Weekly news up to 02/02/2024
Issue #21
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
📰Newsflash
📈Buyside
DTCC targets 90% affirmation by 9pm on trade date ahead of T+1
The Depository Trust and Clearing Corporation (DTCC) has set a target for financial firms to achieve 90% affirmation by 9pm ET on trade date when the US T+1 trade settlement period comes into force in May 2024. In today’s T+2 environment, approximately 90% of all trades are affirmed by 11:30am ET on T+1 , which is the current affirmation cut-off point. However, the targets from the DTCC may prove to be ambitious, with financial firms across the world having to grapple with time zone constraints and a compressed settlement period that could lead to more settlement errors. Over the coming weeks, GreySpark Partners will be releasing a specialist US T+1 report that will address impacts, concerns and key considerations for financial firms adapting to the US T+1 settlement period.
UK private equity investment slumps in 2023
Mid-market private equity investment activity in the UK declined by 10% in 2023, according to new research by KPMG. The number of private equity deals, valued between £10 million and £300 million, fell to 675 transactions from 735 transactions completed in 2022. The fall in the number of deals can be attributed to rising inflation, high interest rates and geopolitical uncertainty. Looking ahead, Alex Hartley, head of private equity in corporate finance at KPMG, expects political instability, emanating from elections across Europe and the US, to weigh heavy on the private equity space, and reduce confidence toward deal-making.
📉Sellside
Lloyds to measure carbon impact of IT stack with Dynatrace
Lloyds Bank Group has announced it is working with technology platform Dynatrace to measure the environmental carbon impact of its IT ecosystem. Dynatrace’s app, called Carbon Impact, translates utilisation metrics including CPU, disk and network input/output into their CO2 consumption. The app also provides guidance on how a firm can reduce its overall IT carbon footprint. IT system monitoring, in an ESG sense, represents a great opportunity for financial firms to assess their ESG friendliness and meet more stringent regulatory requirements, while also improving business efficiency and reducing operational costs.
Deutsche Bank operational efficiency drive
Deutsche Bank is undergoing an efficiency drive that will see the firm save roughly €2.5 billion. Aside from making 3500 job cuts, Deutsche Bank is undergoing an infrastructure overhaul, including application decommissioning, front-to-back office system redesign and optimisation of the bank’s platform in Germany. This move follows the release of Deutsche Bank’s latest financial figures, which revealed a 14% year-on-year drop in net profits for 2023.
✴️Digital transformation
Mastercard jumps into generative AI race with new model
Payments giant Mastercard has revealed it has built its own proprietary generative AI model to help thousands of banks in its network detect fraudulent transactions. The new AI model, called Intelligence Pro, will allow banks to detect suspicious transactions in real time and alert support teams. In particular, the algorithm used in the AI model uses the history of a cardholder’s merchant visits as the metric to determine whether the business involved in a transaction is a place the customer would visit. Increasingly, financial institutions are incorporating their own iterations of generative AI models including BlackRock and Morgan Stanley. However, as GreySpark outlined earlier this week, the use of generative AI can bring several challenges that firms should be aware of.
FIX Trading Community welcomes EuroCTP as its latest member
The FIX Trading Community has added EuroCTP, the European initiative to establish a consolidated tape in the EU, as its newest member. This latest inclusion in the FIX community follows recent additions over the last few months, including China Post Global, which provides investment solutions across various asset classes, and OSTTRA, the joint venture between S&P Global and CME Group. EuroCTP seeks to bring transparency, fairness and access to market data for all investors by providing a fully consolidated view of the European equity and ETFs markets. The consolidated tape will include market data from all trading platforms such as exchanges in order to provide investors with “up-to-date” transaction data for the whole of the European Union from 2026.
📱Technology trends
Digital Assets Association Launches
This week, the Digital Assets Association (DAA) announced its official launch, marking a watershed moment for the adoption of digital assets at an institutional level. By bringing together financial institutions, fintechs, technology providers and legal and regulatory experts, the DAA aims to bridge the gap between traditional finance and tokenised real-world assets, which BlackRock CEO Larry Fink recently referred to as the future of finance. The DAA is made up of personnel from several financial institutions, including Standard Chartered and Banking Circle. Collectively, the DAA will aim to drive growth in the digital assets ecosystem and support industry development of tokenisation by combining expertise from the involved parties.
LTX by Broadridge files four fixed income trading patents
LTX, a subsidiary of global Fintech leader, Broadridge Financial Solutions, today announced that it has been awarded four new patents on its fixed income trading technology. The patents are dealer selection score technology, liquidity aggregation technology, bond similarity detection technology and RFQ+ trading protocol. The newly patented technologies enhance trade workflows; from bond discovery and selection and counterparty selection, to e-trading of larger size orders. Together, these technologies will help to inform pre-trade decision-making and improve trade execution efficiency.
🧑⚖️Regulatory developments
EU moves to delay CSRD introduction until 2026
The Legal Affairs Committee of the European Parliament has greenlit a proposal suggesting a two-year delay for the full enactment of the Corporate Sustainable Reporting Directive (CSRD). This delay, if approved, would extend the adoption of sector-specific sustainability disclosure standards and reporting obligations for non-EU companies until 2026. Adopted in November 2022, the CSRD initially imposed reporting obligations on both publicly traded and privately held EU businesses from 2024. The reason for the potential delay is to give financial firms more time to meet the new regulatory standards, amid a turbulent start to the decade that has seen the Covid pandemic and soaring inflation.
ESMA seeks market input on crypto classification under MiCA
The European Securities and Markets Authority (ESMA) has published a consultation paper, seeking feedback from the market on the classification of crypto assets under the Markets in Crypto Assets Regulation (MiCA). Comments from stakeholders are being received until 29 April, with ESMA specifically seeking input on establishing conditions and criteria for qualifying crypto assets as financial instruments. Currently, there are ambiguities in the MiCA legislation as to what constitutes a cryptocurrency, with stablecoins and decentralised-finance networks failing to be defined. Following the feedback, a final report is set to be published in the last quarter of this year.
📊Chart of the week
Source: GreySpark analysis
Financial firms in the European Union now have less than one year to be compliant with the Digital Operational Resilience Act (DORA), with the implementation date set for January 17 2025. This in itself will require more sophisticated and robust operational resilience frameworks, with regulators demanding that all system vulnerabilities are addressed in the face of business disruption. However, worryingly, it seems that several financial institutions are not on track to meet the DORA requirements. According to a report, 32% of banks report that they do not have up-to-date, reliable IT asset inventory, while 37% of institutions under the supervision of the ECB reported a cyber incident in 2022.
Given the time constraints, and the sophistication of operational resilience requirements, GreySpark believes that a digital twin model is currently the best way for in-scope firms to test and ultimately achieve operational resilience. However, as outlined above, successfully implementing a digital twin model is an intricate process that can put a significant strain on a firms’ resources if not done correctly. In implementing a digital twin model, additional expertise is typically required.
🐤Tweet of the week
This week, the Federal Trade Commission announced it had issued orders to five companies, requiring them to provide information regarding recent investments and partnerships involving generative AI companies and major cloud service providers. The compulsory orders were sent to Alphabet, Inc. (Google’s parent company), Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI, Inc. Specifically, Microsoft and Open AI, Amazon and Anthropic and Google and Anthropic currently have ongoing partnerships. In particular, the FTC is seeking information relating to the strategic rationale behind the deals, the impact on competition and the AI technology involved in each deal. This could give some indication of how regulators will aim to tackle the growing influence of AI providers going forward.
📄GreySpark insight
The pace of technological advancement is ever increasing, and firms struggle to keep all their systems at the forefront. Application development is complex and the average turnaround time between receipt of validated requirements and delivery using the traditional project management approach can often be measured in years, during which time, business needs may change, and project goals become obsolete. A well-known example, in the field of aerospace, is the US Space Shuttle programme which, when the Shuttle was launched in 1982, was still using technology from the 1960s.
While many organisations have tried to reduce the turnaround time by setting smaller goals or delivering projects in phases, the complexity of those projects means that significant lag often remained. Demand grew for an approach that was timelier and more responsive to evolving situations. Businesses had to be nimbler and more flexible and, to remain competitive, they needed a faster time to market to take a more customer-centric approach to problem solving. Necessity being the mother of invention, this led to the development of Agile Transformation.
Discover more here.