Weekly news up to 03/11/2023
Issue #12
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
Is the global AI regulatory action plan underway (see more below)?
Newsflash
Buyside
JPMorgan, Franklin Templeton launches set stage for active ETF growth spurt
Asset managers are increasing their presence in Europe, with JP Morgan and Franklin Templeton launching a series of ETF products following a surge in demand. Franklin Templeton launched three active fixed income ETFs at the end of October 2023, with JP Morgan Asset Management rolling out an aggregate global bond ETF in the same month. However, the European ETF market remains a long way behind its American counterparts. According to data from ETFGI, 15 active ETFs were launched in Europe between January and the end of September 2023, fewer than the 250 rolled out in the US over the same period. Franklin Templeton also made recent headlines when it revealed it had filed for a spot Bitcoin exchange-traded fund last month.
Hedge funds increasingly uneasy over impact of FX prime broker consolidation on liquidity
Consolidation in the FX prime brokerage (PB) sector is becoming increasingly apparent, with many banks pulling out of offering FXPB services due to rising costs and regulatory requirements. As a result, hedge funds are growing increasingly uneasy about the risks associated with reduced access to liquidity. According to Acuiti, almost 70% of respondents were concerned about the impact on their business a market withdrawal of one of their FX PB providers would have, with one third of respondents not having a back up plan in the event of being offboarded by their core FX PB provider.
Sellside
HSBC becomes first bank in the world to offer tokenised gold
HSBC has become the first bank in the world to offer tokenised gold. On 2 November 2023, HSBC unveiled a platform that uses distributed ledger technology (DLT) to tokenise the ownership of institutional clients’ physical gold held in the bank’s London vault. This trend, otherwise known as ‘asset tokenisation — something that we have covered in recent posts, is an emerging technology trend that allows financial firms to exchange assets in a more efficient and transparent way using blockchain-centric technologies, with transactions typically being executed via APIs.
The UK’s major banks have warned that the tailwind from high interest rates that has driven soaring profits over the past year is coming to an end amid macroeconomic uncertainty. Banks including Barclays, NatWest and Standard Chartered all experienced share price decreases following the release of quarterly results. In particular, Barclays experienced a daily share price decline of 8% after it reported earnings and revealed cost-cutting measures. Other banks are also feeling the squeeze — last month, Metro Bank experienced a 31% drop in its daily share price, following reports that it was urgently seeking to raise funds to shore up its finances.
Digital transformation
Visa trials tokenised deposits for e-HKD pilot programme
Visa has announced the findings of a pilot test of tokenised deposits for B2B payments between HSBC and Hang Seng Bank as part of trials for an e-HK Central Bank Digital Currency (CBDC) programme. CBDCs are an emerging financial trend, in which central banks create and issue fiat currency electronically by means of a digital ledger, helping to boost efficiency and transparency. Nischint Sanghavi, head of digital currencies, Asia Pacific, Visa, noted:
Through the pilot programme, Visa has highlighted various potential benefits for the deployment of CBDCs, such as quicker settlements, a more seamless payment experience for high-value transactions, better transparency, as well as other benefits that come with an ‘always-on’ infrastructure. Our involvement in piloting actual use cases delivered pivotal learnings that are not only paramount to the possible implementation of the hypothetical e-HKD but can also help shape the future of the payment ecosystem.
HSBC and Abu Dhabi Securities Exchange partner to develop digital fixed income securities
Abu Dhabi Securities Exchange (ADX) and HSBC Bank Middle East are partnering to develop digital fixed income securities, with the aim to widen capital market use cases in the Middle East. According to Abdulla Salem Alnuaimi, chief executive of ADX, the collaboration will enable '“digital assets, such as digital bonds, to be made available on HSBC Orion, the bank’s digital assets platform, and to be listed on ADX.” This points to the continued maturity of frontier markets, as they continue to realise their digitisation potential across several asset classes.
Technology trends
BondbloX makes its bond trading platform available for individual investors
In a first for Asian markets, retail investors now have ‘democratised’ access to a fractional bond exchange via Bondblox’s platform. Specifically, BondbloX uses an exchange model for all-to-all order matching contrasting with the over-the-counter (OTC) model that currently exists with phone dealers servicing individual investors, allowing individual investors to access transparent interbank bond pricing with no hidden spreads. The platform can be accessed via a smartphone application, helping to provide simplified and ultimately more convenient access to bonds.
SNB moves CBDC into production on SIX Digital Exchange
The Swiss National Bank is to issue its first real wholesale CBDC for tests with six commercial banks operating on the distributed ledger platform of SIX Digital Exchange. The pilot, called Helvita Phase III, will create a tokenized version of the Swiss Franc as a settlement instrument between financial institutions for digital assets on the exchange. A wholesale CBDC differs from a retail CBDC, in the sense that it is exchanged between financial institutions, rather than individuals. The pilot will run from December 2023 to June 2024.
Regulatory developments
Recent days have seen arguably a key step forward in the race to regulate artificial intelligence. This week, US President Joe Biden issued an executive order to establish new AI safety and security standards. In particular, the order requires that developers of the most powerful AI systems share their safety test results and other critical information with the U.S. government. Additionally, the London-hosted AI summit took place this week, which saw the world leaders and critical technologists meet to explore real-world applications of AI. Speakers at the summit included business tycoon Elon Musk and UK Prime Minister Rishi Sunak.
Global regulators form asset tokenisation policy forum
Financial regulators from the UK, Singapore, Switzerland and Japan are collaborating on a new project to explore fund and asset tokenisation use cases and decentralised finance. The project aims to share knowledge and examine the benefits, regulatory challenges, and commercial use cases of asset and fund tokenisation. With global regulatory frameworks toward asset tokenisation currently ambiguous at best, action from regulators to explore the asset class and potentially create common regulatory standards could go a long way in increasing confidence toward this new asset class.
Chart of the week
Banking as a service (BaaS) allows the offering of banking products and services by non-banking customers through API technology or platforms, allowing tailored and more specialised banking solutions for customers. BaaS providers don’t face the same regulations as actual banks, and don’t have the authority to custody funds. Instead, BaaS technology connects these firms to traditional banks, allowing them to legally handle money.
Specifically, there are three types of BaaS utilisation:
Bank-Direct Approach: Banks create APIs in-house, managing customer relations and regulatory adherence. Larger fintechs may use this solution for its control and compliance, despite its lower flexibility and longer set-up time.
Bank-Vendor Collaboration: Banks and vendors offer technology companies banking services. The bank oversees compliance, utilising vendor APIs for client engagement and quick integration.
API Dealer Strategy: Some companies mimic banking functions via APIs without owning a bank charter, acting as intermediaries. This model attracts regulatory scrutiny and carries substantial risk, although it’s quick and easy to execute. Getting a bank charter is recommended for operations resembling traditional banking.
Tweet of the week
GreySpark insight
For sellside institutions – specifically, Tier I to Tier IV corporate and investment banks (CIBs) – a relatively new breed of process and workflow management software systems called intelligent automation solutions offer an expanding range of mission-critical processes across the front-, middle- and back-office capital markets arenas. The range of mission critical processes offered by these solutions include:
• Enterprise Data Automation (EDA) – Defined as systems that process data flows in various structured and unstructured formats, from various channels, to deliver end-to-end automation. Low-code data automation platforms use machine learning (ML) to reconstruct datasets by validating, repairing and enriching data inputs that then enhance the quality of data outputs. The input data is digitalised within a user’s workflow, which helps improve operational efficiencies and automate complex manual / legacy systems and processes;
• Robotic Process Automation (RPA) – Defined as an application of technology, governed by business logic and structured inputs, aimed at automating business processes via the use of ‘bots’ developed in low-code environments. Crucially, RPA bots operate at the user interface (UI) level and can be developed by business users to automate human tasks – for example, copying and pasting, moving files and e-mailing; and
• Enterprise Process Automation (EPA) – Defined as systems that allow users to create workflows and business processes that integrate enterprise architecture and other systems to enable automation. EPA systems enable design, orchestration and implementation of business process workflows as well as the monitoring and optimisation of end-to-end processes.
Discover more here.
What has caught our eye?
Fintech Brain Food: The great erosion of banking
This piece by Simon Taylor takes a look at the current challenges faced by the global banking industry, with growing competition from fintechs, at least from a customer service perspective, threatening to knock long-time industry incumbents off their perch.
Impact of distributed technology in capital markets
This report provides a comprehensive rundown of the opportunities and risks posed by Distributed Ledger Technology (DLT) – including DLT-based Securities (both Tokenized Securities and DLT-native Security Tokens) – and associated activities across the end-to-end securities lifecycle. For anyone looking to understand the intricacies of DLT, this one is for you.
The future role of BigTechs in financial services
In the ever-evolving landscape of the digital age, giants such as Google, Amazon and Meta, are extending their reach into the world of financial services with innovative and disruptive products. Their enormous customer networks, vast data vaults, potent brand value, and advanced technological competencies not only equip them to disrupt the financial sector but also to rival incumbents on an equal footing. This piece takes a look at how they could go about doing this.
Have your say
We’d love to hear from you! If there are any topics or trends you’d like to see covered, please comment down below.