Weekly digest
Weekly news up to 25/08/2023 | Issue no. #2
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
Europe poised for arrival of zero-day options
From August 28 2023, derivatives exchange Eurex will offer zero-day options that track the Euro Stoxx 50 equity index. Zero-day options refer to contracts that expire on the same day they are purchased and allow traders to take targeted positions in stock markets around events such as economic data releases and monetary policy. With inflation remaining stubbornly high, traders are suddenly becoming more sensitive to data releases that could impact Central Bank policy. Although zero-day options are a tried and tested method in the US, there are concerns about the impact they could have on European market volatility. All eyes on Monday!
Newsflash
Buyside trends
Buyside asset managers have identified fixed income, equities and exchange traded funds (ETFs) as the three largest areas for market data spend over the next 12 months. A report by Coalition Greenwich found that amongst buyside asset managers, fixed income market data spend is set to rise by 13%, followed by 10% for equities and ETFs. In particular, the rapid digitisation of market infrastructure, most notably in fixed income markets, has led to an increase in the amount of data for participants to execute.
Sellside trends
Quod Financial launches range of features tailored for the US sellside
Trading infrastructure provider Quod Financial is bolstering its presence in the US market. This week, the company introduced a suite of innovative new features specifically for US sellsides, including a complete regulatory reporting suite and new market-making capabilities. Medan Gabbay, Chief Revenue Officer at Quod Financial stated how the new solution is akin to replacing “all vendors with a single multi-asset, multi-desk solution on the cutting edge of technology.”
Goldman Sachs considers sale of mass market wealth management business
Goldman Sachs is considering the sale of its personal financial management unit, further accelerating its retreat from the consumer market. Goldman currently manages around $29 billion in client assets. The main reason for this is mounting losses in this area of the business, with its consumer Platform Solutions unit generating a pre-tax loss of $1.2 billion in the first half of 2022.
Citi invests in Peruvian FX fintech Rextie
This week, Citi made a strategic investment in fintech company Rextie. Rextie has more than 12,000 registered businesses and 170,000 registered individuals. Citi’s FX technology will be integrated into Rextie’s currency exchange services. According to Citi, this will give Rextie clients automation, real-time payments, greater liquidity, and more competitive rates.
Digital transformation trends
E-trading development in US rates and credit centred on innovation, not growth, report finds
A report by Coalition Greenwich found that trading via request-for-quote (RFQ) is continuing to grow in line with increased automation, with the market moving towards an algo-driven protocol. This is despite credit e-trading remaining comparatively similar to the previous year, while overall e-trading in US rates declined by 3%.
Technology trends
JP Morgan offers merchants Tap to Pay on iPhone
JP Morgan is now utilising Apple’s Tap to Pay payments solution by allowing its merchants to accept contactless payments using their iPhones. The solution means merchants can accept payment without the need for a card terminal or additional hardware, making for a seamless payments experience. Sephora is JP Morgan’s first payment client to enable Tap to Pay on iPhone.
Regulatory trends
Private fund industry faces sweeping new US rules
On August 23 2023, the SEC enforced sweeping new measures which require the private fund industry (private equity, real estate and hedge funds) to meet stringent investor-based requirements. The measures, first proposed in 2022, are aimed at protecting investors by requiring detailed quarterly reporting on performance, prohibiting secret side deals that give better terms to some investors and limiting what expenses private managers can pass onto their clients.
Deutsche Borse, SimCorp acquisition receives final approval from regulators
Deutsche Börse has confirmed it has received final regulatory approval for its $4.3 billion acquisition of SimCorp. The offer period for the acquisition expires on 19 September, with the transaction expected to be completed by 29 September. The acquisition has a minimum acceptance level of 50% plus one share of all SimCorp shares, with SimCorp’s board of directors having unanimously recommended to shareholders that they accept the offer. Once completed, Deutsche Borse will combine its existing data and analytics subsidiaries Qontigo and ISS.
SEC charges fintech investment adviser with violating marketing rule
This week, the SEC charged fintech investment adviser Titan Global Capital Management USA with misleading investors over advertisements about performance metrics. Between August 2021 and October 2022, Titan, which offers retail investment strategies through its trading app, made misleading statements about potential returns of its crypto trading strategy, citing annual returns of 2,700%, when in reality, the projections were only valid for a three-week period. It’s the first case involving the SEC’s new marketing rule for investment advisors, which was introduced last year. Titan were fined $1 million.
Morgan Stanley hit with £5.4 million fine after energy traders used WhatsApp
In last week’s update, you may have read about the hefty fines faced by financial institutions over their illicit use of WhatsApp. Now, Morgan Stanley is the latest company to feel the wrath of regulators following improper WhatsApp use. On August 23 2023, Morgan Stanley was hit with a £5.41 million fine by UK regulator Ofgem, after energy traders communicated on WhatsApp using private phones to discuss market transactions.
GreySpark’s take
In July 2023, the FED announced sweeping new capital requirements for all “large” US banks with total assets of $100 billion and above — an extension on previous terms which only subjected banks with assets of $250 billion or more to capital requirements . The recent collapse of Silicon Valley Bank (SVB) has intensified the FED’s scrutiny of the banking sector, with the FED responding by enforcing more stringent capital reserve requirements to help boost financial resilience. You can see details of the measures here. For some global banks, the new rules could mean increasing their capital reserves by as much as 20%. The rules are due to come into effect in 2025, however banks will have until July 2028 to become fully compliant.
The new requirements will likely have a negative impact on banks’ bottom lines, as their ability to extend loans at the same volume will be compromised. Bank of America (BofA) CEO Brian Moynihan debunked the misunderstanding that increased reserves would allow BofA to extend more loans. Under the terms, loans must be riskless, meaning they can only be held as cash or Treasury securities. Already, banks have set aside large amounts of money for possible loan defaults, which will likely accelerate during the economic downturn, so additional pressures on their budgets could be likely. In many ways, the requirements could have a detrimental impact on US market liquidity and lending, which could lead to a self-fulfilling prophecy of higher lending rates.
Nevertheless, GreySpark believes the new measures will go a long way in helping further crises from materialising, and create a more robust financial system, not only in the US, but globally too. As we covered in our August 1 2023 post, such requirements would’ve likely prevented erratic and faulty liquidity and balance sheet management which SVB succumbed to.
Do you think the increase in capital reserve requirements will be a positive for the banking sector? Comment down below.
Chart of the week
As you can see, over the past decade, Goldman Sachs has orchestrated the most UK IPOs, amassing 34 in total, worth a cumulative total of circa £23 billion.
The UK IPO market continues to struggle against a backdrop of macroeconomic uncertainty, with IPO deal numbers falling 31% between H1 2022 and H1 2023.
GreySpark insight
In 2023, there are roughly 80 identifiable technology vendor-provided platforms or solutions that can be used for financial crime prevention purposes, of which GreySpark believes that 10% are relevant to the global sellside industry, specifically CIBs and non-bank brokerage firms. GreySpark also believes that, since the onset of the 2008 financial crisis, the number of vendor-provided financial crime prevention solutions available to the financial markets industry has roughly doubled.
Prior to 2008, vendor-provided financial crime prevention solutions were fairly basic, and centred around anti-money laundering (AML), know-your client (KYC) authentication and transactions monitoring. However, following the financial crisis, financial crime solutions have become far more sophisticated, and are leveraging technologies such as artificial intelligence to analyse large data sets and detect anomalies that could indicate financial crime.
Find out more at https://www.greyspark.com/report/digital-transformation-the-capital-markets-innovation-landscape-2023/
What has caught our eye?
Understanding the key changes in EMIR Refit
There’s lots of capital markets regulations in the pipeline at the moment. One of which is the European Market Infrastructure Regulation (EMIR). EMIR was introduced in the aftermath of the financial crisis in an effort to improve market transparency and reduce risk associated with the derivatives market. EMIR mainly concerns reporting regulations from any EU or UK entity that enters into derivatives transactions. EMIR Refit, which came into force in 2019, is an amendment to the original regulation and is facing changes which Macquarie points out here. The new standards will become effective from April 29 2024 for EU entities and September 30 2024 for UK entities.
How banks can use technology to create a unified bank experience
In this piece, Greynier Fuentes, vice president of sales and digital strategies at Veritran, takes a look at how small-to medium-sized banks can boost their success by partnering with technology vendors that best adhere to their needs. Fuentes also highlights some interesting statistics around the importance of banks delivering meaningful customer experiences in the face of growing competition.
Institutional crypto needs greater trust. Prime brokers can help
In this piece, Financemagnates.com gives an interesting insight into the ongoing trust issues in the crypto market. Since its inception in 2008, the crypto industry has largely been concentrated in the hands of retail investors. However, as institutional interest has grown, operational and trading risks have come to light with the lack of trusted institutional crypto trading infrastructure to meet demand. Prime brokerage could go a long way in instilling trust towards crypto adoption at an institutional level.