The Future for Financial Engineering?

Financial engineering has been blamed for its role in triggering each and every one of the most notable disasters that have occurred in international financial markets since the Black Monday crash of October 19^th 1987.  Synthetic portfolio insurance programmes were central in triggering the stock market crash of October 1987.  Not to forget the influence of human psychology, hubris and greed in particular, it was the excess and easy availability of leverage combined with supposedly ‘low risk’ arbitrage trading that contributed to the collapse of the Long Term Capital Management hedge fund in the Fall of 1998.  Again it was derivatives based innovations which underlay the collapse of Enron in late 2001.  More recently, it was the widespread adoption of the Gaussian-Copula ‘magic formula’ in fuelling the massive growth in CDS and CDO markets which led to the dual credit cum liquidity global financial crisis of late 2008-2009.  In each of these cases, financial engineers and derivatives traders have been to the forefront of the financial innovations which, for a while at least, brought huge profits to the financial institutions involved, and a supposedly more controlled if not benign risk environment for the clients of those institutions.

You might well ask – given the consequences for the stability of global financial markets, is the ‘computationally scientific’ discipline of Financial Engineering (like it’s not too distant computationally scientific relation Nuclear Engineering) an inherently negative or potentially destructive knowledge domain ?  Should the financial innovation genie be firmly put back in its box, to be forgotten about but possibly left to be re-discovered by some unsuspecting future generation ?  The answers to each of these questions are firmly in the negative.  Lessons have to be, and are being, learned by the incumbent generation.  With stricter and hopefully better informed financial regulation coming quickly down the tracks in the form of Dodd-Frank, Basel III, Mifid II (Markets in Financial Instruments Directive) and Emir (European Market Infrastructure Regulation), the brakes may be well and truly applied to the financial engineering arms race that has typified the surge in financial innovation that has occurred in the international financial markets of the last 25 years or so.  However, this will not signal the death knell of financial innovation.  This author believes that a more controlled and better understood form of financial engineering will continue to thrive.  Investors will continue to demand innovative wealth-management products which better balance their tolerance for risk, expectations for return and needs for liquidity.  The aviation industry, and in particular the aviation leasing sector, for example represents an end user likely to benefit from this more controlled and better understood form of financial innovation and risk management.  This author is actively collaborating with industry partners to bring the ‘best parts’ of financial engineering best-practice to bear in the creation of structured hedges which will significantly mitigate the operating cost uncertainties faced by airlines, and add shareholder value as a result.

Financial engineering will also continue to be taught in leading business schools – but of necessity through a more interactive and experiential delivery mechanism by academics, who themselves must become more industry facing, relevant and connected in their research.  Finance students – the financial engineers, traders, risk managers and regulators of tomorrow – are already being taught how to apply financial engineering insights and knowledge, adapting and refining their insights using the feedback signals provided by market simulators, potential future exposure stress-tests, and strategy back-testing using the ever more extensive back-filled financial databases which are now available from suppliers such as Bloomberg.  Behavioural Finance theorists will play an increasingly important role in the development, refinement and application of Finance theory.  In short, the international financial services industry will continue to demand that Finance graduates combine a quantitatively-founded understanding of market dynamics and financial risk, but will equally expect that these graduates possess the added ability to de-mystify and apply complex financial models with a mix of common sense and keen intuition.

No engineering shortage until infrastructure plan materialises

A shortage of engineers in South Africa would only come into play when government’s planned infrastructure investment plan materialised, Consulting Engineers South Africa (Cesa) CEO Graham Pirie said on Tuesday, adding that an engineering skills scarcity was not yet apparent at the current volumes of work.

“There is not a shortage of engineers, the main reason for this is that 60% of our work comes from the public sector, which is not firing on all cylinders,” he told Engineering News Online.

But Pirie said that action would be needed to step up skills development to deliver on South Africa’s planned infrastructure investments of R3.2-trillion by 2020.

While South Africa was losing fewer engineers to other countries as developed economies slowed down, he stated that the country would have to deal with supply-side issues and policy instability to ensure it had enough qualified people to deliver the new build projects going forward.

In South Africa, there is currently one engineer for every 3 100 people, compared to one engineer for every 200 people in Germany and one for every 310 persons in the UK, the US and Japan.

“This must change,” Pirie noted.

The head of Cesa attributed the slow start of public sector projects in South Africa to long project lead times and the government’s shortage of technical capacity.

“The public sector is faced with severe capacity constraints…they do not have sufficient qualified people with experience to handle the infrastructure delivery process and this is particularly problematic at local authority level.”

Cesa’s latest biannual economic and capacity analysis, for January to June 2012 period, showed that the local construction industry was running below capacity and that only about 80% of the country’s consulting engineers were used on projects.

The survey found that confidence in the consulting engineering sector generally lagged business sentiment, which deteriorated again in the second quarter after improving in the first quarter of 2012. This was mainly owing to growing concerns over the global economy and the widespread downward revision of South Africa’s growth outlook.

Project postponements and delays also affected confidence in the contracting fraternity, with civil contractors’ confidence remaining well below levels experienced between 2005 and 2008.

Pirie stated that public–private partnerships were central to delivering on projects, as the private sector operated below capacity, while the public sector lacked sufficient capacity.

He commended the National Planning Commission and the National Development Plan 2030. “We are very good at planning in this place, but we are not good at delivery.”

Pirie also warned that the slow implementation of projects was warding off foreign companies.

“Our members are frustrated, their businesses are not doing so well in South Africa post 2010 and they are looking north of our border, saying it is easier to work in the rest of Africa,” Pirie indicated.

DoE confirms new renewables bid schedule after window-one delays

Following delays to achieving financial close on the first 28 wind and solar projects, which advanced to the preferred-bidder stage in December last year under South Africa’s Renewable Energy Independent Power Producer Programme (REIPPP), the Department of Energy (DoE) has confirmed a postponement to the third bid submission date.

It has also revised the financial-close schedule of the 19 second-round preferred bidders to between March 18 and 28, 2013, from an initial date of December 2012.

In a note to bidders, the DoE outlined a new third-window submission date of May 7, 2013, having previously indicated that it intended sticking with the October 1, 2012, deadline – this, notwithstanding the fact that the window-one projects had not closed in June as initially scheduled.

The DoE indicated that the postponements followed representations from bidders, which were currently focused on the window-one and -two financial-close processes.

The department had been unable to move to financial close on the window-one projects in June, owing primarily to internal authorisation processes within government, including the firming up of government guarantees for Eskom, which would be the buyer of the power over a 20-year horizon.

It gave no indication as to when these projects would close, some bidders having indicated that the process could be concluded by the end of September.

In a statement, the DoE stressed that it had finalised all the necessary approvals required to enter into the implementation agreements with the preferred bidders.

“The government-support framework has been concluded, giving assurance to Eskom that government will support Eskom in relation to the financial implication resulting from signing of the power purchase agreement,” the department said.

It also acknowledged that the approvals processes had taken longer than anticipated and apologised to those inconvenienced by the decision to delay the process.

“Given the limited resources, it is imperative for the department to give more attention to financial close for windows one and two,” the DoE said, adding that it remained committed to closing window-one projects despite the delays.

Besides focus on financial closure for the first 47 projects, the DoE would also use the extension to update the request for proposals, and finalise the new determination for additional capacity.

Self-powered devices could help people monitor health

North Carolina State University is leading a nanotechnology research effort to create self-powered health monitoring sensors and devices to help people monitor their health and understand how the surrounding environment affects it.

The US National Science Foundation (NSF) Nanosystems Engineering Research Center for Advanced Self-Powered Systems of Integrated Sensors and Technologies (ASSIST) is a joint effort between NC State and partner institutions Florida International University, Pennsylvania State University and the University of Virginia.

The centre, funded by an initial five-year $18.5m (£11.5m) grant from NSF, also includes five affiliated universities and approximately 30 industry partners in its global research consortium.

ASSIST researchers will develop sensors that could be worn on the chest or wrist, as a cap that fits over a tooth, or in other ways depending on the biological system that’s being monitored.

According to NC State, wireless health monitoring is a fast-growing industry, but the self-powered technology being developed by ASSIST means that changing and recharging batteries on current devices could be eradicated.

By using nanomaterials and nanostructures, and thermoelectric and piezoelectric materials that use body heat and motion, respectively, as power sources, ASSIST researchers want to make devices that operate on the smallest amounts of energy.

‘Currently there are many devices out there that monitor health in different ways,’ said Dr Veena Misra, the centre’s director and professor of electrical and computer engineering at NC State. ‘What’s unique about our technologies is the fact that they are powered by the human body, so they don’t require battery charging.’

The centre’s headquarters will be housed in the Larry K Monteith Engineering Research Center on NC State’s Centennial Campus. There, ASSIST researchers will develop thermoelectric materials that harvest body heat and new nanosensors that gather health information from the body such as heart rates, oxygen levels and respiration data. In addition, the researchers will find ways to package the technology developed by the centre into wearable devices.

Researchers at partner institution Penn State will create new piezoelectric materials and energy-efficient transistors. The team from the University of Virginia will develop ways to make the systems work on very small amounts of power, while the group from Florida International University will create sensors that gather biochemical signals from the body, such as stress levels.

The results of that work, coupled with low-power radios developed by the University of Michigan, will be used to process and transmit health data gathered by the sensors to computers and consumer devices, such as mobile phones.

3D Systems Acquires Paramount Industries

3D Systems Corporation has acquired Paramount Industries, one of the world's most experienced direct manufacturing and product development solutions providers for aerospace and medical device applications.

3D Systems plans to integrate Paramount's state-of-the-art manufacturing facilities and advanced tooling and assembly operations with its growing on-demand direct manufacturing services. Paramount Industries maintains AS9100C and ISO 9001:2008 certifications along with an ITAR registration.

"We are honored to become part of 3D Systems, the recognized global 3D content-to-print leader," said Jim Williams, president and CEO of Paramount Industries. "We expanded our reach into the growing aerospace and medical device industries with 3D Systems' SLS production printers. Together, we can deliver the full impact of direct manufacturing capabilities to our aerospace and medical device customers all over the world."                                  

Abe Reichental, president and CEO of 3D Systems. "With Jim Williams' continued leadership, we are extremely well positioned to expand our aerospace and healthcare manufacturing activities and build the required infrastructure to support these significant customers."