Weekly news up to 24/11/2023, Issue #15
Hello everyone and welcome to the latest edition of GreySpark Insights.
Please do not hesitate to contact us with any questions or comments you may have. We are always happy to elaborate on the wider implications of these headlines from our unique capital markets consultative perspective. Happy reading!
Revolut to offer bond trading for EU clients (see more below)
According to a survey of 700 global senior executives in the asset management industry by law firm Simmons & Simmons, the biggest current concern of senior executives in the industry is the legal risk associated with failing to comply with sustainability regulations. Given the spate of ESG-related regulations that are currently being rolled out in the capital market space, which you can be reminded of here, now represents a critical yet confusing time for asset managers as they seek to maintain regulatory compliance and keep their reputations intact. Earlier this month, the Transition Plan Taskforce (a framework launched by HM Treasury in the UK) launched a consultation on guidance to help companies in the private sector prepare their climate transition plans, including for asset managers and owners, and banks.
Private equity firms are resorting to buying back companies they only recently took public, in a bad to salvage underperforming investments that have listed on stock exchanges. In the past few months, PE firms including EQT, Cinven and Silver Lake have either taken private or considered buying back public companies they owned or in which they had a large minority stake. In 2021, public markets were trading at record highs and buyout houses floated a record 287 companies worth just shy of $140bn. However, a sharp decline in company share prices that were taken public by private equity firms since 2021 has led to valuations falling below initial floatation prices, putting them in the shop window for PE firms seeking to buy them back.
JP Morgan has become the first issuer to launch Hong Kong dollar pair FX warrants, which are now traded on the Hong Kong stock exchange (as of 23 November 2023). As a result, JP Morgan has become the first financial institution in Asia to introduce CNH/HKD and JPY/HKD as underlying currency pairs. The development is set to enable investors to further diversify their portfolios, offering an alternative investment tool. FX warrants do not require any margin or collateral requirements, enabling a convenient and efficient currency solution for FX investors.
BNP Paribas’ Securities Services has signed an agreement to integrate HSBC’s hedge fund administration business. The mandate has been signed in an effort to strengthen BNP Paribas’ offerings for liquid alternatives and hedge fund managers. Specifically, the agreement covers HSBC’s hedge fund administration business, which will be transferred to BNP Paribas’ entities in several markets, including Hong Kong and Singapore, giving BNP Paribas’ clients access to services such as fund administration, depositary and prime brokerage services.
Investment funds authorised in the UK may now be able to progress their tokenisation strategies following the publication of a report from The Technology Working Group of the Government's Asset Management Taskforce. The taskforce founded earlier this year, has now published a roadmap for implementing fund tokenisation, whereby shares in investment funds can be represented as digital tokens on a blockchain. The funds must meet certain conditions to be eligible for tokenisation. For instance, the funds must comprise mainstream assets and continue to provide valuations and settlements through the same processes and timeframes as conventional funds. The Financial Conduct Authority (FCA) has welcomed the move, and given its regulatory approval.
UK fintech Revolut has announced it is set to offer bond trading for EU clients. It is expected that Revolut’s European clients will have access to Europe and American government and corporate debt markets by the end of the first quarter of 2024. Revolut is also planning to lower the minimum investment level for clients to €100. This move by Revolut shows the continued democratisation of bond markets, with retail investors now facing lower barriers to entry.
SIX has launched a new automated software application, SIX Bot, aimed at providing clients with an enhanced view of market movements through wider access to corporate actions data. According to Annelotte De Nanassy, senior product manager at SIX;
“The key objective SIX has with these types of innovations is to make data relating to corporate actions more freely accessible, increasing workflow efficiency for processing teams.”
The tool enables financial market professionals to ask questions relating to corporate actions events and provides information on over 70 corporate action event types. The solution is hosted on markets’ infrastructure and technology platform, Symphony. Theoretically, the solution should transform a corporate actions data analysis process that is currently very time consuming and manual, to one that is more efficient and nimble.
A survey from Oliver Wyman, which questioned 23 companies ranging from international to mid-size banks and non-banking FS firms, found that roughly three quarters of UK financial services firms are piloting the use of generative AI. Additionally, nearly all firms are already accounting for AI risks in their control frameworks, and three out of five have already taken action to prepare for the risks of generative AI. While AI preparations are clearly being put in place in the capital markets industry, the next step for firms to take will be to collaborate with policy makers and regulators on a long-term, flexible approach to regulation that can keep pace with technological change.
Morgan Stanley was hit with a $6.5 million fine from US regulators this week after a significant security lapse that arose from the company’s negligent disposal of hardware. According to Security Week, the hardware contained unencrypted personal information of millions of customers. Morgan Stanley failed to properly erase unencrypted personal information on decommissioned devices. As a corrective measure, Morgan Stanley has been mandated to implement several security enhancements, including data encryption methods and hardware tracking systems.
EU regulators are considering widening the scope of cybersecurity regulation which could impact banks, fintech vendors and big technology companies. The EU Union Agency for Cybersecurity (ENISA), has proposed a new EU certification scheme (EUCS) that addresses the cloud cybersecurity and outlines how businesses and governments can choose cloud vendors. The draft includes obligations for cloud operations at four security levels, with the fourth being the highest. In the third and fourth security levels there will likely be strict requirements for cloud services to be operated within the EU, with data being stored and processed in the EU, and the cloud service provider requiring to follow EU regulations.
Chart of the week
Key European AML & FinCrime investment stats in Q3 2023:
European AML & FinCrime companies raised a combined $17m in Q3 2023, which puts projected investment in 2023 to reach $464m by the end of the year;
European AML & FinCrime deal activity reached 49 transactions in the first nine months of 2023, a 43% drop from Q1-Q3 2022;
The UK was the most active AML & FinCrime country in Q1-Q3 2023 with 15 deals.
Tweet of the week
Technology replacement initiatives require many decisions to be made, and an important one that should be asked early in the review process is the question of whether to buy a solution from a third-party vendor or to build one in-house. Often, this is not a straightforward question to address, and answers may vary from firm to firm, and even project to project, as there are many variables to consider, and it may not always be a strictly binary choice.
In general, there are a number of benefits and drawbacks to either approach. It tends to be quicker, cheaper, and easier to buy an off-the-shelf vendor solution. Implementing an out-of-the-box solution, however, can result in unexpected costs that were not included in initial vendor quotations. This risk is harder to anticipate and mitigate than it is for in-house development projects. Although it is not always the case, a software build can lessen costs after the initial implementation compared to licencing a vendor product, which may entail contractual costs in perpetuity, as well as other potentially unfavourable or non-negotiable conditions.
Discover more here.
What has caught our eye?
This piece from Global Trading provides some intriguing insight into the main challenges currently being faced by asset managers globally. The report found that roughly half of asset managers view data velocity as their main pain point. In this instance, data velocity refers to the speed and quality of inbound data in a system. For example, are the prices being seen by asset managers on their platform real-time, or are they a nano second behind other vendors?
This interesting piece from CEPR argues that it is the EU that is most advanced in adopting comprehensive and detailed legislation, with its ambitious AI Act, while also highlighting the importance of adopting a risk-based approach that seeks to prevent harmful outcomes in AI implementation.
The F-Prime Fintech Index provides an overview of the financial health of emerging, publicly traded fintech companies. Why not take a look?