Weekly digest
Weekly news up to 06/10/2023, Issue #8
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
ESMA opens door for T+1 implementation in Europe (see more below)
Newsflash
Buyside
Asset managers tread carefully following DW’s fine by SEC
The SEC has charged Deutsche Bank’s investment arm DWS with making misleading statements over its ESG investment process. DWS has agreed to pay a $19 million fine to settle the charges, making it the largest ever ‘greenwashing’ penalty imposed on an asset manager by the SEC. Specifically, the SEC found that DWS failed to integrate aspects of its global ESG integration policy as marketed to clients, while misleading investors around ESG considerations in its research and investments. This news comes off the back of the SEC new rules, which require funds with names that suggest an investment focus on ESG or sustainability-related factors to invest at least 80% of the value of assets in that sector.
Private equity vultures feast on beleaguered markets
Private investors are currently taking advantage of beaten down publicly traded companies despite a high interest rate environment, suggesting that high rates have now been fully priced into the market. According to analysts at Proactive Investors, the number of buyouts of UK PLCs this year has already reached its third-highest annual volume in 10 years. Additionally, the buyout activity has been fuelled by the vast sums of available dry powder. According to Bain & Co, private equity dry powder currently stands at roughly $3.7 trillion.
Sellside
JP Morgan steps up securitisation efforts before new capital requirement rules
JP Morgan is currently speeding up the rate at which it is securitising billions of dollars of its loan portfolio ahead of the new capital requirements for large US Banks. Securitising the loans is one mechanism by which companies can reduce the amount of risk-weighted assets, because it removes loans of the balance sheet and therefore means they don’t have to hold capital against them. As a reminder, the new capital requirements won’t come into effect until July 2028.
Digital transformation
UBS goes live on Broadridge DLT-based repo platform
This week, Fintech company Broadridge announced that UBS successfully went live on its newly launched DLT-enabled Distributed Ledger Repo platform. In short, distributed ledger technology is an emerging technology trend that acts as a peer-to-peer digital system for recording transactions between parties in multiple places at the same time. DLT has its roots in the crypto market, with code-centric blockchain technology largely being comprised of DLT. In particular, DLT can help increase efficiencies and reduce settlement times in repo trades. Broadridge’s announcement is testament to the increasing digitisation that is currently afoot in fixed income markets.
Visa creates £100 million generative AI fund
Visa has opened a £100 million fund to invest in companies harnessing generative AI technologies and applications for commerce and payments. The initiative will be led by Visa Ventures, the global corporate investment arm of Visa. Even during a difficult macroeconomic environment, the willingness of financial firms to stay relevant to the AI trend shows just how pivotal it’s going to be for their growth going forward.
Technology trends
Hong Kong Exchange set to launch settlement acceleration platform
Hong Kong Exchange and Clearing Limited (HKEX) will launch its highly anticipated settlement acceleration platform for Stock Connect on Monday 9 October 2023. Stock Connect is a trade programme through which investors in mainland China and Hong Kong can trade and settle shares listed on the other jurisdiction. The platform will utilise smart contracts to streamline post-trade workflows, enhance operational efficiencies and transparencies, and reduce settlement risks.
Wolters Kluwer releases OneSumX for Basel
Information services company Wolters Kluwer has released a new solution which allows users to manage the entire Basel reporting process from data integrity and lineage, through to finance and risk management, and into regulatory calculators and reporting. With much of the focus in capital markets right now on meeting tighter capital reserve requirements, ensuring and maintaining compliance through optimal compliance management solutions will become essential for banks. As such, we expect integrated solutions such as OneSumX to receive traction from banks in the coming months due to the ease of use and competitive advantage they can bring.
UBS Asset Management launches first blockchain-native tokenized VCC fund pilot in Singapore
UBS Asset Management has launched its first live pilot of a tokenized Variable Capital Company (VCC) fund. The fund is part of a wider VCC scheme led by the Monetary Authority of Singapore to bring various real-world assets on chain, or in other words, ‘tokenise’ them. Real world asset tokenisation is a growing theme in capital markets at the moment, which creates digital representations of assets existing in the physical world. Doing so helps to improve liquidity of notoriously illiquid assets and improve market transparency. Early movements in this space by the world’s largest investment seem to suggest the growing traction behind real world asset tokenisation.
Regulatory developments
ESMA opens door for T+1 implementation in Europe
Given the switch to T+1 trade settlement in US securities markets next year, it’s expected that Europe, who currently operates on a T+2 settlement cycle, will follow suit to keep formality and avoid conflicts of interests in trading settlement. Although not explicitly confirmed, the latest activity from European regulator ESMA could suggest that Europe T+1 trade settlement may become a reality. This week, ESMA launched a call for evidence among market participants to assess the impact of a shorter settlement cycle on the continent, with the final report scheduled for Q4 2024. With the feedback received, ESMA stated it will consider all possibilities for a shortened settlement cycle – including both T+1 and T+0. The regulator notes that any subsequent decision needs to be based on a proper assessment of costs and benefits faced by market participants. Of course, with a larger concentration of clearing houses and currencies, any possible settlement cycle transition in Europe will likely be far more complicated than across the Atlantic.
Central banks bid to embed compliance requirements into real-time transactions
The Bank for International Settlements, along with the central banks of Singapore, Malaysia and Australia are exploring the possibility of embedding regulatory requirements into cross-border transactions. Disparate policy and regulatory frameworks between different jurisdictions are among the main obstacles to smooth and efficient cross-border payments. They contribute to the regulatory compliance burden across the payment cycle and increase the time for cross-border transactions to execute among stakeholders. Embedded compliance can ease this burden by automating compliance procedures and frankly, take the faff out of cross-border transactions.
AWS and Microsoft duopoly to be investigated by Ofcom
Two key providers of cloud infrastructure to capital markets are being investigated by UK regulator Ofcom. Amazon Web Services (AWS) and Microsoft Azure, who had between 70-80% market share of the UK’s cloud infrastructure services market in 2022, and as such, are warranting further investigation from UK regulators to see whether this split of the market share is or will have an adverse effect on competition.
Chart of the week
This chart from Insider Intelligence shows the anticipated slowing growth rate in banks’ technology expenses over the next few years. Between 2021 and 2022, we can see a significant spike in the growth in banks’ technology expenses, largely fuelled by the pandemic as banks had no option but to digitise workflows as they took them off-premise. With these increasingly digitised work flows, and the adoption of emerging technologies such as AI, the growth in technology spend is declining as banks realise economies of scale, although spending is still set to nudge higher year-on-year between 2023 and 2026.
Tweet of the week
Source: Tarique Khan on Twitter
GreySpark insight
As of last year, in cash equities e-trading, GreySpark observed three categories into which industry players could be grouped;
1. High-touch Trading Vendors – Historical players such as Trading Technologies, for example, which are experiencing a shrinking of their user market share to vendors with more modern and automated solutions – that is, low-touch trading vendors and automated trading platform providers vendors;
2. Low-touch Trading Vendors – Where, in 2022, there remain few independent specialists as a result, in part, of significant market consolidation over last five years; for example, Itiviti Group’s acquisition of ULLINK and then Broadridge Financial Solutions’ acquisition of Itiviti. The remaining independent vendors in the low-touch space are small and are more limited in their capabilities than the larger, now-consolidated incumbents; and
3. Automated Trading Platform Vendors – Some e-trading software vendors invested heavily since 2015 in building open platforms that can handle multiple workflows and that allow their users to implement custom business logic. These providers are now expanding their functional coverage to incorporate the capabilities of high-touch vendors and low touch vendors as a means of federating both types of agency trading and principal trading.
Discover more here.
What has caught our eye?
Nine questions banks should ask a potential core technology partner
This piece by Fintech Futures takes a look at the nine questions banks should ask a potential core technology partner before implementation. In such a relationship, some of the most integral parts include transparency and communication. For instance, if banks want to add new features to the core technology stack, how long will it take for these features to be added, and what will the cost be? Conducting due diligence on technology vendors may just save the bank a headache or two down the line.
Common pitfalls in cloud migrations and how to avoid them
In today’s rapidly evolving technological landscape, the move to the cloud is a near-inevitable journey for financial institutions seeking agility, scalability, and cost-efficiency. However, the transition doesn’t come without its challenges. This piece by Global Finance and Banking Review takes a look at three challenges that typically facing financial firms when it comes to cloud deployment, including inadequate data security measures, and lack of strategy.
Report on the 2023 banking turmoil
This report by the Bank of International Settlements takes a deep dive into the banking turmoil concerning Silicon Valley Bank in March 2023. In particular, the report provides an assessment of the causes of the banking turmoil, the regulatory and supervisory responses, and the initial lessons learnt. It’s an interesting read, and a topic that we have covered here on GreySpark’s Substack. In fact, you can be reminded of this here.
Have your say
Below is a key question that is currently on the minds of EU capital market participants. Do you think the EU should follow suit with the US, and implement a T+1 trade settlement cycle? Let us know below, and we’ll reveal all next week!