Weekly news up 17/11/2023
Issue #14
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
US Senate Republicans urge bank regulators to scrap capital hike efforts (see more below)
Newsflash
Buyside
Over half of asset managers planning to reduce OTC exposures over the next three years
According to a report by Acuiti, roughly 60% of buyside firms are expecting to see a reduction in their over-the-counter exposures for equity products over the next three years. This is largely due to the higher operational costs and lack of clarity on margin rules emanating from the post-economic crisis landscape. Will Mitting, founder of Acuiti, highlighted that this reduction in OTC exposures represents an ‘opportunity for the market to fill a gap in the market,’ and offer listed and more tailored products aimed at solving client requirements — particularly, thematic, ESG-related products.
Wellcome Trust warns of private equity shakeout
Nick Moakes, CEO of the £38 billion Wellcome Trust, has warned that the private equity industry is set for a shakeout, with years of low interest rates attracting tourist capital from investors that haven’t properly understood the risks of holding illiquid assets. The risk on environment at the start of the decade meant investors were happy to gain higher returns in exchange for forgoing easy access to their funds. However, according to Moakes, this has left many investors overcompensating and triggering a shakeout process, characterised by the increasing sales of high-quality private equity funds. This could have negative repercussions for the industry, with distressed sales poised to rise.
Sellside
JP Morgan Chase tops AI bank index
JP Morgan is currently the world’s top bank for artificial intelligence, according to the Evident AI Index. The Evident AI Index is an industry-recognised benchmark for commercial AI adoption among banks. North American banks dominate the index, with six of the top 10 positions: JPMorgan, Capital One and RBC are joined by Wells Fargo, Goldman Sachs and Citi. Overall, European banks are lagging behind their North American counterparts, with no European banks making the top ten in the index.
JP Morgan and Apollo unveil tokenisation project to expand access to private assets
JP Morgan and Apollo Global Management have unveiled a new partnership under the Monetary Authority of Singapore’s Project Guardian initiative, to explore how tokenisation can help make private equity assets become more accessible to the wealth management market. The firms aim to demonstrate through an early-stage proof of concept how wealth advisors could seamlessly and automatically manage discretionary portfolios at scale, and include private assets in these portfolios, by using smart contracts and fund tokenisation. According to global funds network Calastone, tokenisation will ‘revolutionise’ the 100-year-old fund structure.
Digital transformation
Goldman Sachs and BNP Paribas lead £77.7 million investment in Fnality
Fnality, a blockchain-based wholesale payments firms that leverages digital and tokenised assets, has raised £77.7 million in a Series B funding round co-led by Goldman Sachs and BNP Paribas. The new investment will further Fnality's goal of establishing a global liquidity management ecosystem for new digital payment models in both wholesale financial markets and emerging tokenised asset markets. Rhomaios Ram, CEO of Fnality International, noted:
Our Series B funding round represents the financial sector’s desire for a central bank money backed blockchain-based settlement solution that bridges the gap between traditional finance (TradFi) and decentralised finance (DeFi) in wholesale markets.
Wolters Kluwer enhances ESG reporting capabilities
The current ESG landscape in the capital markets space is growing in complexity and granularity, as the implementation date of new legislation such as the Corporate Sustainability Reporting Directive (CSRD) in 2026 edges closer. Therefore, we believe ESG platforms that simplify the ESG recording and reporting process will be of high value to in-scope financial firms seeking to stay compliant. Wolter Kluwer’s latest update on their Enablon platform has the potential to aid finance leaders in several ways. It allows the collection, unification, and validation of ESG data from over 100 decentralized sources. It also helps in mapping ESG data to frameworks and regulations, governing and monitoring the ESG process, and producing auditable ESG disclosures.
Technology trends
Tradeweb to acquire algo provider r8fin as fixed income algo arms race heats up
Tradeweb is to become the second major fixed income venue to acquire an algo provider in the second half of 2023, after MarketAxess confirmed the purchase of Pragma in August. Tradeweb is set to acquire institutional fixed income algo platform r8fin, which specialises in US treasuries and interest rate futures. The deal highlights the proliferation in algo trading among fixed income markets this decade.
HSBC goes live on Broadridge’s distributed ledger repo platform
HSBC is the latest high-profile financial institution to go live on Broadridge Financial Solutions’ newly launched distributed ledger (DLT) enabled repo platform. It is the second entity to go live since the platform’s launch in early October 2023. Users are set to experience a significant reduction in settlement costs, as well as streamlined processes and enhanced operational efficiency and scalability. Horacio Barakat, head of digital innovation at Broadridge, noted that the deal is ‘another significant step in its journey to revolutionise global repo market infrastructure.’
Regulatory developments
Singapore develops generative AI risk framework
The Monetary Authority of Singapore has brought together banks and tech firms to develop a generative AI risk framework and explore how the technology can be used in the financial services sector. The project's first phase is a white paper detailing a risk framework that seeks to address things like the possibility of more sophisticated cybercrime tactics, copyright infringement, data risk and biases, with major financial institutions such as Citi and Standard Chartered involved in the project. Currently, much ambiguity and uncertainty around the regulation of generative AI in financial services remains, with global authorities still investigating how best to regulate the technology through means of pilots and case studies.
US Senate Republicans urge bank regulators to scrap capital hike efforts
This week, a written letter by a group of 39 Senate Republicans called for major U.S. banking regulators to withdraw a contentious proposal to significantly raise bank capital requirements, warning it could hinder lending and harm the economy. After the collapse of Silicon Valley Bank this year, US banking regulators introduced the ‘Basel III Endgame’ proposal in July 2023, which aims to increase the minimum capital reserve requirements of America’s largest banks in order to reduce the probability of black swan events. However, the proposals have been met with backlash from banking executives due to the implications it may have on trading and lending activities, and in turn, profitability. Earlier this month, the comment period for the regulations for industry participants was extended to 16 January 2024, with the final implementation date for the Basel III requirements set for 2028.
Chart of the week
Source: BCG via Ledger Insights
Asset tokenisation is a trend that is currently gaining huge traction in the capital markets landscape. Over the past few weeks, we have seen large financial institutions such as HSBC, JP Morgan and Citigroup dip their toes into the asset tokenisation space. Asset tokenisation is the process of converting ownership rights of a particular asset (i.e., a security) into a digital token on a blockchain. This can provide many benefits, including democratised access to typically illiquid markets, instant cross border payments and settlement, and the fractionalisation of markets. For example, tokenisation can be used to break down large ticket sizes in institutional fixed income trades. Although underpinned by blockchain technology, the asset tokenisation use-case stretches beyond crypto, with its main use case centred around creating more efficient and liquid securities markets.
According to BCG, the asset tokenisation industry will reach $16 trillion by 2030, making up around 10% of global GDP.
Tweet of the week
This week, a blowout earnings release from the world’s largest Neobank, Nubank, could suggest that even during these bleak macroeconomic times, there is thankfully still some life left in the global fintech industry, and that the industry may have weathered the worst of the storm.
For Q3 2023, Nubank reported a net profit of $303 million, well above the $7.8 million reported this time a year ago and beating the estimate of $288.2 million from analysts.
Revenue also grew by 53% to reach $2.1 billion across the two periods, beating analysts' estimate of $2.05 billion.
In fact, data from FT Partners found that global fintech deal activity volume across financing, mergers and acquisitions, and IPOs grew for the second quarter in a row (27% QoQ) in Q3 2023, indicating that the market ‘bottom’ may have been back in Q1 2023. Given that our chart of the day this week showed the decline in US VC fintech funding, the data from FT Partners and the figures from Nubank above suggest that incumbent, later-stage fintechs are the ones who are to thrive in this current environment.
GreySpark insight
In recent years, there has been a global shift away from the established pattern of business communications. The Covid pandemic, and the continuing uncertainty it has created, has accelerated a change in working practices that was already underway; namely that of staff working from non-office locations. Surveillance teams have seen an increase in the volume of recorded audio communications and the wider use of a variety of platforms traditionally used for personal, rather than professional, communications.
Additionally, increased digitalisation of workflows has meant that the lines have become rather more blurred in terms of what can be classified as illicit use of communication channels, putting in-scope financial firms at risk of regulatory punishment. In particular, this year has seen more than $500 million in fines dished out from US regulators in response to banks’ use of WhatsApp. As a result, financial services firms are under increasing pressure not only to capture and quickly analyse increasingly large audio communications, but also to futureproof their surveillance platforms in the quickly evolving and diverse landscape of media channels.
Discover more here.
What has caught our eye?
This piece by Franklin and Templeton provides expert commentary on the crypto market landscape, providing insight into current regulatory frameworks, the cross-over between traditional finance and decentralised finance markets, and much more. With interesting toward crypto seemingly reigniting once more, this piece will ensure you are bang up to date with industry affairs.
Q3 2023 Quarterly Fintech Insights
This report from FT Partners gives an in-depth breakdown of the current global fintech industry in Q3 2023, providing hard numbers on different areas of the global fintech industry deal activity, including financing, M&A, and IPOs.
T+1: Failure to Follow the US Could Add to Europe’s Liquidity Woes
This report by James Pike, ex-EMEA client operations chief at Morgan Stanley, underlines the harsh realities being faced by European capital markets if they do not replicate the US’s shift to T+1 post trade securities settlement next May. These include the increasing flow of investment from the Europe into US equities, and a more depleted liquidity environment.