely to switch and use practices that make it harder for people to leave. At the same time, firms do not always offer regular switchers their lowest prices. The FCA identified 6 million policyholders were paying high or very high margins in 2018. If they paid the average for their risk, they would have saved £1.2 billion. Some of this is due to harmful pricing practices, which the FCA’s proposals aim to tackle.

In the long-term, the proposed FCA remedies are designed to improve competition. This should lead to lower costs for supplying insurance, and ultimately lower the prices paid by consumers on average. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years.

There is one true rule when it comes to insurance, if it is too complex, you will be “BEEP” hardly. You don’t want to end up paying for nothing, it is the opposite of fun.

Insurers will not be bankrupts, if you were worried , don’t be

According to the FCA press release:

The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues. 

Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

Most policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover for BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty. 

The judgment says that most, but not all, of the disease clauses in the sample provide cover.  It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.

Good job done by the FCA team, while good job done by the insurers.

Why insurers made a good job? they will claim to the government that those policies were not designed to bring them into bankruptcy, and they will request and get compensation, where needed. Therefore, if you were worried, don’t be, most probably, we will pay for it, it will still come from your pocket. When the system is smarter than us, it may be…

New research suggest foreign exchange quotes complexity means that customers may end up with a poor deal

According to a new research, the scale of payments and transfers to foreign countries from the UK is very large. An estimated $26.8bn was transferred in 2017 alone as remittances (transfers by non-UK nationals to their home country).
Approximately £4bn was estimated to be ‘lost’ in hidden charges paid by small and medium sized enterprises in 2015. The new regulations are designed to increase the transparency of costs, but they do not impose changes in underlying market practices, such as in costs structures or how long an exchange rate offer remains available to the customer.
A particular issue in the retail FX market is the complexity and amount of information that a consumer needs to understand when deciding whether or not to transact with a particular firm. For example, firms can operate different transaction cost structures, use different exchange rates and can deduct costs from the monetary amount to be converted or from the amount of the new currency to be received. In general, attempts to improve consumers’ abilities to compare and contrast different providers in the financial services sector, especially where information is complex and could be presented in diverse ways, often involves standardisation or defining the minimum amount of information that needs to be presented at the point of sale.
Previous research has shown that providing more information about financial products doesn’t necessarily help consumers make better decisions, so it is vital to test the efficacy of such interventions.
According to the research, on average, people are more likely to shop around where no registration is required and on average, people are more likely to choose the highest received amount where the market exchange rate is the same across all offers (stable). The timestamp and statement have no significant effect.
The research results suggest that people make better choices when they can compare offers across providers that are fixed during the time they are searching. However, in line with previous research, adding further information in the form of a timestamp and disclosure about exchange rates changing did not improve participants’ choices.

According to our understanding:
God is in details. If there is too much information, you should not be intimidated, in some cases it can also be fun, and you may enjoy and benefit from the process. It may be just like assembling a puzzle.
Don’t be afraid to ask, answers can assist you, we are here to assist you, it is your call whether or not to use the information provided, and it is better to keep the information available out there. Confusing or not, people may need more time to adapt to the extra information provided.

Insurance which works for you is something that yet to be invented

The FCA case study page 17:

Rob, 44, lives is a large detached house in the countryside, with his wife and his 2 children. Rob is now a wedding photographer, after previously being an aerospace engineer.
Rob only recently changed professions, as three years ago his contract as an aerospace engineer came to a sudden end. Unfortunately, this happened just after he had committed to buying a new house, a house which was a significant step up from his previous home (£150,000 more than the current property at the time). He was out of work and without an income for a year, so his financial situation was impacted,
also affecting his mental health and relationship.
The loss of income did not impact on the house purchase as Rob and his wife had a large savings pot and did not have any outstanding debts. However, it did impact on their lifestyle, as they had to avoid some of the previous luxuries they had been used to.
Rob sees himself as very financially savvy and does tend to shop around for financial products. However, he hasn’t reviewed his mortgage, current account or his car insurance for some time, as he feels he already has the best deals.

In October 2017 Rob’s property was damaged by a storm. The storm caused considerable damage to his large electric gates. Rob contacted his home insurance provider to make a claim.

The initial call hander he spoke to informed him that the repairs to his gates would be covered by his policy. Rob sent a claim for the cost of restoring the gates to the insurer when he was then informed that they would not cover the costs, as the gates were classed as fencing which is  not included under the policy. He later realised that this was mentioned in the small print of the policy documents.

If you want to replace the insurer, instead of paying the premium for the insurance companies, make a monthly provision. In case something goes wrong, you can always trust yourself.

Nice research – An estimated 2.6 million UK consumers have bought cryptoassets at some point, new FCA research reveals.

It is nice, since it comes from independent organization. Some highlights from the research:

The FCA commissioned research to gain insight into the size of the market and identify
potential harm. Through a nationally representative survey of 2,132 UK consumers and 31 in-depth interviews, this research provided invaluable insights into the size of the market and where potential harms could be found. It concluded that the size of the market was relatively small with 3% of consumers having ever bought cryptoassets, spending on average £200. It also showed that awareness of cryptoassets among the general population was low.

The FCA chose to use the term ‘cryptocurrency’ throughout the research. This
term is more widely used in public domain than the broader ‘cryptoasset’ term it tend to prefer. The FCA also use ‘exchange’ to represent ‘cryptoasset trading platforms’, given
‘exchange’ is widely understood and used by consumers.

Most cryptocurrency owners appear to understand the lack of regulatory protections and demonstrate some awareness of the technology underpinning cryptocurrencies. Also, they acknowledge that prices are highly volatile and may fall.

Consumers appear increasingly aware of cryptocurrencies, as 27% had never heard of
cryptocurrencies this year, compared with 58% in our survey last year. The number of
consumers aware of cryptocurrencies has significantly increased. A possible explanation
for this increase in awareness may relate to the increased media presence. Bitcoin was
the most recognised cryptocurrency and, whilst Libra does not yet exist as a  cryptocurrency, 22% had heard of Libra. The list of cryptocurrencies included unlaunched ones (Libra), to capture awareness of potential cryptocurrency players.

When asked why they bought cryptocurrencies, 47% said they bought cryptocurrencies
‘as a gamble that could make or lose money’ compared with 31% in the 2019 consumer
research (noting this year’s survey was online whilst last years was face to face) as one
of the main reasons.

More people are first hearing about cryptocurrencies through the media, with ‘traditional media’ being the place where people are most likely to have first heard about cryptocurrencies.

Over 25% use cryptocurrencies to purchase goods and services, nearly half have never done anything with them, suggesting people purchase them with the hope of making a return.
In general, cryptocurrency holders expect to hold them for long periods of time.

According to the research, we can conclude that Cryptoassets, at the moment, are more like gold or commodity, rather than a currency (place to store value rather than a currency like EUR/GBP/USD).

 

Modernizing is always the best practice

3,476,141 non-professionals were monthly subscribers to data for NYSE-listed securities in the fourth quarter of 2019. These users generally are retail investors, obtaining data by requesting quotes from their brokers.

National Best Bid and Offer (NBBO) is a regulation by the United States Securities and Exchange Commission that requires brokers to execute customer trades at the best available (lowest) ask price when buying securities, and the best available (highest) bid price when selling securities, as governed by Regulation NMS.

On physics, there are unavoidable limitations due to the speed of light—and the speed of fiber optic cable.  This means that, as long as users are not all in the exact same location—which they are not—information cannot reach all users at exactly the same time.  As a result, the NBBO at one location will vary slightly from the NBBO at another location.

Today, hundreds of firms are located in different locations.  Some buy NMS market data, some aggregate proprietary data.  Some get their data over fiber.  Some get their data over microwave towers.  Anyhow, you get the point. There is no one NBBO in a world where markets are quoting and trading in nanoseconds.

According to Director Brett Redfearn, today, the best-priced offer for a higher-priced stock in NMS market data may be 100 shares for $400.50, while the exchange proprietary data feeds may have a 20-share offer at $400.45.  If a retail investor places a 20-share buy order and it is executed at $400.48, the executing venue is entitled to report that the retail investor received two cents for price improvement.  This is true even though an odd-lot quote on the exchange proprietary data feeds was readily available at a price that was three cents better than the “price-improved” execution supposedly provided to the retail investor.

The SEC have hard work ahead, plenty of responsibilities, and they are doing it for us, in order to keep our funds safe. The future for sure will be different and modernize. Maybe, blockchain technology can assist, once it will become faster, only god knows. Hopefully, we get better prices in the future.

Is trading history simply information about an economic transaction with no expressive value or maybe it is time for more smart contracts?

Some people might say, “Of course it’s different: trading history is not protected expression; it is simply information about an economic transaction with no expressive value.” However, economic transactions offer a window into a person’s deepest thoughts and core values. Our purchases and sales of securities, particularly when aggregated together, are a rich form of value expression. They might express a view of how markets work, a determination on the efficiency of markets, expectations about the future, or even a moral philosophy. Investors’ trades may flow from a carefully crafted trading strategy based on a person’s education, careful data analysis, intuition, or market experience. People may trade to express their belief about how a company, industry, or nation will perform in the short- or long-term. People might sell stock because they fear a recession is coming or buy stock because they anticipate that the election of a particular candidate or party will bring a period of economic prosperity. An investor might buy shares of a movie company because she is sure a particular movie will be popular, shares of a technology company because he/she believes the company’s engineers are geniuses, or the shares of a cellphone provider because he/she believes a strategic merger is on the horizon.

According to SEC commissioner, Hester M. Peirce’s statement, we should not risk our freedom and privacy. If history is any guide, unauthorized access to, or disclosure of, the information contained in the Consolidated Audit Trail (CAT) is almost certainly just a matter of time.

Given these risks, the commissioner advise to eliminate the CAT, and if the Commission believes the program needs further improvement, it could enhance the current rules. The current regime provides the information needed, and incremental improvements to reduce delays and errors could make the commission investigations more efficient without sacrificing Americans’ liberty and privacy.

What if people will use smart contracts to buy shares and other securities? How will the SEC follow them? Does the SEC wants us to use smart contracts to get more privacy?

When the future is not connected to reality

On April 20th, the day prior to the last day of trading and expiration of the May futures contract for WTI, the price of the May futures contract fell from $17.73 per barrel at the market open to a closing settlement price of negative $37.63 per barrel.  In the last 20 minutes of trading, buying was scarce as the price dropped approximately $40 per barrel. As a result of this unprecedented collapse, the price of the May crude oil futures contract became disconnected from the price of crude oil in the physical market and other derivative instruments.

According to the CFTC, The WTI contract is a key benchmark in the energy and financial markets. Businesses use the contract to manage their risks arising from energy prices.  The contract also is used by financial market participants to manage inflationary and other risks correlated to energy prices.  The extreme divergence between the price of the WTI futures contract and prices in the physical market particularly affected the market.

According to the Energy Information Administration, the “extreme market events” just prior to the expiration of the May WTI futures contract were caused by a variety of factors, including “the inability of contract holders to find other market participants to sell the futures contracts,” and the “scarcity and high cost of available crude oil storage,” which forced market participants who were unable to take delivery to pay counterparties to take their contract—in essence, negative prices.

Do we need contracts who disconnected from its underline commodity? do we have too much financial innovation and we went too far? the CFTC will provide more answers soon, stay tune.

Who do you favour insurers or insured?

According to the FCA, most SME (small medium entities) insurance policies are focused on property damage (and only have basic cover for business interruption (BI) as a consequence of property damage) so, at least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic.

Some customers’ policies also cover for BI from other causes (for example in relation to infectious/notifiable diseases, non-damage denial of access and public authority closures/restrictions) and may in some cases provide cover. Whether there is cover for the business interruption related to the pandemic crisis will depend on a number of factors including the policy’s wording. The range of wordings and types of coverage are sufficiently broad in the BI market that it is difficult to determine at a general level the degree to which any one individual customer may be able to claim.

There are BI policies where firms have determined an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. Firms still need to do more work to agree, process and pay these claims as promptly as possible in all cases, including using interim payments where appropriate.

However, in relation to other policies, firms may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover.

The issues around BI policies are complex and there are significant differences in policy wording between policies and across firms. These complexities have the potential to create ongoing uncertainty for a lengthy period.

It is clear that decisive action is appropriate given the severity of the potential consequences for customers in the current coronavirus emergency.

In this context, FCA will work actively and promptly to seek to resolve issues causing uncertainty over BI coverage, to provide greater clarity for parties and help ensure there is not undue delay to payments where there are valid claims.

The FCA intend to do this by seeking to bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some BI insurance policy wordings where there remains unresolved uncertainty. The FCA is  working to identify a sample of cases representative of all the most frequently used policy wordings that are giving rise to uncertainty, where it would be appropriate for them to bring such proceedings.

Who will side insurers (except their fully paid lawyers)? should they be protected? did they sell unreasonable policies? who will side SME? time will tell.