Weekly digest
Weekly news up to 01/09/2023 | Issue no. #3
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
Grayscale secures SEC legal win over Bitcoin ETF (see more below)
Newsflash
Buyside trends
Hedge fund exposure to 7 biggest tech stocks at record high, Goldman Sachs says
According to Goldman Sachs, hedge funds currently hold record exposure to the seven biggest tech companies by market capitalisation. Those companies are Microsoft, Apple, Alphabet (Google), Meta Platforms, Amazon, Nvidia, and Tesla. Collectively, these stocks now make up roughly 20% of the total net market value held by hedge funds. According to Goldman Sachs, the main reason for this hedge fund activity is the growing desire to stay relevant to the emerging artificial intelligence trend.
Sellside trends
JP Morgan increases stake in Brazilian digital bank C6
JPMorgan Chase has increased its stake in Brazilian digital bank C6 from 40% to 46%. JP Morgan first bought into C6 in 2021, as it sought to exploit one of the largest retail banking markets in the world. Over the last two years, C6 has seen its customer base roughly triple, rising from eight million to 25 million. Sanoke Viswanathan, noted the increased investment in C6 is an “important part of JP Morgan’s global digital banking strategy.”
UBS breaks record with $29bn profit after Credit Suisse deal
Banking crisis? What crisis? Swiss investment bank UBS reported the largest ever quarterly profit for a bank, recording a gain of $29 billion in Q2 2023. The huge profits can be attributed to the accounting gain from its takeover of stricken rival Credit Suisse. The two entities will be fully integrated by 2025.
Fed warned Goldman Sachs over risk and compliance oversight at fintech unit
US banking regulators have raised risk and compliance concerns over Goldman Sachs’ partnerships with fintech companies. Issues raised by the Federal Reserve include insufficient due diligence and monitoring processes when accepting high-risk, non-bank clients. Following the concerns, a division of the bank’s transacting business has now stopped signing on “riskier” fintech clients.
Digital transformation trends
UK is still the largest market in Europe for fintech investment
The UK is still the largest market in Europe for fintech investment, despite a 57% slump in investment during H1 2023 over the same period last year. There were 215 M&A, private equity and venture capital deals completed in the first six months of 2023 compared to 392 a year ago. According to KPMG, the downfall is being driven by a “cloud of uncertainty” with high interest rates, inflation and geopolitical tensions contributing to fintech sector challenges.
Tradeweb completes Yieldbroker acquisition
This week, leading fixed income trading platform Tradeweb completed a A$125 million acquisition of Australia-based government bond and interest rate derivatives trading platform Yieldbroker. The deal broadens Tradeweb’s Asia-Pacific footprint, and points to the increasing electronification and equitisation of fixed income markets.
Technology trends
Fintech start-up NAO offers investment in private equity funds
Fintech start-up NAO announced this week it is launching a new investment platform that is removing barriers to private equity (PE) markets for retail investors. In particular, NAO is lowering the minimum investment amount into a secondary equities PE fund managed by UBS down to €1,000 down from the industry standard of €50,000. The fund can be redeemed on a quarterly basis, unlike the usual capital lock-up period of ten years in PE funds.
Swift hails success of blockchain interoperability pilot
Financial messaging network Swift has lauded the results of a banking project that placed its financial infrastructure as a central point for instructing the transfer of tokenised assets by banks across multiple blockchains. Participants in the project included BNP Paribas, BNY Mellon, and Citi. Transfers of simulated tokenised assets took place across the same distributed ledger technology, between two wallets on different public blockchain. The findings could go a long way in developing a framework for instructing the transfer of tokenised assets between financial institutions.
Regulatory trends
US Treasury sets out crypto tax reporting proposal
Cryptocurrency exchanges and payment processors in the US will be required to report information on their users' transactions to the Internal Revenue Service under new proposals. The rules are designed to address tax evasion risks posed by digital assets, and could raise roughly $28 billion in ten years. Exchanges would have to provide a tax reporting form called a 1099-DA, which records a customers’ capital gains and losses. If enforced, the rules would take effect from 2026.
Grayscale secures SEC legal win over Bitcoin ETF
A US federal appeals court has sided with asset manager Grayscale in a lawsuit against the Securities and Exchange Commission (SEC) after the regulator denied an application to convert the Grayscale Bitcoin Trust into an ETF. The news is significant, because it could clear the path for a spot Bitcoin ETF — currently, only Bitcoin futures ETFs have been approved by the SEC, however, the SEC’s lack of clarity in not also approving a spot Bitcoin ETF has been met with resistance by regulators. To be clear, this doesn’t mean the inception of Grayscale’s sought-after Bitcoin spot ETF, but it is definitely a step in the right direction.
GreySpark’s take
Will MiCA regulation be a positive for the financial system?
Grayscale’s mini triumph over the SEC has once again bought the the topic of crypto and regulation under the microscope.
Of course, the clock is ticking towards the implementation of the most significant crypto regulatory framework yet seen. The Markets in Crypto-Assets Regulations (MiCA), which are centred around transparency and disclosure requirements for the issuance and admission to trading of crypto-assets (among much else), are set to come into force in the EU in June 2024.
In truth, the MiCA regulations are a balancing act between providing regulatory clarity and stability in the crypto industry, and fostering innovation and growth.
For example, MiCA will impact crypto service providers and token issuers by increasing time and monetary costs associated with more stringent compliance processes. This could deter smaller players with tighter budgets from entering the market, thus slowing down the pace of innovation. As such, small crypto networks and exchanges looking to disrupt the space will likely view MiCA as a negative.
However, for the wider financial system, and in particular, those financial institutions looking to seize upon new opportunities in the crypto space, MiCA could be seen as a positive.
As discussed in our August 23 2023 update, there remains a lack of confidence and trust towards crypto from financial institutions stemming from Black Swan events such as the collapse of the FTX exchange in November 2022 and structural deficiencies in crypto-asset trading infrastructure.
MiCA could be about to change this.
For example, if EU-based crypto service providers are facilitating transactions between fiat and crypto users, they are going to be subject to certain requirements — in particular, they must be authorised to carry out their services and comply with ongoing practices.
This means the financial institutions seeking to partake in crypto will be reassured that when dealing with crypto service providers, these providers are compliant with anti-money laundering and other practices. This in turn should result in greater trust toward the crypto industry.
Of course, building trust can take years, and can be broken in a matter of moments. Who knows if another high-profile crypto collapse is around the corner. Nevertheless, the MiCA regulations are a step in the right direction for the integration of crypto into the global financial system, because it sets the precedent for crypto regulatory standards, which have mired in controversy and uncertainty for so long.
Do you think MiCA will be a positive for the global financial system? Comment down below.
Chart of the week
The number of commercial banks in the US has dramatically fallen in recent years. Since an all-time high of 30,456 in 1921, the number of commercial banks has fallen to less than 4,500.
International Banker cites three main reasons for this; increasingly complex regulatory environments which are deterring new banking applications and the selling-off of existing banks, growing competition in the age of a more digitised banking environment, and finally, the capital costs and requirements of new startup banks. For instance, startup banks are required to submit three-year business plans that demonstrate profitability by the end of the projection period, giving them the difficult task of generating money over critical mass.
Given the current macroeconomic backdrop, GreySpark believes this a trend that could continue over the coming months.
GreySpark insight
Algo Trading Controls & Governance
Algorithmic trading has been growing steadily since the early 2000s and, in some markets, is already used for around 70% of total orders. This growth is being facilitated by technological development, such as increased computing power, reduced storage costs and the implementation of artificial intelligence and machine learning techniques. In the capital markets sector, cost considerations, competitiveness, regulatory obligations and profitability are key incentives to trade using algorithms.
However, algorithmic trading also brings risks stemming from potential failures of algorithms, IT systems and processes. In recent years, several major algorithmic trading failures have resulted in substantial losses, fines and reputational damage for investment firms. This report discusses various aspects of algorithmic trading that financial institutions have observed in the industry.
What has caught our eye?
What will be the key regulatory developments in H2 2023?
An interesting piece by RegTech Analyst hones in on what we can expect in terms of regulatory developments in capital markets in the second half of 2023. This includes trade surveillance, ESG, and most notably, increased AI regulation. On the point of AI regulation, Allison Lagosh, director of compliance at RegTech company Saifr, notes a recent development with the SEC. The SEC’s recently proposed rules and amendments to address certain conflicts of interest associated with the use of predictive data analytics in investor interactions amongst asset managers could lead to further regulation.
In this article, Chip Lowry, former Senior Managing Director at State Street Global Markets, delivers some engaging insight into the current FX trading landscape. He gives his opinion on how he thinks T+1 settlement in the US will impact the FX market, while also looking at how developments in transaction cost analysis have helped reduce market data fragmentation in the FX space.
This miserable market could be a catalyst for private equity firms
This piece by Institutional Investor takes a close look at the changes that are afoot in the private equity market, given a backdrop of macroeconomic uncertainty and higher interest rates. For example, private equity companies are becoming more hands on with the portfolio companies they own (i.e., assisting with their portfolio company’s recruitment processes) because profitability is now harder to come by. Why not take a look at our recent piece on the current challenges faced by the private equity industry.