Weekly news up to 16/02/2024
Issue #23
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
One in six asset managers expected to disappear by 2027
📰Newsflash
📈Buyside
One in six asset managers expected to disappear by 2027
A survey from PWC has found that one in six (16%) asset management firms are predicted to disappear over the next four years as the industry faces a wave of consolidation. Market headwinds such as inflation, high interest rates and market volatility has weighed heavily on asset manager fees and pushed the rate of turnover to roughly twice its historical rate. According to the survey, 73% of asset managers said they were considering strategic allocation in the ‘near future.’ The top ten largest asset managers are set to control half of all mutual fund assets globally by 2027, up from the current figure of 42%.
JPMorgan and State Street quit climate group as BlackRock scales back
JP Morgan and State Street, two of the world’s largest asset managers are quitting the Climate Action 100+ investment group. The Climate Action 100+ group is an investor-led initiative to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change. However, following more stringent corporate engagement requirements, JP Morgan and State Street have both left the group, dealing a major setback to the climate ambitions of Climate Action 100+. None of the world’s five largest asset managers are now fully behind the effort, casting doubt over the industry’s desire to improve its ESG credentials.
📉Sellside
Nasdaq Expands Bank and Broker-Dealer Risk Platform into Asia
This week, NASDAQ announced it has secured the first client to adopt its Risk Platform in Asia, after Kiatnakin Phatra Securities (KKPS), Thailand’s largest institutional broker, agreed a multi-year partnership. The NASDAQ Risk Platform is widely used by financial institutions globally, providing a live view of client portfolio risk using detailed analytics that support live decision-making. The deal could set the foundation for NASDAQ to extend this service offering to other broker-dealers across the APAC region.
Goldman Sachs achieves 99% same day affirmation Rate via DTCC’s CTM Match to Instruct workflow
With the new T+1 trade settlement period in the US now less than four months away, there are signs that preparations among financial firms are going well. In particular, Goldman Sachs revealed it has achieved a 99% same-day affirmation rate after using the DTCC’s Match to Instruct (M2i) workflow during a testing phase. In addition, Goldman Sachs was able to achieve a 64% reduction in US settlement fails, by value, when matching and affirming trades with other investment managers who also used the M2i workflow. The new trade settlement period encourages the use of automation and new, slicker workflows as firms will be left with no option but to affirm trades on the trade date.
✴️Digital transformation
Citi tests tokenisation of private funds
Citi has partnered with private equity firm Wellington Management and asset manager WisdomTree to explore the tokenisation of private markets. The partners carried out a simulated proof-of-concept on the Avalanche blockchain and found that the tokenisation of private funds, using smart contract capabilities, could deliver new operational efficiencies. Tokenisation represents a new paradigm for the trading of institutional assets. Typically, it involves creating a blockchain-based, tokenised version of a real-world asset, such as a private equity fund. Through fractionalisation, tokenisation improves market accessibility and liquidity, while also boosting the efficiency of trading due to the instant settlement functionality that blockchain provides.
Revolut launches AI-based scam detection feature
Revolut has launched an AI-powered anti-scam feature to protect customers from falling victim to authorised push payment fraud. The new layer of security protection uses machine learning to determine if there is a high probability that the customer is making a card payment as part of a scam. If so, the solution will decline the payment. The customer is then prevented from performing other similar payments and is sent through a scam intervention flow in the application. Since the launch of the product, Revolut has observed a 30% reduction in fraud losses resulting from card scams. Given the recent resurgence in popularity of cryptoassets, the solution comes at an important time for those looking to safely invest in cryptoassets.
📱Technology trends
FIX Trading Community set to establish digital assets-focused standards
The FIX trading community, the provider of standardised trade communications in the capital markets industry, has revealed it is going to establish new standards for digital assets, with institutional interest toward digital assets piquing once again. In particular, the new standards will be centred around interoperability, regulation and digital ledger technology. Establishing a set of standards such as the ones suggested by FIX will play a vital role in lowering barriers to adoption of digital assets, facilitate innovation and ensure the secure exchange of data and value between capital markets participants. Ultimately, at an institutional level, it will also allow greater participation and foster greater trust toward digital assets.
Euronext cash and derivatives slow down offset by fixed income and power trading surge in 2023
Euronext reported a 4.7% reduction in trade revenues for 2023 in comparison to 2022. Euronext attributed the decrease in trade revenues to a drop in cash and derivatives trading revenues. However, the decline in trade revenues was largely offset by record results in fixed income trading, which was up 15.6% in comparison with 2022 at €107 million and power trading, which was up 14.5% to €37 million. The steep rise in fixed income trading revenues points to the ever-increasing automation of bond trading against a backdrop of high policy interest rates.
🧑⚖️Regulatory developments
On February 9 2024, the Securities and Exchange Commission (SEC) announced charges against five broker-dealers, seven dually registered broker-dealers and investment advisers, and four affiliated investment advisers for failures by the firms and their employees to maintain and preserve electronic communications. The financial penalties faced by each party ranged from $8 million to $16 million, with one exception. According to the SEC, the broker-dealer firms’ employees communicated through personal text messages about the business of their employers, and the investment adviser firms’ employees sent and received off-channel communications. The incident serves a reminder of the importance of having a robust surveillance monitoring framework in place, with regulators clamping down on the use of personal devices when discussing business matters.
Visa, Mastercard, JP Morgan, Citi among companies to attend US AI Safety Consortium
As part of US President Joe Biden’s efforts to regulate AI, over 200 organisations, including JP Morgan, Citi and Visa this week formed an AI Safety Institute Consortium. The group, which will also consist of academics, developers and industry regulators, will collaborate and come up with ways to safely and ethically advance AI products and services. The Biden Administration has been pushing for AI regulation, in setting transparency laws and standards for ‘Big Tech’, with Biden releasing an executive order on the issue.
📊Chart of the week
Source: GreySpark analysis
Intuitively, one could imagine that moving from T+2 to T+1 trade settlement in the US might halve the post-trade settlement time, but this is not necessarily the case when it comes to cross-regional trading. Due to time zone constraints, European/UK firms’ settlement window will reduce by far more after the switch to US T+1 settlement.
As shown in the figure above, a halving of the US settlement period will reduce the time a European/UK buyside firm has to submit allocations by a greater amount than a firm in the US (US buyside from 26 to 9.5 hours – a reduction of 63%, European/ UK buyside from 32.5 to 16 hours – a reduction of 51% ) This constriction of the available time for allocations will inevitably heap pressure on post-trade divisions and, in particular, leave less time to source and execute corresponding foreign exchange (FX) transactions. Essentially, the window after market close on the trade date will take on greater importance. Cash management processes will also have to be compressed into a shorter period to ensure that correct funding is in place for settlement. Collectively, these issues could lead to more processing errors and settlement fails.
🐤Tweet of the week
The AI revolution took another dramatic twist this week, with OpenAI, the founders of ChatGPT, launching a new groundbreaking AI model that can create 60-second videos from text prompts. OpenAI noted:
“We are teaching AI to understand and simulate the physical world in motion, with the goal of training models that help people solve problems that require real-world interaction.”
Discover more here.
📄GreySpark insight
Order Execution Management (OMSs) are designed to manage securities and listed derivatives orders, end-to-end from pre-trade checks through execution, to STP, post-trade processing, compliance, Best Execution and performance reporting. The core functionality of an OMS is to track the progress of each order, be it a single order or part of a block trade. It can be a simple workflow or a sophisticated system. Buyside OMSs include portfolio management functions, connectivity to the EMS’s and large networks allowing orders to be sent from institutions to a vast array of brokers.
The buyside OMS takes over the functionality of order management from traders, passing orders to the EMS and brokers. Alongside care orders being sent to dealers blotters for execution, the OMS handles indications of interest (IOIs), block trades and internal crossing between portfolios. The OMS connects to back-office systems with additional capabilities that may include netting, P&L calculation, position management and risk management. The OMS’s compliance and reporting functionality allows for Best Execution and regulatory reporting.
Check out our full list of buyers guides here.