Weekly digest
Weekly news up to 22/09/2023, Issue #6
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!
Top story
FIX Trading Community launches new messaging capabilities for real-time settlement (see more below)
NB: All eyes are on the highly anticipated switch to T+1 trade settlement in the US next year. Keep an eye out for more coverage on this topic by GreySpark in the coming weeks.
Newsflash
Buyside
Buyside turn to automated trade service from DTCC ahead of switch to T+1
The Depository Trust and Clearing Corporation (DTCC) has revealed that around 350 Investment managers are using its central trade matching (CTM) platform to accelerate the post-trade lifecycle ahead of the transition to T+1 settlement. The CTM solution provides seamless connectivity from trade execution to settlement for cross-border and domestic transactions. DTCC noted that the clients using its CTM platform are achieving a near 100 percent same-day affirmation (SDA) rate by 9pm on trade date, which is critical ahead of the adjustment to T+1. DTCC has also released a new T+1 scorecard, available through its ITP Data Analytics service. The scorecard compiles trade data and provides an interface of key metrics, including trend analysis, trade volumes and trade execution timings.
Private equity prepares for rampant consolidation
According to David Layton, CEO of private equity company Partners Group, the private equity industry is on the cusp of a “huge consolidation,” with the number of private market fund managers expected to fall to less than 100 over the next decade. Layton noted that only the “large players that can withstand the forces reshaping the private markets industry” with the top 25 largest competitors having captured more than a third of the $506 billion of new capital allocated to PE so far this year.
Sellside
Citi TTS develops institutional digital asset offering
Citi has created a new offering, called Citi Token Services, that uses blockchain and smart contracts to provide cross-border payments, liquidity, and automated trade finance solutions on a 24/7 basis for institutional clients. The solution is expected to reduce friction associated with cut-off times and service gaps. The private/permissioned blockchain technology underpinning Citi Token Services is owned and managed by Citi. Shamir Khaliq, head of global services at Citi, noted how the development of Citi Token Services is “part of their journey to deliver real-time, always-on, next-generation transaction banking services to our institutional clients.”
Eurex chosen by BNY Mellon to centrally clear European repo transactions
BNY Mellon has officially become a trading and clearing member at Eurex, marking the first time that a clearing house in Europe will offer repo trade clearing. The development is testament to the growing interest toward the repo market among financial institutions. According to Finance Feeds, the total traded repo volume on Eurex across all markets has doubled on a YTD basis compared to the same period in 2022. Average daily term-adjusted trading volume also peaked at €340 billion this year, which is an increase of more than 70 percent compared to same period last year. Looking only at the buyside, total traded repo volume increased 265 percent year-on-year during the same period.
Digital transformation
First ETF zero-day options ETF launches in the US
The first exchange-traded fund to trade in “zero-day-to-expiry” options has launched in the US, pointing to the surging popularity in this investment trend. Zero-day options are contracts with a maturity of 24 hours or less that allow the purchaser to buy or sell a security or asset at a specific price at a specific time. The move will provide another asset to trade among the ETF ecosystem and is a testament to the growing innovation within the space, although market participants are wary of the risks and volatility that may ensue as a result of their introduction.
Just eight exchanges handle 90 percent of all crypto trading volume
Market analysis by Kaiko found that 92 percent of market depth and 90 percent of trading value is spread throughout only eight crypto exchanges. In particular, latest figures show that Binance controls 30 percent of the market depth and 60 percent of the trade volume in 2023. Concentrated markets can be a positive and negative for investors — positive in the sense that liquidity is less fragmented across multiple exchanges, which makes for better price discovery, and negative in the sense that if a major exchange were to collapse, the market would succumb to risk interdependencies.
Technology trends
Overbond unveils new artificial intelligence-based smart order routing system
Fixed income analytics platform Overbond has released a new AI-based smart order routing (SOR) system, helping to achieve best execution (based on price and liquidity) in fixed income securities. Additionally, the solution can determine the optimal method to break up a large block trade that requires liquidity from different sources. The solution points to the continued increase in trading automation in fixed income markets.
FIX Trading Community launches new messaging capabilities for real-time settlement
FIX Trading Community, the financial industry standard protocol for electronic trade communications, has launched new real-time messaging capabilities to support the shift to the forthcoming T+1 settlement cycle. Specifically, four new messaging types have been introduced, with the aim of boosting speed and efficiency in communications among buyside firms, brokers and custodians, while reducing risk with real-time, transparent settlement updates. As a reminder, the planned implementation of T+1 settlement is May 28 2024.
Regulatory developments
FCA Chair Calls for Global Unified Approach to Financial Regulation
Nikhil Rathi, chair of the Financial Conduct Authority (FCA), has called for international cooperation among regulators to avoid financial regulatory fragmentation. This is following the signing of a memorandum of understanding between the UK and EU in regulatory cooperation for financial services. In a speech, Rathi identified sustainable finance, crypto regulation and non-bank financial intermediation as three key areas in which regulators should be aligned. In particular, Rathi identified the risks associated with hidden leverage in hedge funds and other non-bank sectors. This is where institutions use financial strategies to amplify their exposure to risk without full transparency or disclosure, which can lead to broader instability and systemic risks in the financial system.
Fund industry braced for SEC crackdown on deceptive product labels
US regulators are looking to crackdown on deceptive fund names, despite industry warnings it will discourage stock picking and potentially force funds to sell assets at a loss. The SEC would require funds to prove that 80 percent of their holdings match their names — for example, a labelled fund that explicitly states it is a “small cap” fund would need to have 80 percent of its holdings tied up in small cap companies. If the proposals are approved, funds will have 90 days for corrective action if fund holdings don’t meet the 80 percent requirement.
Chart of the week
A report by the Global Association of Investment Professionals which surveyed 3,000 investment professionals in late 2022 examined the use cases of AI in the fund management industry. Out of the 696 respondents, who could give more than response, 45 percent stated that AI is boosting operational efficiency by allowing staff to use their time more productively on other tasks. However, it should be noted that 41 percent of respondents stated that a shortage of talent was a major obstacle to the integration of AI and big data into the investment process.
Tweet of the week
Source: The Kobeissi Letter on Twitter
Global bank deposits are offering miniscule returns on cash compared to other alternatives such as Certificate of Deposits (CDs). Banks will need to address this issue if they are to prevent further outflows in deposits and potentially risk not having adequate capital reserves in light of recent regulatory developments.
GreySpark insight
GreySpark observes three business technical barriers common to all Corporate Investment Banks (CIBs) globally that serve to incentivise the uptake of vendor-provided post-trade automation solutions. These barriers are:
Ever-increasing IT budgets — CIB IT budgets have grown modestly over the last five-to-seven years, but much quicker as a proportion to their overall expenditure. At the time, large transformation programmes stemming from changing client requirements and regulatory obligations mean that CIBs are turning to vendor solutions to deliver more rapid change that can deliver economies of scale;
A Twilight of DIY Approaches to Technology Development — Apart from the very largest Tier I institutions, CIBs no longer have the funding required to build and operate in-house systems outside of the most competitively differentiating areas: for instance, just under two thirds of CIB IT budgets are spent on run-the-bank operations.
A Focus on Straight-through Processing — Increased automation and reduction of manual processes is a key driver with the aim of reducing the overall cost of the trade lifecycle process and cost income ratios.
Discover more here.
What has caught our eye?
Using your why to navigate change successfully
This interesting read from FinXTech takes a look at the implications a bank can face by changing its technology stack. In particular, the article takes a look at the four main reasons as to why a bank may invest in a new technology offering. These reasons include the urgent need to fix dysfunctional workflows, and ripple effects from a major technology change which require modifications to spin-off systems.
Capital Markets Moving Quickly to Adopt Generative AI
Thanks to revolutionary language learning models such as ChatGPT, generative AI (GenAI) is fast gaining traction around the world. However, its place in financial firms has been met with some scepticism. This article from Global Trading goes a long way in answering those critics, taking an interesting deep dive into real-world use cases for GenAI among financial firms. In particular, the London Stock Exchange Group is currently utilising GenAI in a variety of products including summarisation, entity recognition, topic detection and sentiment analysis.
Digital Assets 2023: Identifying the opportunities across the enterprise landscape
This expertly written report by Zumo takes an in-depth look at what it means to apply the concepts of digital assets and blockchain technology to everyday finance and commerce. Among much else, the report looks at the nuances involved in digital asset trading at a retail and institutional level, and the technology that underpins the trading of digital assets. It’s an excellent piece which provides clarity on this seemingly mysterious and exciting new asset class. You can download the report by clicking on the link above.