Weekly news up to 08/03/2024
Issue #26
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
24 Exchange Aims to Launch National U.S. Equities Exchange
📰Newsflash
📈Buyside
Murex and Alveo partner to bring market data solutions for the buyside
Financial software platform Murex has partnered with Alveo, a provider of cloud-based market data management services, to provide enhanced data services for Murex’s buyside clients. The partnership will provide Murex’s buyside clients with easy access to comprehensive data sets, including listed derivatives, bonds, stocks and funds through Murex’s MX.3 Investment Management System (IMS). The solution will also be adapted to current ESG requirements, as well as providing lower onboarding costs and increased operational efficiency through a tailored, self-service data management function.
US asset managers’ split widens over social and environmental issues
Given its size and sophistication, the US market has arguably the least cohesive ESG environment out of the all the major economies (EU, UK and APAC). Currently, there is a divide between US asset managers on issues around social and environmental policies with US regulators condemning some of their ESG practices. Asset manager BlackRock was sued by the attorney general of Tennessee over its ESG policies in December 2023, while it has also been dropped from the public pension funds of multiple US states. This is seemingly creating a backlash, with a report by Morningstar revealing that US asset managers are quickly ‘moving away’ from pro-ESG positions and showing a lack of support towards disclosing emissions in their value chains. The recent departure of State Street and JPMorgan from the Climate Action 100+ engagement initiative — with BlackRock also limiting participation to its international business, highlights the dwindling support for ESG in the US.
📉Sellside
24 Exchange Aims to Launch National U.S. Equities Exchange
24 Exchange, a new multi-asset class trading platform, has submitted an application to the US Securities and Exchange Commission (SEC) for a license to create a new national securities exchange. If approved, 24X Exchange will be the first fully electronic exchange in the US that allows around the clock trading of securities. According to 24 Exchange CEO and Founder Dmitri Galinov, 24X National Exchange would facilitate around-the-clock trades in US equities for retail and institutional traders anywhere in the world via broker-dealers, who are registered members of the Exchange.
BofE plans cloud-based data platform and AI pilots
The Bank of England (BofE) has announced it is building out a cloud-based data and analytics platform in a bid to refresh its data and analytics strategy. The BofE intends to hold all of its data in one lake that can be found via a searchable catalogue and integrated with a suite of analytical tools. The modernisation programme will also see the BofE carry out a set of AI pilots to help identify AI use-cases across the business.
✴️Digital transformation
HSBC and the Bank of East Asia execute first Hong Kong repo trade using digital bonds
HSBC and the Bank of East Asia have executed Hong Kong’s first repo trade using digital bonds. The transaction involved using HK$-denominated bonds as collateral. Using HSBC’s Orion solution as the digital assets platform, HSBC helped the Hong Kong Monetary Authority (HKMA) complete a HKD6 billion-equivalent digitally native bond issuance for the Hong Kong government across four currencies: HKD, CNH USD and EUR. The repo transaction marks a significant milestone in APAC’s fixed income market and highlights the continued digitisation of fixed income markets, with more traditional means such as voice trading becoming less prominent. According to HSBC, this was the largest ever digital bond issuance globally, alongside being the first multi-currency digital bond issuance. The bonds settled on 7 February 2024.
Less Than 1 in 10 Retail Banks Have Established a Viable Generative AI Roadmap
According to research from Capgemini, only six per cent of retail banks have established an enterprise-wide roadmap for the use of generative AI (gen AI) capabilities at scale. A lack of funding is making it difficult for banks to scale new technologies such as gen AI. Additionally, just two per cent of banking executives indicate they are regularly tracking the business impact of their generative AI performance. According to Nilesh Vaidya, global industry head of retail banking and wealth management at Capgemini, banks risk becoming ‘technological laggards’ if they are not rapidly adopting solutions such as gen AI and preparing to take advantage of its capabilities.
📱Technology trends
Hedge Funds Get Closer to Clearing Repo Trades Directly on Eurex
Eurex Clearing AG, one of the world’s leading central counterparties, has announced plans to start clearing repo trades for hedge funds directly by the middle of 2024. This would provide a key step forward in improving liquidity and trust in a market that has been constrained over the years by tighter financial regulation. Traditionally, hedge funds have conducted their repo transactions without interacting with clearing houses, with their banks instead acting as middle men. However, lenders’ appetite for this service has been limited by rules that have been in play since the 2008 financial crisis. This has given rise to an alternative approach, where the funds plug into the central clearinghouse directly.
HKMA to pilot CBDC sandbox for tokenised deposits
The Hong Kong Monetary Authority has started a new wholesale central bank digital currency (wCBDC) project, as it continues to explore the potential of tokenisation. The project, called Ensemble, will initially focus on tokenised deposits issued by commercial banks and be made available to the general public. It follows the completion of HKA’s pilots with 16 firms last year, which took a deep dive into potential use cases for an electronic Hong Kong Dollar (eHK). Eventually, HKA’s wCBDC project could lead to new financial market infrastructure that bridges the existing gap between tokenised real world assets and sovereign currency. Tokenisation, in the context of CBDCs, expresses the currency as a safe and unique digital token on a blockchain or digital ledger, providing potential benefits in terms of efficiency and settlement times.
🧑⚖️Regulatory developments
SEC pushes back BlackRock, Fidelity spot Ethereum ETF proposals
After the regulatory approval of eleven spot Bitcoin exchange-traded funds (ETFs) earlier this year, the capital markets industry is eyeing ETF approvals for the second largest crypto network, Ethereum, as crypto continues to integrate with traditional finance systems at breakneck speed. However, this week, the SEC delayed its decision to approve or reject BlackRock and Fidelity’s spot Ether ETFs. The SEC first delayed its decision on BlackRock’s and Fidelity’s Ether ETF applications in January 2024, shortly after it approved the spot Bitcoin ETFs. The SEC can delay its decision up to three times before making a final decision. The SEC’s delay doesn’t come as a surprise, with market analysts speculating that the SEC will only decide to approve or deny the ETFs once the first final deadline arrives in May 2024.
FCA highlights AML failings in ‘Dear CEO’ letter
As highlighted in yesterday’s post, The Financial Conduct Authority (FCA), the UK’s financial regulator, has sent a serious warning to financial institutions (FIs) after discovering widespread shortcomings in how they prevent financial crime, including money laundering, terrorist financing and proliferation financing. GreySpark Partners would like to underscore the importance of in-scope firms taking immediate action in the wake of the findings to ensure that regulatory penalties are avoided.
📊Chart of the week
The regional bank crisis of 2023 hit capital markets almost exactly one year ago, as Silicon Valley Bank (SVB) collapsed and sent shockwaves throughout the global banking industry.
This week, an intraday share price drop of over 40% for New York Community Bank (NYCB), a large US regional bank with more than $100 billion in assets, served a stark and visceral reminder of the vulnerabilities still present in the global banking industry. The share price drop came after NYCB declared financial losses ten times larger than previously recorded and reduced its dividends, with reports stating that it needed a cash infusion from external investors to bolster its balance sheet.
A prolonged period of high interest rates in response to high levels of inflation is seemingly taking its toll on regional banks. The increase in borrowing costs has squeezed profit margins for banks, as they earn interest on loans but pay interest on deposits. On top of this, regional banks tend to rely more heavily on short-term funding and have greater exposure to specific sectors like commercial real estate, which has endured headwinds this decade. Collectively, regional banks are more vulnerable to macroeconomic risks than their larger counterparts.
It seems as if new capital reserve requirements in the US can’t come quick enough for the banking industry. Subject to approval, the new requirements will be phased in between July 2025 and July 2028 and would see aggregate capital requirements across the banking system increase by roughly 16%, according to Federal Reserve assessments. The NYCB share price crash will undoubtedly put more pressure on regulators to act, with the likelihood that other regional banks are also facing similar difficulties given the macroeconomic landscape.
🐤Tweet of the week
Consultancy work may have just got a whole lot easier. Microsoft recently released its revolutionary Copilot AI tool. As Arnill Hasan explains above, it is essentially OpenAI’s popular ChatGPT in disguise, providing productivity hacks and efficiency gains for Microsoft Office users. One functionality that caught our eye was the fact that you can ask questions on your Word document and transform texts into a table. AI is only just getting started…
📄GreySpark insight
The Clearing & Settlement of Cryptoassets Trading
The overarching functional capabilities requirements of a clearing and settlement system for handling the post-trade management elements of cryptoassets must be fundamentally different from the functional capabilities requirements of a system that handles only traditional, fiat assets or securities. For example:
24/7 Availability – Cryptoassets markets, unlike other organised markets, do no stop;
The Ability to Handle Fractional Settlement – Traders use cryptocurrency and fiat currency to buy / sell fractional amounts of a crypto coins, contracts or tokens, sometimes at minimum order sizes totalling just 0.00001;
Different Wallets for Different Coins / Instruments – Each cryptoasset is settled in a corresponding wallet, and they cannot be mixed into other wallets – effectively one portfolio per cryptoasset;
A Virtual Ledger System – The creation of a batch mechanism to reduce the costs associated with settling multiple transactions;
Payment of Miner’s Fees in Cryptocurrency – In order to process a transaction on a blockchain, the network charges a fee to users that can only be paid in cryptocurrency;
The Ability to Process Fixed Quantity, Not Price, Fiat Currency Orders – In cryptoassets trading, investors settle on a quantity of which the notional amount is unknown; and
Specialised Crypto Interfaces – Traditional, fiat interfaces for clearing and settlement work by facilitating the transfer of funds between different financial institutions.
Discover more here.