Weekly digest
Weekly news up to 13/10/2023, Issue #9
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
JP Morgan leading institutional interest in asset tokenisation (see more below)
Newsflash
Buyside
Asset managers boost ETF assets via active fund launches, conversions
Asset managers are seeking to grab a larger slice of the ETF market by introducing new ETFs and converting existing mutual funds into ETFs, as the soaring institutional and retail interest toward ETFs continues. Goldman Sachs and Calamos Investment Management recently established actively managed ETFs, with Morgan Stanley also announcing plans to convert two of its actively managed mutual funds into ETFs. ETFs are in many cases cheaper and more liquid for investors than mutual funds, and have risen in popularity in recent years. Over the past five years, ETF AUM has doubled to reach $7.4 trillion.
Private equity groups face investor scrutiny over tactics for returning capital
Scrutiny toward private equity (PE) is growing, with PE groups increasingly using other, arguably riskier alternatives to generate return amid a slowdown in dealmaking. According to the Financial Times, PE groups have been using margin loans and net asset value financing — secured against shares in their listed companies or asset portfolios — to boost returns and fund distributions to investors. As a result, PE firms may be deviating away from more traditional methods of generating returns on equity from investing in undervalued companies. As we speak, The Institutional Limited Partners Association, an industry body representing private equity investors, is examining borrowing strategies and drafting detailed recommendations, which include providing more disclosure of the costs and risks to investors.
Sellside
JP Morgan launches Securities Services Data Mesh
This week, JP Morgan announced the launch of its Securities Services Data Mesh solution for institutional investors. The solution enables investors to retrieve critical investment data held by J.P. Morgan’s Custody, Fund Accounting and Middle Office services, using cloud-native channels including Snowflake Financial Services Data Cloud and Jupyter notebooks. Through providing a range of cloud-native channels, Fusion is addressing long-experienced pain points in integrating asset servicing data, such as scalability amid increasingly complex investment environments.
Broadridge and Iress market joint OMS for UK broker-dealers
Fintech company Broadridge Financial Solutions has announced a strategic partnership with software provider Iress. The combination of Broadridge’s order management system and market-making platform integrated with the Iress retail service provider network will allow ‘liquidity provider’ clients such as market makers to benefit from streamlined order management, increased market connectivity, and real time data and analytics.
Deutsche Bank invests in LLM developer Kodex AI
Deutsche Bank’s Corporate Venture Capital Group (CVC) group has invested in Kodex AI, a Germany-based startup that develops its own language learning model (LLM) application. The model has been optimised for the financial industry, and is able to understand complex technical terminologies, ultimately allowing for deeper and more accurate analysis of financial documents. Unlike traditional LLMs, Kodex AI can also interpret visual elements such as tables, highlighting the continuing evolvement in financial LLM-based AI solutions.
Digital transformation
Spanish banks road test ‘digital euro’ on existing payment infrastructures
Central bank digital currencies are an emerging trend in capital markets at the moment, with many Central Banks across the world exploring ways to introduce ‘digitised’ versions of their sovereign currencies as they seek to enjoy the increased efficiencies that digitalisation could bring. In fact, we did a deep dive on the topic of CBDCs, which you can be reminded of here. Since November 2022, 30 Spanish banks have been road-testing the use of a ‘digital Euro’ CBDC, using existing payment infrastructures, rather than digital ledgers and blockchain technologies which, broadly speaking, underpin the exchange of CBDCs. The tests suggest that the Euro could leverage existing payment infrastructures, which could suggest that significant infrastructural ‘makeovers’ in banks in order to facilitate CBDCs may not be needed after all.
Technology trends
Bloomberg unveils portfolio management offering
Bloomberg has launched a new portfolio management workspace to help bolster its presence among buyside firms. The offering is aimed at supporting decision-making processes through streamlining the link between analysis and portfolio implementation. It combines real-time portfolio exposures with market data, portfolio construction, sophisticated risk analytics, and real-time liquidity insights. Users can also use Bloomberg portfolio manager workspace to surface liquidity and reduce operational risks.
JPMorgan moves to commercialise blockchain with Tokenized Collateral Network
This week, JP has announced its first client trade on a tokenised network. Specifically, JP Morgan’s Ethereum based Onyx blockchain and the bank’s Tokenized Collateral Network (TCN) was used by BlackRock to tokenize shares in one of its money market funds. The blockchain is used for tokenized asset movements including collateral settlements. This move from JP Morgan highlights the current traction behind asset tokenisation among financial firms, a theme which helps to improve market efficiency and liquidity, particularly in traditionally illiquid markets. We’ll be covering the tokenisation theme more in the coming weeks.
Regulatory developments
CFPB takes aim at bank 'junk’ fees
The Consumer Financial Protection Bureau (CFPB) is warning America's large banks about the practice of charging so-called junk fees for basic customer services like the provision of account information. The CFPB says that its market monitoring of large banks’ customer service teams reveal that some providers charge customers for basic information that is critical to fix problems with their account or to manage their finances, when account information requested by account holders should be freely available on request. The CFPB says it is getting offending firms to refund around $140 million to consumers.
FCA issues 146 alerts to non-compliant firms on first day of crypto asset promotion regime
This week, the Financial Conduct Authority (FCA) issued 146 alerts about crypto promotions on the first day of enforcement of new crypto marketing rules.
The new rules, which came into force on 8 October, require firms seeking to promote crypto-assets in the UK to be authorised or registered by the FCA, or have their marketing approved by an authorised firm. These changes bring crypto-assets in line with other high-risk investments. Under FCA rules, promotions must also be clear, fair and not misleading and labelled with prominent risk warnings. In addition, they must not inappropriately incentivise people to invest.
The new regime applies to all firms marketing crypto-assets to UK consumers, even if they are based abroad and regardless of the technology they use to promote the assets.
FCA guidance on post-Brexit trading venue definition comes into force
The Financial Conduct Authority (FCA) has confirmed that its guidance regarding the post-Brexit definition of trading venues has now come into force. In particular, it makes clear that in the case that a firm does not operate a multilateral trading system, it will not require authorisation as a trading venue. The FCA stated: “Further guidance on the trading venue perimeter will provide greater certainty regarding models where we do not intend trading venue requirements to apply – supporting innovation in our markets – while promoting competition and high standards by ensuring that models possessing the key characteristics of a venue are treated equally…”
SEC poised to shine light on short selling with stock loan disclosure
Short sellers such as hedge funds and other market participants will have to speed up their disclosure processes when ‘shorting’ securities, under new rules being proposed by US regulators this week. Proposals would require securities lenders to report each loan within 15 minutes of the deal. Information on each loan, but not the names of the parties involved in that particular loan, would be made public. The proposals have been met with opposition, with securities lenders concerned about the increases in reporting costs the new requirements could bring.
Chart of the week
Source: CBI Insights on Twitter
US-based companies accounted for half of venture capital (VC) funding in Q3 2023. Globally, although VC funding has increased by 11% QoQ, and being driven by megatrends such as AI, funding levels are still less than half of what the market saw at this stage in 2022.
Nevertheless, one saving grace here is that VC companies are currently awash with dry powder, with US-based VCs sitting on roughly $271 billion. This suggests that the VC market may be more robust than it seems.
Tweet of the week
We couldn’t help but crack a smile at this one. Straight facts.
GreySpark insight
In November 2021, in an effort to support innovation and fair competition, the EU finalised new regulations for the provision of crypto assets trading and custody services by financial services firms through the Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-Assets (MiCA). MiCA is set to come into force next year. The EU regulation, which enshrines federally the actions that some member states previously took to manage growth in the space at the country-specific level, is now also being examined by other countries and jurisdictions.
GreySpark believes that other nations and supra-national jurisdictions are likely to implement their own mandates as demand at both the institutional level and retail level to trade and hold cryptoassets continues to grow. At issue, then, is that the global financial system does not currently offer these cryptoassets trading and custody services at a scale comparable to the growing demand for them in the sense that:
Fragmentation – Cryptoassets markets and trading venues are spread over a range of legal and quasi-legal constructs run by regulated and unregulated infrastructure providers alike;
Illiquidity – The liquidity available in most cryptoassets types is often insufficient in its supply to satisfy levels of traded demand for it, especially in critical market situations;
A Lack of Depo Banks – Depository banks such as the US Depository Trust & Clearing Corp. (DTCC) are currently unable to order and process crypto assets trades; and, crucially
Technology Gaps – Custody and investment banking industry back-office systems are unable to translate cryptoassets clearing and settlement protocols into messaging language that can be understood by fiat-centric systems.
Discover more here.
What has caught our eye?
Nathan Vurgest, Director of Trading, Record Currency Management, assesses the balancing act of execution and non-execution work as an ongoing challenge on the trading desk, while also giving an overview of the FX trading landscape.
The AI regulatory toolbox: How governments can discover algorithmic harms
This piece by Brookings gives an insight into how financial regulators can bring AI systems under compliance, with many regulatory frameworks globally failing to keep pace with the rapid advancements in AI technologies.
The changing role of the buy-side in fixed income price making
As the liquidity landscape increasingly turns buy-side firms to the role of price maker in fixed income, Annabel Smith from The Trade explores the current technology available to them to do so and the role data will play in giving the buy-side the confidence to cement this trend as mainstream.
Have your say
We’d love to hear from you. What topics would you like to see us cover in the coming weeks? Comment down below.