MiFID II costs mount as industry navigates uncertain future

A report analysing regulatory compliance has put the projected cost of MiFID II at $2.1 billion for the financial services industry in 2017 alone.

The report from HIS Markit and Expand, a Boston Consultancy Group company, provides the industry with fresh insight into how the sprawling package of reforms will affect financial institutions in Europe.

Upon its expected introduction in 2018, MiFID II will increase trade reporting requirements on multiple asset classes, accelerate the transition of OTC derivatives onto regulated electronic venues to reduce bilateral risk, while increasing both investor protection and market transparency with a series of measures.

Yet, such a comprehensive piece of legislation comes at an uncertain time for the financial services sector in Europe, as the UK’s future role and access to the single market is yet to be determined.

With many financial institutions in the UK firmly established in mainland Europe, with offices in financial centres such as Frankfurt, Amsterdam and Paris, the risk of a two-tiered regulatory framework poses real operational issues.

In order to gain insight from the market regarding the proposed compliance obligations, the FCA recently published a consultation paper on MiFID II, which outlined some of the organisation’s key priorities.

Andrew Bailey, chief executive at the FCA highlighted the following areas of focus:

“Strengthening consumer protection is one of the key aims of MiFID II and this aligns with, and advances, our own statutory objectives. The changes to rules we are proposing today reflect key themes that we have worked on in both retail and wholesale markets over recent years to promote competition and market integrity.”

However, Bailey also reiterated the need for institutions to comply with both UK and EU financial regulation:

“As we said in our statement following the EU referendum result, firms must continue to abide by their obligations under UK law including those derived from EU law. They must continue with implementation plans for legislation that is still to come into effect, of which MiFID II is one such example.”

Rise of ‘regtech’

In today’s cost-cutting environment, the growing cost of compliance has become a major issue for banks and the buy-side. A Thomson Reuters report analysing the current regulatory landscape in 2015 identified that 69 percent of respondents expect the cost of compliance to rise.

The report notes: “Regulatory matters are consuming disproportionate amounts of board time, from correcting non-compliance and preventing further sanctions to implementing structural changes to meet new rules.”

However, this increased focus has led to the rise of ‘regtech’ a subset of the growing fintech sector. The ability to develop innovative ways to comply with incoming regulation in an effective and cost-efficient manner enables firms to secure a competitive advantage.

The market is also poised for future growth, with more than two-thirds of firms that took part in the same Reuters study (68 percent) expecting an increase in their compliance budget last year with 19 percent expecting significantly more.

Those keen to differentiate themselves from the competition in a cost-sensitive environment are already looking at compliance as a means to secure an advantage.

Partnering with ‘regtech’ firms and building technology and operations around future regulations are likely to yield tangible results. But with uncertainty hovering in the air – it is easier said than done.

Rumours of a flash crash as FX markets experience high volatility

Sterling plunged by around 6 percent in two minutes in Asia trading this morning before recovering as rumours about a flash crash or fat finger trade spread. And we’ve still got US employment data to come. Happy Friday.

Sterling sank in early Asian trade, at one point losing as much as 7.5 percent against an average of its top counterparts following an article in the Financial Times quoting Francois Hollande.

Referring to the outcome of the Brexit referendum and recent strong-worded rhetoric from UK Prime Minister Theresa May, the French President argued that the EU must be as tough as possible on the UK.

Thin liquidity before the trading open on most Asian bourses probably amplified the move. The magnitude of the drop and the violent recovery thereafter – prices erased more than three quarters of the move within 10 minutes – suggests this is not the whole story however.

There is currently rampant speculation that trading algorithms have compounded volatility. Shellshock after the Pound fiasco appeared to translate into wider risk aversion overnight.

The sentiment-linked Australian, Canadian and New Zealand Dollars tracked Asian stock benchmarks and S&P 500 futures downward, with the Kiwi underperforming amid swelling RBNZ easing speculation. Markets now price the probability of a rate cut at next month’s policy meeting at 66 percent. The anti-risk Japanese Yen and US Dollar outperformed.

Later today, the greenback may continue to build higher as US Employment data is released. The economy is expected to have added 175k jobs in September, up from 151k in the prior month. An increase of more than 143k would keep the three-month average at 190k, a threshold identified by Fed Chair Yellen as supportive of a rate hike in 2016.

This seems to mean that anything short of deep disappointment will reinforce already swelling tightening probability. The priced-in chance of an increase in December is now at 63.6 percent.

R3 expands blockchain testing to bond markets, reference data and syndicated loans

 It’s been a busy week for R3 CEV. The blockchain consortium has partnered with Credit Suisse, Intel and Axoni to advance the use of distributed ledger technology in real world use-cases.

As the financial services industry rushes to integrate the nascent technology, blockchain to a variety of markets and applications, we take a look at how a single shared ledger for financial transactions could enhance US Treasury trading, the reference data industry and syndicated loans space.

Bond Markets

The R3 consortium has successfully completed blockchain testing for bond trading in partnership with Intel. The test, which involved eight banks including HSBC and State Street, enabled trading, matching and settlement of US Treasury bonds, as well as automated coupon payments and redemption.

The initiative is intended to simplify and standardise protocols and processes in the US Treasuries trading, a market that has become increasingly complex of late, as noted in a recent Fintech Focus article. In the clearing arena for example, challenges persist. While the Fixed Income Clearing Corporation (FICC) acts as a central counterparty for its membership, non-bank firms often don’t qualify for membership and if they do, find FICC membership costs prohibitive, opting instead for bilateral settlement outside the CCP model.

Syndicated Loans

 Symbiont and data provider Ipreo have joined Credit Suisse in utilising R3’s Lab and Research Centre to test how distributed ledger could be used in the syndicated loans market. By connecting agent banks via a blockchain, the initiative is expected to achieve faster and more secure settlement in the loans market.

The user benefits are clear and demonstrate the value distributed ledger technology can deliver in a wide variety of fields. Loan investors will have direct access to an authoritative system of records for syndicated loan data, a process that will reduce manual reviews, data re-entry and systems reconciliation.

 At present, the syndicated loans market requires each participants involved in a transaction to maintain its own separate lending system. By adopting blockchain technology, loan processing can be done exclusively on a shared distributed ledger – minimising middle and back office operations.

 Reference Data Market

R3 CEV has also announced a collaboration with capital markets technology provider Axoni, to test how blockchain technology can be used to enhance the reference data market. The project, which also involves Alliance Bernstein, Citi, Credit Suisse and HSBC is the latest example of how the financial services industry is finding new applications for the technology.

Reference data has become a real issue in financial markets of late as it accounts for up to 70% of the data used in transactions, but continues to be supported by legacy technology that often requires manual processing and constant upkeep. With reference data adding significantly to operational costs and ultimately affecting the bottom line for cost conscious institutions; it is a market ripe for innovation.

Moreover, as the market continues to grapple with regulatory measures designed to ensure firms manage and maintain the quality and accuracy of their reference data, many are now exploring the possibility of streamlining the process via a distributed ledger.

While those institutions developing blockchain solutions may have passed the proof of concept test, the need to tailor this technology to a variety of different use cases now presents the next challenge.

Standardised netting of FX payments moves closer to reality

In a guest post for Fintech Focus, David Puth, CEO of CLS, explains how standardised netting of payments can deliver greater efficiencies for the foreign exchange market.

Leaders from the financial services and technology industries are descending on the Sibos conference in Geneva this week. This annual gathering of the buy-side and sell-side, fintechs and transaction banking specialists showcases the very best in technology, innovation and ideas that ensure financial technology continues to shape the way business, finance and commerce operates.

While some areas of financial markets and technology have undergone significant development over a number of years, there is clearly an opportunity for post-trade partners to do more – including in foreign exchange (FX). CLS sits at the heart of this market and sees approximately USD5 trillion of payment instructions settle through our core service every day.

In the search for ever more ways to improve liquidity and efficiency, we are focused on innovation centering on the payment efficiency of our clients’ underlying supporting infrastructure. For traders in a market of such size and scale, efficient netting of payments can have a significant impact on intra-day liquidity demands and an institution’s overall ability to effectively manage risk.

The inception of CLS in 2002 addressed many of these issues for institutions that use our services. Our role is to protect our settlement members, 66 of the world’s leading financial institutions, and 21,000 of their clients, from the most significant risk in the FX market – settlement risk.

Time for innovation

However, not all currencies or market participants access our core settlement service. And while some participants are currently capable of bilateral payment netting for trades not settled in CLS, this practice is not universally adopted. Various bespoke approaches to payment netting lack standardisation, scalability, and efficiency, which in turn increase operational risk. Therefore, many institutions limit their payment netting activities to their larger counterparties.

In addition, many FX market participants across the buy-side and sell-side do not use bilateral payment netting and instead settle a significant portion of their non-CLS trades on a gross basis. Gross settlement without netting requires access to deep liquidity, which requires institutions to allocate more collateral and capital.

To address this gap in the market, we are working closely with the global FX market community to develop CLS Netting, a standardised, bilateral payment netting solution for all market participants, regardless of whether or not they currently have access to CLS.

Netting already forms a crucial part of our settlement offering and the facilitation of standardised netting for a wider group of institutions will significantly improve the way currency payments are netted across the globe, with tangible benefits for clients.

Participants will be able to submit FX instructions for six products and 24 currencies. In addition to the 18 currencies CLS currently settles, we will offer payment netting for the Chinese renminbi (offshore), Czech koruna, Polish zloty, Russian rubble, Thai baht and Turkish lira.

CLS Netting will standardise bilateral matching and payment netting in these currencies, manage payment netting positions through a single interface and enable automated reconciliation. This will decrease the volume of payments manually initiated, resulting in fewer late or failed payments.*

The strong appetite for a globally standardised netting service is demonstrated by the desire of leading international financial institutions to become early adopters. So far, 14 have committed to work with CLS, including: Banco Actinver, Bank of America, Bank of China – Hong Kong, Bank of Tokyo-Mitsubishi UFJ, Citibank, FirstRand, Goldman Sachs, Goldman Sachs Asset Management, HSBC, Intesa Sanpaolo, JPMorgan Chase, Morgan Stanley, Neuberger Berman, Northern Trust – with others joining this group in due course.

Use of distributed ledger technology

The speed at which technological innovations are developing leads us to focus our efforts on those post-trade processes where change is possible. Our goal is to continue to expand and develop the service with new currencies, products, and technologies, and the adoption of distributed ledger technology (DLT) will be central to this.

In addition to submitting FX instructions over existing SWIFT-based channels, participants will have the option of connecting directly to CLS Netting via a highly secure, permissioned distributed ledger, administered by CLS.

As a founding member of the Linux Foundation’s Hyperledger Project, we have long acknowledged the benefits of distributed ledger technology and have worked diligently over the past 12 months to explore how DLT can be used to improve efficiencies, security, and resilience in the global FX community.

It is crucial that the basic fabric of any distributed ledger technology we use for the CLS Netting platform adheres to high standards and resilience. We will incorporate DLT capabilities in a way that is meaningful to our members and participants, and we believe it has enormous potential.

To facilitate broad adoption amongst industry participants, we will collaborate with IBM to develop the underlying technology, which will be based on the Hyperledger fabric rather than a proprietary solution. IBM is a key member of the Hyperledger Project and has been a partner of CLS since our inception. Our partnership creates the foundation for new technology that can be applied not only to CLS, but more broadly across the financial industry.


Cybersecurity: could a global standard be the answer?

A committee of central bankers are working with the Bank for International Settlement (BIS) to explore ways of tackling the threat cybersecurity poses for the financial services industry – in the first initiative designed to set a global common standard.

With cyber attacks against financial services firms continuing to escalate, the need to standardise best practice across the industry has becoming a pressing issue for many.

According to a PWC report, in 2015, 38% more security incidents were detected than the previous year, while theft of hard intellectual property increased 56% in 2015.

As the volume and severity of security breaches increases, regulatory organisations and governments are also voicing concern. The FCA recently reported a huge spike in the number of reported incidents, from just five in 2014 to 75 in 2015. While these numbers are likely to only touch the tip of the iceberg when compared to those attacks that go unreported – the statistics still present a worrying trend.

New York Gov. Andrew Cuomo has also proposed cyber security regulations for banks, which would increase the onus on technology departments to invest in cyber protections. The prospect of mandated investment in cyber security comes at a difficult time for the banks, as they grapple with compliance issues and growth in competition from non-bank firms.

Yet, many institutions are already taking proactive measures. A 24% rise in security budgets split across a number of initiatives designed to mitigate the risk of cybersecurity breaches, such as employee awareness programmes and enhanced monitoring tools, appears to be paying dividends. PWC noted a 5% decline in financial losses associated with cyber attacks in a year-on-year comparison.

However, the absence of a common standard has led to discrepancies in the ability for some financial institutions to handle online attacks, something that has become particularly apparent in developing economies across Asia.

With up to 90% of Asia-Pacific companies targeted by cyber-attacks this year, a 76% rise from the year before, many firms are playing a high price for breaches online.  $81.3bn out of a global total of $315bn was lost to cyber-attacks in the region exceeding those in North America and the EU by about $20bn.

Yet, the consequences of a security breach are also reputational. With many financial services firms acting as custodian for sensitive  information – the need to stop data from entering the wrong hands is a critical issue.

But there is now growing recognition that a proactive, cross border response is required. Recent attacks affecting Bangladesh, the Philippines, Taiwan, Thailand, Vietnam, and Japan, have prompted officials to gather in Singapore next month to discuss how these economies can mitigate the impact of cyberattacks.

Already this year, Japan has made proactive moves to introduce reforms that will allow the country’s banks to invest directly in technology to defend against cyber-attacks.

While national programmes designed to increase cybersecurity is certainly a step in the right direction, the need for a common global standard should not be underestimated.

Much like the global Code of Conduct for the foreign exchange market, also spearheaded by the BIS, a solution must be universal in its application to instigate comprehensive, rather than siloed progress.

BIS FX Code of Conduct Offers Reasons For Optimism

Chris Salmon, Executive Director of Markets at The Bank of England, highlights the reasons to be optimistic about the new FX Code of Conduct, which will launch in London next May.

The BIS Code of Conduct is arguably one of the largest, most ambitious and comprehensive efforts to introduce globally-accepted standards and guidelines to govern conduct and behaviour in the foreign exchange market.

Initiated in 2015 by the Bank for International Settlements (BIS), it is designed to establish a single, global code of conduct for the wholesale FX market and promote greater adherence.

The process is well advanced and remains on track to launch in May 2017, according to Chris Salmon, Executive Director, Markets, Bank of England. As a senior official at the UK’s Central Bank, he is actively involved in the development of the Code. His speech at the ACI Financial Markets Association in London provided great insight into why global regulators and market participants remain positive about the final Code.

Chris Salmon highlighted four reasons for optimism. The first is the substance of the Code itself. It will directly address the complexity of the FX market and provide guidance where it is necessary, he says.

Secondly, he reiterated the importance of keeping the Code up to date. Its completion in just two years means it should be relevant for today’s market when published. Importantly, he adds, the new Code will not be allowed to stagnate; the BIS is committed to developing an appropriate review mechanism so that the Code stays up to date and evolves as the market evolves.

Third, the process for developing the Code is inclusive and unprecedented in many ways. The Code will apply to the buy-side, sell-side, non-bank participants, trading platforms and other market infrastructure providers. Therefore, there is engagement from all types of key market participants, including 40 members of the Market Participants Group (MPG), chaired by CLS CEO David Puth, and regional FX Committees. This ensures the final Code will get buy-in from a wide range of diverse market participants.

Lastly, he highlighted how the Code is one of a suite of important initiatives that have launched in recent years to improve conduct in FICC markets. Initiatives such as the FICC Market Standards Board, created as a direct consequence of the Fair and Effective Markets Review, and UK Senior Managers and Certification Regime, soon to be extended beyond banks to all FCA authorised firms, will aim to raise standards of market conduct by strengthening the accountabilities of senior management. These initiatives, combined with a greater focus on conduct, create a supportive environment for the objectives of the Code.

While this will be received well by the FX market, he also cautions that the Code will only rebuild trust if it is actively used by market participants and drives a market-wide shift in culture and attitudes – one that embeds behavioural norms that are consistent with both the letter and spirit of the Code.

This type of cultural shift is not something that can be mandated; ultimately, that change must come from the industry. Firms that assimilate the Code fully are likely to benefit, over time, from greater trust in the marketplace, a stronger reputation, and a higher long term franchise value.

Individually, firms and senior personnel should start considering the steps they will take to support the Code. In a world where competition for market share remains fierce, winning the trust of clients matters financially.

To this end, Mr Salmon recommends three elements be put in place to realise the benefits of the Code.

First, the Code needs to be embedded in firms’ practices, training and education; second, firms should have the right policies and procedures in place to ensure that they are able to monitor how successfully they have embedded the Code; and third, firms should be able to demonstrate publicly that their behaviour and practices in the FX market are in line with the Code’s principles.

The first phase of the Code was well received by the FX industry, and there is no doubt that the widespread use of a common public attestation could be a powerful tool. It would provide a strong signal of a firm’s commitment to following good practices and rules that are applied internationally across borders.

The launch of the second phase will be an important milestone in the industry’s efforts to reaffirm trust in the FX market. It is no secret that all has not been well in FX or FICC markets more generally; the completion of the Code of Conduct, and its application amongst individual firms, will send the right signal to clients, regulators and employees.

The full speech by Chris Salmon can be found here.

Blockchain set to streamline reference data market

Blockchain consortium R3 CEV have announced a collaboration with capital markets technology provider Axoni, to test how blockchain technology can be used to enhance the reference data market. The project, which also involves Alliance Bernstein, Citi, Credit Suisse and HSBC is the latest example of how the financial services industry is finding new applications for the technology.

Reference data has become a real issue in financial markets of late as it accounts for up to 70% of the data used in transactions, but continues to be supported by legacy technology that often requires manual processing and constant upkeep. With reference data adding significantly to operational costs and ultimately affecting the bottom line for cost conscious institutions; it is a market ripe for innovation. 

Moreover, as the market continues to grapple with regulatory measures designed to ensure firms manage and maintain the quality and accuracy of their reference data, many are now exploring the possibility of streamlining the process via a distributed ledger. 

In partnership with Axoni, R3 CEV recently completed a multi-month proof of concept (PoC) exercise, coordinated by Credit Suisse. The prototype was created using Axoni Core to simulate the management of reference data on the blockchain, and also inform corporate bond issuance. The technology enabled participants to interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, unchangeable record of all data related to the bond.

David Rutter, CEO of R3, comments: “Quality of data has become a crucial issue for financial institutions in today’s markets. Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data. Distributed ledger technology – which allows financial institutions to push these functions to a cloud environment – removes the need to reconcile multiple copies of data, providing a sophisticated and agile solution to the headaches currently caused by these legacy systems and processes.”

Whilst the study of distributed ledger technology’s application to reference data is still in its early stages, this project marks the first step in testing its potential.  

What to expect at SIBOS 2016

With over 8,000 business leaders set to descend on Geneva for the annual SIBOS conference next week, this year’s event comes at a poignant time for the industry.

More than 200 exhibitions and hundreds of conference sessions will take place over four days, bringing together decision makers from banks, market infrastructure providers, multinational corporations and technology vendors.

With the industry continuing to grapple with a number of developing issues, from the emergence of disruptive technology and the ongoing impact of regulation and cyber crime to the potential implication of a Brexit, there is plenty to talk about.

The theme of this year’s event, ‘Transforming the Landscape,’ will explore issues surrounding the future of payments, securities, cash management, trade and financial crime compliance.

To help you keep track of what to look out for, we’ve picked out some key highlights from the programme agenda:

  • Cyber resilience in a changing world, Monday 26 September, 09.00 – 10.00
  • Patterns of disruption in wholesale banking, Monday 26 September 09.30 – 11.15
  • Insights on Blockchain: a panel discussion of early adopters hosted by IBM, 26 September, 11.30 – 12.00
  • When RegTech meets FinTech: the day after tomorrow – How technology disruption intersects with regulation in securities, 27 September 10.15 – 11.15
  • Fintech hubs – EMEA, 27 September, 12.45 – 13.45
  • After the Brexit, what’s next: A BRICS-it towards a multilateral financial system?, 27 September, 15.30 – 16.30
  • Machine learning – The future of compliance, 28 September, 09.00 – 10.00
  • Open API’s and the transformation of banking, 28 September, 16.30 – 17.15
  • Capital markets: Big data, big deal, 29 September, 09.00 – 10.00
  • Financial centres outside of the EU – What can the UK learn from Switzerland, 29 September, 10.15 – 11.15

Details of the full programme can be found on www.sibos.com

Derivatives industry gathers to discuss market reform, opportunities and challenges

The great and the good from London’s derivatives industry descend to FOW Regulation to discuss G20 reform, Brexit, Basel III and all things MiFID II.

More than 200 banks, brokers, vendors and buy-side participants gathered at the Grange City Hotel to find out how MiFID II and other European and international regulations will impact trading, risk management and regulatory operations in the global derivatives market.

Attendees at the 4th annual FOW Regulation conference participated in presentations, panel discussions and Q&As on the implementation of MiFID II, MAR and Basel III, the impact of Brexit, algorithmic trading, compliance and trade reporting. With representatives from regulatory bodies, banks, buy-side institutions, legal firms, technology vendors and trade bodies all offering their views, the audience was offered a broad range of views from different perspectives. MiFID II was undoubtedly the topic on everyone’s mind.

Although it remains the centrepiece of European regulatory reform, and still looks certain to be introduced in the UK, fundamental questions remain over London’s capital markets and the competitive advantage or disadvantage that Brexit will bring. The early morning panel discussed what Brexit meant for the implementation of EU regulatory reform in the UK and its interaction with Europe and the rest of the world. This was followed by a panel discussing the plethora of reforms across the world seeking to bring greater oversight, transparency and accountability to algorithmic trading.

With differing approaches and definitions in place, new rules are increasing complexity for firms in the market. The debate focused on how will Reg AT in the US impacts Europe, how to manage obligations across a global trading book, how MiFID II will transform algorithmic trading and what trading institutions should do to meet regulatory requirements. The final panel of the morning discussed the complexities of trade reporting in an increasingly automated trading environment.

The EMIR reporting requirements were introduced amid confusion from the market and reports of miss-reporting and over-reporting were rife. But this has not dampened the appetite of regulators to enforce new rules, and many expect a tougher stance to be taken with MiFID II reporting. There were also fruitful discussions around the Market Abuse Regulation regime, which came into force in July with unprecedented scope and ambition, Organised Trading Facilities (OTFs) and the increased requirements for commodity derivatives. But another prominent challenge for the derivatives industry that became clear throughout the day was the management of capital rules.

Already, a number of large FCMs have pulled out of the market and more rules, including MiFID II, CRD IV and the new IOSCO requirements, are coming down the line. Panel members and the audience discussed how this will impact liquidity and trading activity and how banks and buy-side firms can adapt. Overall, the reform of financial markets continues to gather pace and it remains the case that regulation remains at the forefront in the post-2008 regulatory environment.

The complexity of compliance in an electronic, automated environment remains a concern, but participants were also given insight into the innovation taking place amongst technology vendors and trading institutions to stay ahead of the regulatory curve. 12 months is a long time in financial services and we could be looking at a very different market in a year’s time.

FCA sets out fertile ground for fintech innovation

The fintech sector continues to grow at a rapid rate. According to a PWC report, which explored how the sector is shaping financial services around the world, over USD 50 billion has already been invested in roughly 2,500 fintech companies since 2010.  And investment is expected to accelerate to over USD 150 billion over the next three to five years.

But while the value delivered by innovative technology companies in financial services has become abundantly clear, particularly in areas such as blockchain, data analytics, machine learning and peer-to-peer trading, the industry also requires a flexible regulatory framework that facilitates growth and innovation – rather than stifling it.

As Caroline Binham notes in the Financial Times, it is an issue that the FCA appears to be handling well. In a separate EY report, the UK is singled out for its friendly regulatory stance — topping the global survey as the most fintech-friendly jurisdiction — closely followed by California and New York. The EY report recognised the progress the UK has made in securing a competitive advantage against its rivals, stating; “The UK benefits from a world leading fintech policy environment, which stems from supportive regulatory initiatives, tax incentives and government programmes.”

Clearly, a number of FCA led initiatives designed to promote innovation and market competition appear to be paying dividends. One of the most prominent examples, the ‘regulatory sandbox’ outlined in 2015 as part of Project Innovate’, enables firms to test products for compliance purposes at an early stage in order to fast track the adoption of financial technology by the market.

All this is encouraging a dynamic sector to grow further. As Matthew Hodgson, CEO of Mosaic Smart Data, noted in an article on fintech investment earlier this year, “London is almost perfectly positioned at the intersection of finance and technology. In the last 24 months, the Capital has acted as a hotbed for venture capital investment for a variety of fintech firms pioneering new technologies designed to disrupt traditional business models, but also to enhance existing ones through collaborative partnerships with established financial services providers”.

But amidst competition from tech hubs in Silicon Valley, Berlin, Hong Kong and Singapore for fintech investment and top talent, the need to provide an attractive ecosystem for new and rapidly evolving companies is not just optional, but obligatory.

As Fintech Focus noted in a piece exploring fintech investment in Asia Pacific, the region has benefited from a massive jump in financial technology investment, rising from USD 880 to nearly USD 3.5 billion in the first nine months of 2015. All this represent a serious challenge for London’s fintech scene.

While London remains ahead of its peers in the race to provide fertile conditions for innovation and growth, the threat of global competition means the capital must continue to maintain its creativity in order to retain its crown.

Bridging the divide: finance and technology

The annual P2P Financial Systems workshops (P2PFISY) for 2016 hosted by University College London (UCL) brought together academics, technologists, policy makers, regulators and fintech providers to analyse how technology is changing financial services.

The event was attended by The Bank of England (BoE) and a diverse range of experts to address questions of practical importance on: digital currencies and Blockchain technologies, P2P lending and Crowdfunding, digital money transfer,  mobile banking and mobile payments.

Victoria Cleland, Chief Cashier at BoE, outlined the latest wave of fintech activity with a particular focus on distributed ledger technologies (DLT) and the central bank digital currency (CBDC) as part of her speech ‘Fintech: Opportunities for all?

“We are undertaking more fundamental long-term research on the wide range of questions posed by the potential of a central bank-issued digital currency (CBDC). Whether a CBDC would be feasible and whether it would benefit the economy and the financial sector, over the medium term are big issues, and the answers remain far from clear. We have embarked on a multi-year research programme so that any future decision is informed with a full understanding of the implications”, Cleland said.

Cleland also noted that since 2010, more than $50bn has been invested in roughly 2,500 fintech companies’ and over 24 countries are currently investing in DLT with $1.4bn in investments over the past three years. In addition, over 90 central banks are engaged in DLT discussions and more than 60 have joined blockchain consortiums like R3CEV.

Cleland further emphasised the need to explore and understand how we define fintech and the impact it is having. “We need to understand what fintech means for the entities we regulate, how it might impact the overall safety and soundness of the financial system, and how it could alter the transmission mechanism for monetary policy.”

The pace of fintech innovation and investment has rapidly increased in recent years. PWC estimates that within the next three to five years, investments in fintech will exceed over $150bn. However, the firm also highlighted how the lines are being blurred between technology firms and traditional financial institutions in a report entitled, ‘How fintech is shaping financial services’. Accordingly to the research, 83% of the financial institutions who took part in the report believe their business are at risk of being lost to stand-alone fintech companies.

Nonetheless, there is a growing understanding that traditional financial services firms and new fintech providers can collaborate and learn from each other, rather than competing for market share.

The US Treasuries market is ripe for change but challenges persist

Trading in US Treasuries requires significant structural change – but the transition won’t be without its challenges.

The complex structure and highly regulated nature of trading in the largest and most important debt market in the world has traditionally impeded its evolution, but for the first time in a number of years, adoption of new trading technology likely to deliver real benefits for end-users is on the horizon.

The US Treasuries market has always lagged behind other markets such as equities and FX when it comes to electronic trading, however the emergence of a handful of innovative trading platforms represents a turning point for the industry.

This need for innovation has been driven by the significant liquidity challenges participants in the USD 13.4tn market have faced in recent years. As non-bank liquidity providers have emerged as major players and counterparties have become more diverse across the board, the bifurcation of trading between the dealer-to-dealer and dealer-to-client markets enforced by the current market structure has become unfit for purpose, stifling liquidity and growth.

In response to this challenge, a cluster of start-up US Treasuries trading venues such as LiquidityEdge have sought to deliver a choice of trading models that lower the barriers to entry and enable all types of institutions to participate in the market in a manner that suits their individual trading strategy.

However challenges persist, particularly in the clearing arena. In today’s market, FICC acts as a central counterparty for its membership. However, non-bank firms often don’t qualify for membership and if they do, find FICC membership costs prohibitive, opting instead for bilateral settlement outside the CCP model.

FICC volumes have decreased as non-bank firms have become more active in the market, and so the market has become vulnerable to the risks associated with trading outside of a centrally cleared environment.

While vendors deliver innovative technology solutions to the US Treasuries market’s various challenges, the relevant authorities must also play their part in addressing structural and regulatory issues such as these. Only this combined force can drive the changes required to fix one of the world’s largest and most important financial markets.

Global FX market remains buoyant

The publication of the Bank for International Settlements’ (BIS) Triennial FX Survey results revealed some fascinating findings.

As always, it continues to be the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria, and is keenly anticipated by the FX market.

So what did the report tell us?

The headline figure was that, as widely expected, average trading volumes fell slightly to USD5.1 trillion per day, down from USD5.3 trillion in 2013.

But this doesn’t tell the full story; the report found that the appreciation of the US dollar between 2013 and 2016 reduced the US dollar value of turnover in currencies other than the US dollar. This means that, when valued at constant exchange rates, turnover increased by about 4% between April 2016 and April 2013.

This a reality check for everyone with skin in the game. It tells us that the market has been reasonably resilient in the face of many challenges; the SNB revaluation, issues around conduct and low interest rates in major economies to name a few.

While spot transactions fell from USD2 trillion to USD1.7 trillion per day, the decline may have been driven by two main factors. Firstly, the unwillingness of major financial institutions to commit to risk taking activity, and a drop in market volatility. This means the alternative investment community and speculative traders, who are quite active in the spot market, are doing fewer transactions.

The geographical breakdown of trading is also interesting. When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes, followed by New York. While London has continued to retain its crown three years on, activity has fallen by 5%, and New York’s share remains flat.

But Asia gained significant ground; Singapore (7.9%), Hong Kong SAR (6.7%) and Japan (6.1%) all increased their market share. The region continues to develop its currency markets and cross border trading continues to increase; it is a positive growth story for the FX market.

In terms of currencies, USD and EUR continue to remain unchallenged as the most actively traded, but the renminbi gained strong ground by moving into 8th place on the list. Emerging market currencies performed well overall, accounting for more than a fifth of trading.

Lastly, the banks have shored up their positions in the industry, in spite of the regulatory and conduct challenges the sector has faced.

Their position as the main FX trading posts was being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s FX survey.

But trading has increased amongst the interdealer community, accounting for 42% of turnover in April 2016, compared with 39% in April 2013. Banks that are not reporting dealers accounted for a further 22% of turnover, while institutional investors were the third largest group of counterparties at 16%.

So overall, the global foreign exchange market continues to remain buoyant. It remains the largest and most liquid market in the world and a critical component of the global financial system.

As confidence in FX is restored through the global code of conduct and other initiatives, we will see a more liquid and stable marketplace emerge.

All FX Eyes on BIS Triennial Survey

The whole FX industry is watching for the Bank for International Settlements’ Triennial FX Survey results, due this afternoon at 2pm GMT.

Why does it matter? Chiefly because it is the single most comprehensive, trusted and aggregated account of what has been going on in currency trading across venues, jurisdictions and a whole range of macro and micro criteria.

It’s a reality check for everyone with skin in the game. It tells us what currencies are trading the most, where and by what means.

It also gives us a sneak peek at the real market share of the FX market transacted on the electronic platforms and through voice trading.

When BIS last reported in 2013, London was the main FX trading centre by a comfortable margin, with more than 40% of all traded volumes.

USD and EUR remained unchallenged as the most traded currencies, but the renminbi gained strong ground by moving into 9th place on the list. It will inevitably be higher on this occasion.

Since then, the market has experienced the SNB revaluation, issues around conduct and interest rate divergence among the major central banks.

Some established currency trading venues also lost market share and were hampered by reduced trading volumes. This points to a number of themes. Firstly, internalisation of trades at banks; secondly, a drop in overall volatility and trading opportunities; and third, greater competition from upstart trading venues, who grabbed a piece of the FX pie.

The position of the banks as the main FX trading posts is also being challenged by a resurgent non-bank FX trading community, exemplified by the entry of XTX Markets in the top ten of Euromoney’s survey.

This continues the trend evident in past Triennial Surveys. The counterparty segment that contributed the most to growth in global FX turnover between 2010 and 2013 included smaller banks that do not act as dealers, institutional investors, hedge funds and proprietary trading firms as well as official sector financial institutions, among others.

In the 2010 survey, this segment surpassed other reporting dealers (i.e. banks trading in the interdealer market) as the main counterparty category in the Triennial Survey for the first time.

What this shows is that the funds and HFTs are established as major players and are cleaning up their act to become genuine makers and takers in the market. This is an inevitable evolution and blurring of the buy and sell side.

This afternoon we expect the BIS to report relatively flat volumes, if not a dip on 2013. The gallery of top traded currencies will remain broadly the same but the devil will, however, be in the detail and the percentage movements showing direction.

There is will be many things to look out for. Which currencies were the most traded? Will London retain its FX crown? Which instruments were the most popular?

All will be revealed in the next few hours. The industry awaits…

R3 patent application unveils its vision for future of blockchain technology

R3 executives speak publically for the first time about Project Concord and their vision for the future of blockchain technology.

Distributed ledger and blockchain technology represents a once-in-a-generation opportunity to transform the economics of data management across the financial industry.

However, R3 believes the blockchain and distributed ledger platforms that led to this breakthrough moment were never designed to solve the problems of financial institutions and do not meet all their needs. These include tight linkage to the legal domain, an obligation to prevent client data being shared inappropriately and interoperability with existing financial infrastructure.

As reported in the Wall Street Journal, the R3 blockchain consortium filed a patent for its Corda shared ledger platform.

Corda is the outcome of the analysis R3 undertook on how to achieve as many of the benefits of distributed ledger and blockchain technology as possible but in a way that is sympathetic to, and addresses, the needs of regulated financial institutions.

The platform enables firms to record and process financial agreements using smart contracts, as explained in depth in R3 CTO Richard Gendal Brown’s latest whitepaper.

Corda is part of Project Concord, R3’s overall vision and roadmap for transforming financial services infrastructure. Concord will address challenges such as governance, internal record keeping and regulatory reporting across the financial services marketplace.

With a number of successful prototypes having already been completed on the Corda platform and an alpha launch of Concord scheduled for 2017, the next year looks set to be a turning point in the history of financial technology.

Big data overdrive hurting bank profits

With more and more data available, making sense of vast amounts of content efficiently can boost profits by at least five percent a year.

Sell-side banks operating in the FICC markets are producing more and more data, and it is widely acknowledged that there is tremendous minefield of value often hidden within this data that can be of great use to an institution’s trading, regulatory, audit and compliance functions.

But for many institutions, aggregating and gauging this data to make sense of key trends accurately remains a significant challenge. So far, it is proving to be timely, costly and hurting banks’ profits.

The 2016 global study released by Qlik and Wall Street Journal (WSJ) surveying financial service companies about the usage of data and analytics revealed 57% found data information too complex to process, analyse and disseminate in a timely fashion. Yet nearly 80% of respondents believed that leveraging insights from data could boost revenues by at least five per cent annually.

As Duncan Ash, a Senior Director of Global Financial Services at Qlik, says: “Analytics is still the most prevalent in head-office functions, and the people in the field that need it the most are getting it the least.” He added that “firms struggle with the volume and complexity of data, and with the basics of communications and data management.”

This potential rewards on offer has led to a rise of specialist technology vendors that scrutinise and standardise data and do the hard work for their clients. One such as example is Mosaic’s MSX platform, which aggregates multiple sources of transaction data into a singular resource. This enables banks to meet regulatory requirements by building a more comprehensive view of client’s trading activity while creating better audit trails for regulators.

Steven Hatzakis, a financial services industry consultant and a registered Commodity Trading Advisor, said in a column on Finance Magnates that as analytic tools have evolved, so have visual dashboards. “These include not just numbers but adding colors or other variables that indicate changes as reporting and related gauges become dynamic. This is a common trait seen within trading platforms in capital markets and it is used in order to make it easier for technical data to be comprehended quickly.”

As Diane Castelino of Mosaic Smart Data says, “The next and most advanced stage is breaking into the field of predictive analytics and machine learning, where the ability to predict future client trading behaviour based on historical patterns sets institutions streets ahead of their peers.

“In what has become a challenging trading environment for all, the real winners in the race to harness and utilise big data will be those institutions that partner with the technology specialists that deliver expertise and innovation on a cost effective, modular basis and educate staff to use the technology effectively.

Diane’s whitepaper on big data and going beyond the hype can be read here.

Business as usual for London’s FX industry post-Brexit

No signs of exodus to other financial centres as FX recruitment holds firm.

Following the UK’s vote to leave the EU, European financial centres such as Paris and Frankfurt prepared to roll out the red carpet for London’s financial institutions. But this may be more difficult than initially anticipated.

Red tape regulations, heavier personal tax regimes, governmental issues and different social norms means there is little appetite for London’s foreign exchange (FX) trading institutions to move jobs to Europe en mass, according to recruiters keeping close tabs on London’s financial district.

Despite the Brexit vote, and repeated reports about banks accelerating plans to move jobs from the UK, European cities are struggling to match the pull factors that London offers.

London has long been at the heart of the international currency markets, accounting for more than 40% of FX turnover, according to the Bank for International Settlements. With its advanced infrastructure, access to human capital, a strong legal and regulatory system and a time zone that allows London-based traders to service customers all over the world, it has not only maintained its dominance but also attracted a host of emerging fintech companies to form one of the largest technology and innovation hubs in the world – further strengthening the City’s dominance.

All of this means the number of suitable alternatives to London is limited.

In an article for Euromoney, Andrew Kitchen, internal audit manager at recruitment consultancy Morgan McKinley, says there has been no increase in the number of people from the leading banks looking to leave the UK since the EU referendum vote.

This may be because transferring large numbers of FX staff to France in particular will not be a straightforward process, adds Raoul Ruparel, co-director of Open Europe. “Culturally and socially, France has taken a different approach to the UK in relation to this type of business in recent years,” he says. “It remains to be seen whether they have the appetite to offer tax or regulatory incentives.”

French employment and personal tax regimes are also likely to be a factor that counts against Paris, according to James Coiley, a partner at law firm Ashurst. “Making overtures to FX banks and traders to relocate to Paris may not play well with supporters of the socialist French government.”

However, the uncertainty seems to have stopped some banks from transferring jobs from mainland Europe to London, according to Kitchen. “What we are seeing is that several candidates based in Europe who had hitherto been looking to relocate to London are now staying put. This is in part due to the level of uncertainty around future Brexit implications, but also the current weak value of the pound,” he warns.

So while the outlook for 2017 remains unclear, London’s FX industry continues to remain resilient in the face of uncertainty and there has yet to be any knee-jerk reactions that disrupt the status quo on either side. Although it is still early days, what is clear is that fears over London losing its FX crown remain largely unfounded for now.

The City now looks to politicians with bated breath.

Spotlight turns to clearing houses on stress tests

A report from the Bank for International Settlement (BIS) and International Organisation of Securities Commissions (IOSCO) concluded that some Central Counterparties (CCPs) have not adequately addressed their potential risk exposures and did not include enough “liquidity-specific exposures” in their stress testing framework.

Following the 2008 financial crisis, many clearing houses provided a critical role in providing market stability and matching counterparty trades at a time of unprecedented market uncertainty. Given the increased role in the derivatives markets, as mandated by the G20, the spotlight has fallen on clearing houses once again, as the industry assesses whether these institutions have sufficient resources to operate in the event of sudden market shocks.

With a growing volume of OTC derivatives trading now handled by regulated electronic venues and settled via CCPs – in line with regulatory initiatives to create greater transparency and oversight – some industry participants have become concerned that clearing houses could become a source of weakness during times of market stress.

The report is likely to renew the debate over the mandated use of clearing houses for a growing portfolio of derivatives instruments and whether these utility providers are becoming huge warehouses of concentrated market risk. Some are already drawing parallels with the infamous ‘too big to fail’ analogy that characterised the plight of some banks during the financial crisis eight years ago.

There are a many ways clearing houses could get into trouble; investment losses, liquidity shortfalls, member defaults or settlement bank failures all pose possible issues – but the industry is already recognising the value of proper contingency planning. For example, LCH.Clearnet recently addressed a number of pitfalls in a recent white paper, entitled ‘‘CCP Risk Management Recovery & Resolution’.

Moreover, a number of initiatives have already been proposed by IOSCO to dilute the potential market impact in the event of a clearing house failing to deliver its funding obligations. These include providing CCPs with the tools to allocate any uncovered losses and liquidity shortfalls to third parties, and the ability for firms to replenish funds quickly following a ’stress event’.

However, with a deadline of the 31 December 2016 set by the BIS Committee on Payments and Market Infrastructures (CPMI) for clearing houses to demonstrate improvement, the market will certainly be watching the results with bated breath.

Voice brokerage is entering a digital age

In a guest post for Fintech Focus, Daniel Marcus, Global Head of Strategy and Business Development at Tradition, highlights why naysayers predicting the decline of voice trading are failing to see the crucial role it plays in the new digital age of hybrid trading.

The argument that voice brokering has diminished and that the choice between voice trading and electronic trading is binary, and one must compete with the other in the modern trading ecosystem, is inaccurate. Whilst it is true that liquidity available on electronic trading platforms has continued to rise significantly over the past few years, the continued claim that voice brokerage is dying as a result is exaggerated.

If we consider the OTC derivatives market as an example, transactions are generally designed to hedge exposure and are therefore risk reducing. Accordingly, they often involve high-value (therefore notional amounts that are on average significantly larger than those traded on electronic venues) multi-leg transactions with varying degrees of liquidity and participation which require specific tailoring to meet the needs of individual participants. Using a purely electronic market to facilitate such trades would be challenging and potentially significantly increase the market impact for participants.

Tradition believes that in relevant non-commoditised OTC markets the choice is not a simple case of using one or the other, but rather, a hybrid model that combines voice and electronic liquidity/trading. This allows participants to benefit from the best of both worlds – taking the transparency, high quality market data and efficiency of electronic platforms and combining it with the customisability of voice arrangement through interaction with screen-based liquidity. By way of example the success of our OTC derivatives platform, Trad-X, and similar competitive platforms, particularly in the US, is testament to the fact that this model not only works, but also demonstrates, through their performance in terms of market share, the growing demand for flexible execution methods amongst market participants.

Another major advantage of hybrid markets is that the electronification of orders creates an audit trail. This allows for the capture of order and trade data that can then be utilised to address market issues. Take the example of the swap rate benchmark. This was previously based on indicative pricing, and was deemed vulnerable to manipulation. However, ICE Benchmark Administration now calculates the swap rate using irrefutable reference data based on actual firm bids/ offers and trades- something which was previously unheard of.

The fact is, voice broking and electronic trading complement each other well and necessarily so. There is no doubt that in non-commoditised OTC market products execution ecosystem, the fact that both have for the last few years, currently and will continue to exist symbiotically in most areas (Rates, Credit and FX Derivatives being prime examples) is the reason these markets have been able to function so well during the on-going development of global regulatory reform. Despite the potential negative implications on liquidity driven by huge change in market structure, brokers, in combination with our highly efficient and effective hybrid marketplaces have ensured liquidity continues to be of the highest quality available to our market participants.

It’s about time the industry as a whole realised the benefits of this perfect combination.

Blockchain technology receives vote of confidence from the World Economic Forum

A report from the World Economic Forum (WEF) highlights the central place distributed ledger technology such as blockchain will occupy in the future of the financial services industry.

The report focused on the impact of implementing blockchain technology across nine sectors: trade finance, automated compliance, global payments and asset rehypothecation, proxy voting, equity-post trade, syndicated loans, property casualty claims processing and contingency convertible bonds.

The aim of the report is to complement existing distributed ledger technology research and provide a clear view on how financial services functions can interpret and integrate the new technology.

Amongst the experts, who contributed to the report are Todd McDonald and Jo Lang of R3, and David Puth and Tom Zschach of currency settlement system CLS.

Recently, R3, a leading consortium with over 55 of the world’s largest financial institutions, successfully completed two prototypes that demonstrate how distributed ledger technology can address the key challenges of trade finance. It found that distributed and shared ledger technology as a digital alternative for trade financing is significantly faster, more reliable and cost-effective.

Key findings of the report include:

  • DLT has great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes
  • Applications of DLT will differ by use case, each leveraging the technology in different ways for a diverse range of benefits
  • The most impactful DLT applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation
  • DLT is not a panacea; instead it should be viewed as one of many technologies that will form the foundation of next- generation financial services infrastructure
  • Digital Identity is a critical enabler to broaden applications to new verticals; Digital Fiat (legal tender), along with other emerging capabilities, has the ability to amplify benefits
  • New financial services infrastructure built on DLT will redraw processes and call into question orthodoxies that are foundational to today’s business models.

The report stressed that blockchain technology has the potential to significantly improve the financial services ecosystem, with 80 percent of banks currently in the process of working on blockchain projects in collaboration with incumbents and regulators.

How much is too much for market data?

The cost of market data and a lack of transparency around fees has become a topic of growing concern.

The FCA-hosted ‘MiFID Implementation Roundtable for trade associations’ event highlighted these concerns, as a number of trading associations called for the European Commission to review rules on market data pricing for trading venues under MiFID II.

According to The Trade, The Association for Financial Markets in Europe (AFME), the Futures Industry Association (FIA), and FIX were among the trade bodies that attended the event.

Fund managers have long criticized the high costs of market data for European exchanges when compared to the US and routinely challenged the current rules under MiFID which allows market data providers to “include a reasonable margin”. Critics point to a lack of clarity over what may or may not be deemed ‘reasonable’.

A report by the Tabb Fourm show that trading volumes, market-making profits, equity brokerage revenues and institutional trading commissions have all declined, but exchange data, access, and technology revenues are up 62%.

The minutes from the meeting also showed that “questions were asked what reasonable and excessive margin looks like if trading venues are not obligated to disclose costs of producing market data”, according to Trader Magazine.

There had been hopes that the European Securities and Markets Authority (ESMA) would cap market data fees or require more cost transparency in MiFID II. However, authorities decided not to require publication of data costs because members states were concerned the “information was commercially sensitive and not a public matter.”

Preview to the BIS Triennial FX Survey 2016

With the Bank of International Settlements due to release its 2016 Triennial Survey results next month, many market participants are reflecting on how the foreign exchange market (FX) has evolved over the past three years and considering how it has impacted volumes.

A number of high profile black swan events have rocked currency markets of late – injecting significant spikes in volatility and overall market turbulence. The shock decision by the Swiss National Bank to remove the cap on the Swiss Franc in January 2015 was a case in point. The event saw trading activity jump, whilst the recent UK referendum result caused Sterling to plummet to a 31-year low. However, there have also been several phases of low volatility, which has had a significant impact on volumes, as had increasing capital and regulatory pressures on banks.

The unprecedented rise of the Chinese renminbi has also been a significant trend, breaking into the top five most-used payment currencies according to SWIFT last year. The renminbi has also been designated as one of the IMF’s reserve currencies and  is expected to be added to the Special Drawing Rights basket in October 2016 – marking  an important milestone in the currency’s internationalisation.

The market landscape has continued to shift with several new players emerging in the traditionally bank-dominated FX market. The 2016 Euromoney FX survey highlighted the surprisingly rapid growth of non-bank liquidity provision, with new firms such as XTX Markets acquiring a significant portion of market share for the first time.


Japan’s Daiwa Securities Group joins CLS

Daiwa joins 65 other financial institutions in becoming a direct participant in CLS’s settlement and risk mitigation system.

The Japanese financial institution is one of the largest securities companies in Japan and has a significant global presence. It joins 65 other financial institutions in becoming a direct participant in CLS’s settlement and risk mitigation system – which settles approximately USD5 trillion a day on behalf of its clients.

The Japanese currency market is the largest international hub for currency trading in Asia. Recent data from the Tokyo FX Market Committee’s semi-annual FX turnover survey found that a daily average of USD407 billion was traded in April 2016 – an increase of 5% from October 2015.

Furthermore, one of the effects of Abenomics – a collection of policies designed to reinvigorate the Japanese economy – has been greater international diversification of Japan’s financial assets. As cross-border currency trade increases, the emphasis on reducing counterparty risk is becoming even more crucial.

As a CLS settlement member, Daiwa Securities Group and its clients across the globe will benefit from significant liquidity, operational and IT efficiencies to support their currency trading operations.

R3 welcomes Thomson Reuters to distributed ledger consortium

Thomson Reuters has joined financial innovation firm R3 to design and apply distributed and shared ledger-inspired technologies.

As the first market data provider to join the consortium, Thomson Reuters will contribute insights from its work with customers to drive product innovation and transformation in the financial sector using distributed ledger technologies. The firm joins the global network of R3 partners united in its lab environment, the R3 Lab and Research Centre, which has quickly become a key centre for research and testing.

The R3 team of financial industry veterans, technologists and blockchain and cryptocurrency experts are already working with consortium members on research, experimentation, design and engineering to help advance this technology to meet banking requirements for identity, privacy, security, scalability, interoperability and integration with legacy systems.

R3 recently unveiled Corda™, its shared ledger platform specifically designed to record, manage and synchronise financial agreements between regulated financial institutions. It is heavily inspired by and captures the benefits of blockchain systems, without the design choices that make blockchains inappropriate for many banking scenarios.

Financial lobby group release blueprint For UK post Brexit

TheCityUK’s report sets out its vision for the UK’s financial and professional services industry following the Brexit vote.

The outcome of the Brexit vote left the UK’s financial and professional services sectors evaluating their future relationship with the European Union (EU) and how these crucial industries could navigate any short-term uncertainty to continue their historic and longstanding relationships with key trading partners.

Unsurprisingly, the importance of maintaining access to the European single market through passporting mechanisms topped the list as a key requirement. But it also stressed the need to be aware of, and explore, opportunities beyond Europe, with Chinese and Indian markets representing strong growth opportunities.

London is already well placed to cement trading relationships with developing economies around the world. The UK remains the global leader in fixed income, currencies and commodities (FICC) and demonstrated its position of strength in the global foreign exchange market by executing around $2.15 trillion in the six month to April. Moreover, it remains the second largest centre for debt financing globally after the US and recently surpassed Singapore to become the second largest offshore RMB clearing centre.

Overall, the report identifies five broad goals for London to work towards:

1. Connect globally by maintaining an effective UK-EU relationship and sustain market access, while also strengthening ties with developed economies and emerging markets (China and Indian).

2. Drive national growth by building on its strong national footprint and create more connected regional centres with specialist skills and expertise in areas such as emerging technology, middle and back-office.

3. Expand its services and retain its position as the global leader in areas such as capital markets, legal services and infrastructure financing.

4. Innovate, disrupt and scale: continue to harness the momentum gained in London’s burgeoning FinTech sector to see the UK become a centre of excellence and a natural home for the next generation of financial and professional services.

5. Build skills and attract talent through developing local talent, whilst retaining access to a diverse and global workforce with next-generation skills.

The full  CityUK report can be viewed here.


Cost of trading the biggest factor for buy-side when selecting an FX broker

Over 50% of US and a third of EU respondents identified the cost of trading as the most important factor.

The cost of trading topped the list of priorities for the buy-side when selecting a currency broker. In a poll of over 100 buy-side FX market participants, over 50% of the US and a third of EU respondents identified the cost of trading as the critical factor when selecting a broker.

However, there were differing views on the importance of research from brokers; a quarter of European market participants identified quality of research as the second most important factor. In contrast, only 2% of the US respondents agreed, rendering quality of research the least popular choice amongst US traders.

Looking forward, both EU and US traders stressed the implementation of new regulatory guidelines as their greatest priority for the next 12 months. 60% of market participants in Europe highlighted this as their biggest concern, with implementation of guidelines relating to conduct, behaviour and research for new market opportunities considered crucial.

For US buy-side participants, reporting and transparency, closely followed by regulation and risk analysis, were the primary challenges.

The full results of the TradeTech survey can be accessed here.

Executable orders taking priority over last look in FX, says BoE

Market participants may finally be changing their attitudes towards the controversial practice of last look.

The Fair and Effective Markets Review (FEMR) was published approximately 12 months ago to conduct a comprehensive and forward-looking assessment of the way the wholesale Fixed Income, Currency and Commodities (FICC) markets operate and help to restore trust in those markets. The report included guidance on market practices where there could be scope for misconduct, such as last look.

According to Bloomberg News, which reported on the findings, last look gives a market maker time to back out of a trade. That means a bank or proprietary trading firm could unfairly learn a counterparty’s intentions without having to complete the trade.

One year on, the Bank of England reports that some currency trading platforms have changed their matching rules to prioritise executable orders over last look liquidity.

While this development will undoubtedly be welcomed by market participants, trading platforms such as ParFX banned last look long before the FEMR’s recommendations was published.

According to Dan Marcus, chief executive officer, last look may not be appropriate in a market of natural interest and price discovery. “While last look isn’t bad per se, it is contrary to the principle of stable and firm pricing, and potentially leaves the door open for disruptive trading practices, such as the creation of a liquidity mirage or an unclear picture of market depth, to occur,” he says

However, the platform does not believe banning last look is the way forward. “Flexibility in execution is key in differing market conditions with different participants and last look still has a role to play in today’s currency markets, albeit increasingly limited. Ultimately, the market will evolve and decide what practices to carry forward – subject to any regulatory requirements – over the next decade and what to discard,” he adds.

The FEMR Implementation Report is available on the Bank of England’s website and can be read here.


Oliver Wyman and JP Morgan urge asset managers to engage with blockchain

Asset management is just one of the many areas of financial services investigating how blockchain can be used to streamline operations and reduce costs.

It’s clear from the report from consultancy firm Oliver Wyman and American investment bank JP Morgan that there are significant benefits on offer if the asset management community adopted blockchain technology.

More robust and consistent data sharing, seamless transfer of assets and settlement flexibility are just a few of the possible advantages that blockchain could bring to the asset management industry, allowing them to offer improved product solutions and data management.

However, the technology is still very much in its infancy so it may be some time before these benefits are truly realised. The report suggests that elements of blockchain are likely to be applied within four waves, with 2030 suggested as the year when the full benefits will ultimately be realised.

The report also suggests that asset managers must move away from their traditionally passive approach to new technology and actively engage with blockchain if they are to reap these benefits in a timely manner, recommending research and collaboration with regulators and developers take place at an early stage.

The full Oliver Wyman and JP Morgan report can be found here.

Loonie increases share of international payments as renminbi slips

The Chinese renminbi dropped to sixth in the international payment ranking in June, according to SWIFT’s RMB Tracker.

The renminbi was overtaken by the Canadian dollar (CAD), commonly referred to as the ‘loonie’, which accounted for 1.96% of international payments to enter the top five most traded currencies. The RMB was marginally behind with a 1.72% share of international payments.

Despite this small hiccup, RMB internationalization remains on track. Over the past three years it has overtaken six currencies – including HKD, CHF and AUD – to increase its share of international payments exponentially.

SWIFT’s RMB Tracker also found that more than 1,200 banks used RMB for payments with China and Hong Kong in June 2016 – up by a fifth in just 12 months. Asia Pacific leads the way with 43% adoption, followed by the Americas at 42% adoption rate. Europe falls behind at 37% and the Middle East and Africa is at 34%.

There was also good news for the United Kingdom, which regained its status as the number one clearing centre after Hong Kong by processing a quarter of all RMB payments (excluding China and Hong Kong).

Overall, SWIFT remains optimistic about the RMB’s journey towards a more international currency. Alain Raes, Chief Executive, APAC & EMEA at SWIFT, explains that the journey towards full internationalisation is a long one, but “the creation of new offshore centres around the world combined with the progress of China’s new Cross Border inter-Bank Payments System (CIPS) will help move the RMB along its path towards internationalisation.”

For more insight and to download SWIFT’s latest RMB Tracker, please click here.

CLS’s aggregated FX trade data now available

CLS announced it has begun making its FX trade and volume data available via Quandl, an economic and financial data platform.

Subscribers to Quandl will now have access to CLS’s data, which will be delivered on an hourly, daily or monthly basis and aggregated by trade instrument (spot, swap and outright forward) and currency pair.

The currency settlement system, which settles 18 of the world’s most actively-traded currencies, receives an average submission of almost USD 5 trillion every day from banks, asset managers, corporations and hedge funds.

According to David Puth, CEO of CLS, this is the first time CLS has made this level of aggregate data readily available to the market. “It is a key source of trade information that will allow a broad range of users to get a clear picture of FX market activity across major currency pairs and products,” he says.

This view was backed up by Quandl’s co-founder and chief data officer Abraham Thomas, who spoke to trade publication Inside Market Data: “CLS had been aware for some time that it was sitting on a valuable data asset, but didn’t have the distribution infrastructure… or background in monetizing data. They reached out to us a few months ago when they became aware of our data marketplace… especially because our audience includes a bunch of hedge funds and asset managers.”

CLS has historically made aggregated and anonymized data available to the market, but the data made available through Quandl is available in a format more conducive to analysis and with greater frequency.

Customers interested in the data is expected to include large financial institutions, small financial services companies, software companies, academic institutions and research organizations.

Read the news story here.

R3 blockchain consortium leaders rise up technology rankings

Two top R3 executives featured on industry rankings in technology this week.

David Rutter, CEO of R3, and Richard Gendal Brown, CTO, appeared on the Institutional Investor Tech 50 and the Financial News Fintech 40 respectively.

David ranked at number 18 on this year’s Institutional Investor Tech 50 list, recognising the financial market acumen and technological sagacity that led him to launch R3 in 2014. The consortium now boasts over 55 institutions working with R3 to develop applications for distributed ledger technology in the financial services market which could change financial services as profoundly as the Internet changed media and entertainment.

Richard was named one the most influential people in the European financial technology sector for his work with R3, which includes overseeing the team of developers responsible for Corda, R3’s distributed ledger platform for financial services.

R3 Investigates Smart Contract Templates For Blockchain Inspired Platforms

R3 is spearheading efforts to understand and address the challenges of developing master templates for smart contracts, the self-executing contractual agreements used to trade, record and manage assets on distributed and shared ledger platforms. The firm is also exploring how these features could be implemented within existing legal and regulatory frameworks.

Following the R3 Smart Contract Templates Summit in London and New York in late June, R3 has agreed to collaborate with a diverse working group of its consortium members, standards bodies, law firms, academic institutions, exchanges and market infrastructure providers, including Barclays, the International Swaps and Derivatives Association (ISDA), Norton Rose Fulbright and University College London (UCL). The group will begin exploring the development of repositories of smart contract templates for banks to download and use on blockchain-inspired platforms, such as R3’s Corda.

At the summit the group discussed potential roadmaps for development, with a short-term focus on understanding the challenges of connecting existing real-world legal contracts for products such as interest rate swaps, to smart contracts – enabling the simplification of legal documentation and mutualisation of costs for banks.

The R3 Smart Contract Templates Summit’s presentation is now publicly available here:

Currently each bank stores its own instance of contracts, which can introduce inconsistencies and reconciliation challenges. Smart contracts operating on distributed and shared ledgers enable each of the parties to see the same agreed set of legal documents.

The group’s longer term goals include working with the legal community and academics to investigate how to take smart contracts to a point where they can be admissible in court and used for entry into dispute resolution. An update will be given at the second R3 Smart Contract Templates Summit later this year.

Pragma launches TradeBase to enhance order routing transparency

Multi-asset algorithmic trading provider, Pragma Securities, has launched TradeBase, a relational database that provides clients real-time access to their parent and child FIX order messages for greater transparency to facilitate client risk management, compliance, and monitoring of their algorithmic orders.

TradeBase is populated in real-time, and enables Pragma360 clients to feed their trading, risk management and compliance systems child order level trade data in a manner usually available only to firms who build their own algorithmic trading platform. The database provides a granular level of data including entries of all new child orders, amendments and cancellations, as well as child order fills.

David Mechner, CEO of Pragma Securities, summarises the need for technology providers to deliver clients with tools designed to increase trading transparency throughout the trading lifecycle. “Transparency is at the heart of our value proposition, and TradeBase is the next step in delivering on that value. It provides our clients convenient, real-time access to their trading data so they can incorporate it into their own processes and tools with minimal friction, and can conveniently track their order in detail from their OMS to the street.”

The launch of TradeBase follows the publication of a recent white paper by Pragma Securities exploring a buy-side blind spot in best execution due diligence. The paper, published in Tabb Forum analyses the order routing practices of high-touch trading desks and calls for brokers to demonstrate greater levels of transparency to clients.