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.

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.

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.

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.

 

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.

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.

 

 

 

 

R3 Develop Solution To Prevent Blockchain Front Running

According to R3, the blockchain model as it stands will not be suitable for financial services, as it would allow everyone to see exactly what was being traded, when it was being traded and who by – potentially allowing competitors the opportunity to front-run each other.

CEO, David Rutter and Managing Director, Charley Cooper, explain how R3 is trying to strike the balance between the original purpose of the blockchain – to have a public record of transactions that must be verified by the majority of involved parties – and maintaining an appropriate level of transparency and anonymity as required by banks, financial institutions and regulatory authorities.

To read the full article in Fortune, please click here.

A Buy-Side Blind Spot Is Vanishing: High-Touch Desks See Best-Ex Scrutiny

The buy side is closing a major gap in its best-execution due diligence: The order routing practices of high-touch trading desks are falling under intense scrutiny previously reserved for self-directed trading tools. This increased attention presents a major challenge for brokers that use a variety of low-cost algorithms from multiple providers, since they have limited knowledge of how those algorithms route orders, let alone control over their behaviour

David Mechner, CEO of Pragma Securities, a multi-asset algorithmic trading provider, analyses growing demand among buy-side institutions for greater transparency around order routing practices and best execution.

Read the article

Will a Brexit damage the City?

With less than two weeks to go, the debate on whether the UK should remain or leave the European Union is heating up.

Back in April, Chatsworth’s research team polled over 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Two-thirds (65%) of respondents believed a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believed a Brexit would have a positive impact.

Now with the Financial Times Brexit poll tracker indicating a slim lead for the leave camp, it’s hard to tell which way the referendum will go. However, a growing number of bankers are warning of the possible damage a Brexit could cause to the City of London and the financial services sector. According to an article published on the Financial Times website, the City employs 2.2 million people across the UK. If the UK were to leave the EU, then it would no longer be possible for non-EU firms to headquarter European operations in London and continue to trade across the union without barriers. A Leave vote would likely see offices opened in Paris or Frankfurt whilst non-EU firm UK offices would be downsized, potentially putting jobs at risk.

Fintech Innovation In The Capital

A Q&A with Matthew Hodgson, CEO of Mosaic Smart Data

Why is FinTech innovation in London gaining traction compared to other areas of the world?

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.

 Which areas of financial services have been most impacted by FinTech development? 

Within the fintech sector, the field of data analytics has quickly become the new opportunity in financial markets. The ability for financial institutions to move beyond the realm of ‘big data’ by applying real-time analytics on multiple sources of electronic trade data is already providing the most technologically astute banks, hedge funds and asset managers with significant competitive advantage.

However it is the ability to harness predictive analytics that remains at the cutting edge. Much of this capability already exists and is being used to considerable effect, especially by technology giants such as Google and Facebook.

The technology will allow financial institutions such as banks to gain deeper insight into client trading behaviour, ensure higher levels of client retention and shape product and services offering to maximise future revenue opportunities. Gartner, a Harvard research institute has predicted that by 2017, firms with predictive analytics in place will be 20% more profitable than those without.

For some traditional companies is it purely a case of ‘adoption’ rather than ‘disruption’ behind rise of the fintech sector?

The financial technology market has exploded in recent years. Innovation is driving major improvements in the level of service experienced by the end user, however when it comes to financial services, businesses are naturally more wary of the type of ’disruptive’ technology that has transformed other areas of our day-to-day lives such as calling a cab or booking holiday accommodation – after all, we can always call another cab if our Uber doesn’t turn up, but if a billion dollar payment doesn’t reach its intended recipient we have a much more complicated issue on our hands.

The institutional financial services space is much more about collaboration between fintech firms and established players – it is this combined firepower that delivers truly sustainable technological innovation.

Should investment banks or lenders move to disrupt their own business model to avoid losing market share?

Many traditional service providers such as global investment banks are coming to the realization that they need to partner with emerging innovators. 

As such, finance and technology has become synonymous, and data analytics, in particular, is moving to the forefront of efforts to provide new solutions to on-going market challenges.

However, for large players such as global investment banks, the integration of new and specialist fintech solutions should be implemented on a modular basis to work in collaboration with existing systems. In many cases, the reality of effective integration is one of evolution, rather than revolution.

The Currency Ethicist: One Man’s Push to Fix a Tarnished Market

Last week, the Bank for International Settlements launched a code of conduct for market professionals operating in the world’s largest and most liquid financial market – foreign exchange – and in doing so, laid out its vision of how banks, asset managers, hedge funds, corporates and infrastructure providers should behave and operate when exchanging an estimated USD5.3 trillion a day.

At the heart of this initiative was David Puth, Chairman of the BIS Market Participants Group. A former JPMorgan Chase & Co. and State Street Corp. executive, David led the initiative alongside his role as chief executive officer of New York-based CLS Group, a utility that settles trillions of dollars of currency transactions a day and is considered by the U.S. Treasury to be a systemically important piece of the financial system.

He spoke to to Bloomberg about the importance of developing industry-led guidance around trading behaviour and best practice requirement, and how the code of conduct aims to provide a common set of guidelines to promote the integrity and effective functioning of the market.

Read the article, or watch the Bloomberg interview

Greenwich Associates FX Report: A bite size digest

Greenwich Associates has published an interesting report covering the changing nature of liquidity provision in the global foreign exchange (FX) market, as well as the impact of macroeconomic and regulatory factors in driving a market structure evolution.

The paper, entitled Diversifying Liquidity: Attaining Best Execution in FX Trading, highlighted the continuing growth of non-bank liquidity providers, with the largest FX dealers executing less than half of global buy-side FX volume.

However, despite the growth of competition from non-bank liquidity providers and the challenges posed by incoming regulatory requirements, interviews with over 1,600 top-tier foreign exchange users globally found that the world’s largest dealers are expected to continue to play a major role in facilitating FX trading.

The report also noted growing demand for a more granular understanding of best execution by utilising sophisticated transaction cost analysis (TCA) tools to analyse existing trading relationships and engage with new counterparties.

The rise of electronic execution and the subsequent decline of voice brokerage was also striking, with a 32% jump in buy-side trading handled by multi-dealer trading platforms and a 50% reduction in phone-traded volume since 2008. These changes contributed to an overall growth in electronic trading, which now accounts for 73% of all FX volume executed annually.

In line with the growth of electronic trading, a jump in the adoption of FX algorithmic trading amongst the hedge-fund community was particularly notable. From 2014-15, automated execution amongst this group of traders almost doubled from 33% to 61%; in contrast, the growth in adoption rates for fund managers and pension funds showed a mere 5% rise over the same period.

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Lananh Nguyen at Bloomberg covered the growing popularity of algorithmic trading amongst hedge funds here

Europe is betting big on quantum computing

A one billion euro project, announced by the European Commission aims to develop quantum technologies over the next 10 years to place Europe at the forefront of this emerging technology. Quantum computers have been hailed for their revolutionary potential in everything from space exploration to cancer treatment and financial markets.

Unlike conventional computers, quantum computers process data in parallel, mimicking, if you like, the human brain. A quantum computer can recreate the behaviour of atoms, model chemical reactions and simulate nature itself, making it capable of large-scale simultaneous computation.

Newsweek magazine spoke with Chatsworth client, Cambridge Quantum Computing (CQCL) about the European Commission’s commitment to the technology, as well the work it is doing to develop a quantum operating system called t|ket>.

Read the full article

London’s position as the world’s FX trading centre is damaged by Brexit

London’s position as the world’s main currency trading centre would be threatened by a British exit from the European Union, with Frankfurt, Paris, New York and Dublin likely to be the main beneficiaries, according to a survey of foreign exchange (FX) market professionals.

As reported in Bloomberg and Reuters, the research team at Chatsworth Communications polled 12,000 members of the ACI Financial Markets Association, the largest global trade body representing the international currency markets, for their personal views ahead of the UK Referendum vote on 23 June.

Key findings:

  • Two-thirds (65%) of respondents believe a UK vote to leave the EU would negatively affect London’s position as the world’s largest FX trading centre, while 13% believe a Brexit would have a positive impact.
  • Of those concerned about the negative impact on London, more than 70% identified Frankfurt as the trading centre most likely to benefit from a Brexit, followed by Paris (49%), New York (40%) and Dublin (28%).
  • 80% of all respondents believe the UK will vote to remain in the EU.

London’s dominance of the foreign exchange market has grown exponentially as the size of the market expanded, and is, by far, the largest and most established centre for currency trading. Nearly 41% of global trading goes through London, more than double the market share of New York, according to data from the Bank for International Settlements (BIS)*.

Currency trading increased globally to an average USD 5.3 trillion (GBP 3.8 trillion) per day in 2013. The vast majority (75%) occurred in five jurisdictions: London (41%), New York (19%), Singapore (5.7%), Japan (5.6%) and Hong Kong (4.1%).*

Detailed findings:

A UK vote to leave the EU will…

  • Positively affect London’s position as the world’s largest FX trading centre: 13%.
  • Negatively affect London’s position as the world’s largest FX trading centre: 65%.
  • Have no effect: 22%.

How do you think the UK public will vote?

  • The UK will vote to remain in the EU: 80%.
  • The UK will vote to leave the EU: 20%.

Which global trading centres do you think will benefit the most if the UK votes to leave (NOTE: answered only by respondents who believe a Brexit will have a negative impact on London)?

  • Frankfurt: 71%.
  • Paris: 49%.
  • New York: 40%.
  • Dublin: 28%.
  • Zurich: 14%.
  • Hong Kong: 8%.
  • Singapore: 7%.
  • Geneva: 7%
  • Dubai: 4%.
  • Tokyo: 4%.

How long have you worked in the FX industry?

  • Less than one year: 0%.
  • 1-2 years: 9%.
  • 3-5 years: 10%.
  • 6-10 years: 16%.
  • 11-15 years: 17%.
  • 16-20 years: 18%.
  • More than 20 years: 30%.

R3 Announces Corda™, a Blockchain-Inspired Platform for Financial Services

Chatsworth client R3 has announced that it is building a platform, Corda, for its members to test use-cases and evaluate blockchain-inspired technologies. Richard Gendal Brown, Chief Technology Officer at R3 explains more below:

“As reported in Bloomberg this morning, I’m delighted to confirm that R3 and our member banks are working on a distributed ledger platform for financial services: Corda™.

“For the last six months, my team and contributors from our membership have been building a distributed ledger platform prototype from the ground up, specifically designed to manage financial agreements between regulated financial institutions. I am massively excited by the progress our team, led by James Carlyle, our Chief Engineer, and Mike Hearn, our Lead Platform Engineer, are making and I think the time is right to share some details.”

Read Richard’s full blog post here.

Microsoft and R3 partner to accelerate adoption of blockchain-inspired technologies

Tech giant Microsoft and Chatsworth client R3 today announced a strategic partnership that will accelerate the use of blockchain-inspired distributed and shared ledger technologies among R3 member banks and global financial markets, as reported by the Wall Street Journal and Bloomberg.

These technologies enable enterprises and business network participants to complete financial transactions with greater speed, security, cost-efficiency and transparency relative to solutions currently used.

As part of the partnership, R3 will use Microsoft Azure as a preferred cloud services provider in its R3 Lab and Research Centre, where distributed and shared ledger technologies are being developed and tested and use-cases carried out based on an extremely rigorous, empirical-evidence based process.

The Lab and Research Centre has quickly become the centre of gravity for use-case testing and evaluation of blockchain-inspired technologies, bringing together banks, non-banks, both established and start-up financial technology companies, trade associations and regulators.

R3 and consortium members will have access to Microsoft’s expanding ecosystem of Blockchain-as-a-Service (BaaS) partners including Ethereum and ConsenSys, Ripple, Eris Industries, Coinprism, Factom, BitPay, Manifold Technology, AlphaPoint, IOTA, BlockApps STRATO, Tendermint LibraTax, and many others that will aid in the development, testing and deployment of distributed ledger applications in cloud, hybrid and local environments.

Settlement risks involving public blockchains – R3

Entrepreneurs, investors and enthusiasts claim that public blockchains are an acceptable settlement mechanism and layer for financial instruments. But Chatsworth client R3 argues that public blockchains by design cannot definitively guarantee settlement finality, and as a result, they are currently not a reliable option for the clearing and settling of financial instruments.

Read the full article by R3’s Tim Swanson on TabbFORUM

London FinTech comes of age

The great and good of global finance and technology descended on the City of London Business School this week for a thought leadership discussion on the growing influence of new technology on the financial ecosystem. The discussion and content was excellent.

The FT’s chief economics commentator, Martin Wolf, chairing one of the panels provides an insightful summary of proceedings in his comment piece here

Chatsworth client,  R3 took a lead role in the panel debate, with observations on blockchain and its likely application to finance. The R3 team is leading the field in developing blockchain technology with its consortium of over 40 banks took a lead role in the panel debate.

We have worked in this field for over a decade, through the advent of electronic broking systems on traders’ desktops, evolving into more automation through API-based trading, first in equity markets and then into other asset classes such as FX.

This is now entering a whole new game, where incumbent systems and institutions are being challenged, and as a result need to adjust their models, technology and value proposition accordingly.

Our instinct is that the technology is the delivery mechanism but not the answer in itself.

Established systems, venues and institutions have the legal frameworks, proven capabilities, customer usage/coverage and liquidity in place – this is where their real value lies.

New technology is more likely to complement and integrate rather than entirely reorder the plumbing of global financial markets from top to bottom. That is why the meeting of the minds have to take place between financial markets practitioners and technologists.

Finance is a market of natural interest which rewards innovation  – it  will naturally size up and absorb the best emergent tech.

R3 trials blockchain fixed income trading with 40 banks

Chatsworth client R3 CEV has successfully trialed five distinct blockchain technologies in parallel in the first test of its kind, as reported this morning by Wall Street Journal, Forbes and Reuters.

The trial represented the trading of fixed income assets between 40 of the world’s largest banks across the blockchains, using multiple cloud technology providers within R3’s Global Collaborative Lab.

This marked an unprecedented scale of institutional collaboration between the financial and technology communities exploring how distributed ledgers can be applied to global financial markets.

The banks connected to R3-managed private distributed ledger technologies built by Chain, Eris Industries, Ethereum, IBM and Intel. They evaluated the strengths and weaknesses of each technology by running smart contracts that were programmed to faciliate issuance, secondary trading and redemption of commercial paper, a short-term fixed income security typically issued by corporations to raise funding.

Each of the distributed ledgers ran a smart contract based on identical business logic to enable the banks to accurately compare the difference in performance between them. Cloud computing resources were provided by Microsoft Azure, IBM Cloud and Amazon AWS to host the distributed ledgers.

The R3 member banks involved in this trial included Banco Santander, Bank of America, Barclays, BBVA, BMO Financial Group, BNP Paribas, BNY Mellon, CIBC, Commonwealth Bank of Australia, Citi, Commerzbank, Credit Suisse, Danske Bank, Deutsche Bank, J.P. Morgan, Goldman Sachs, HSBC, ING Bank, Intesa Sanpaolo, Macquarie Bank, Mitsubishi UFJ Financial Group, Mizuho Financial Group, Morgan Stanley, National Australia Bank, Natixis, Nordea, Northern Trust, OP Financial Group, Scotiabank, State Street, Royal Bank of Canada, Royal Bank of Scotland, SEB, Societe Generale, Toronto-Dominion Bank, UBS, UniCredit, U.S. Bank, Wells Fargo and Westpac Banking Corporation.

Further exciting developments are set for the months ahead, as R3 continues to work with the banks in its Global Collaborative Lab to test and develop applications based on distributed ledger technology for the financial services industry. The Lab has quickly become a center of gravity for collaborative applied blockchain efforts in the financial services and distributed ledger technology industries.

Survival of the biggest: A new era of mega-exchanges on the horizon?

The prospect of a merger between exchange powerhouses, the London Stock Exchange Group (LSEG) and Deutsche Börse could usher in an era of mega-exchanges, where a handful of providers dominate equity, derivative, fixed income, indices and clearing markets in specific geographies – making them a one stop shop for the entire trade cycle.

Yet the road to that reality is certainly a long one. The unravelling of negotiations between these two trading behemoths to secure a deal in 2000 and again in 2005, demonstrates all to clearly the challenge that lies ahead.

Moreover, possible legal hurdles put in place by anti-trust authorities, combined with political and economic uncertainty surrounding a British exit from the European Union, could yet prove terminal.

The rationale behind this potential corporate marriage is clear. In a statement issued by the LSEG announcing the talks, the Group pointed to “the prospect of enhanced growth, significant customer benefits including cross-margining between listed and OTC derivatives clearing.” The move, which would allow both firms to pool capital, resources and expertise to grow market share and cut operational costs is also consistent with the LSE’s long-term strategy under the leadership of CEO, Xavier Rolet.

Rolet’s commitment to strengthen the Group by completing a string of acquisitions to diversify its offering in the derivatives, indices and clearing market has paid dividends. The purchase of indices providers Russell Group and FTSE in quick succession, as well as a majority stake in LCH Clearnet, one of the largest interdealer clearing houses, has affirmed the group’s position in Europe as a leading provider of trade execution, clearing and data related services.

This strategy has led to a dramatic rise in market capitalisation by as much as fivefold and also transformed the group from being preyed upon by rival firms, to a predator seeking to grow market share, according to a recent article on the proposed deal in the Financial Times.

However, US exchanges are increasingly seeking to secure a global, rather than continental footprint with a move into European Markets. BATS Global Markets, a US operator, now runs the biggest stock exchange in Europe by market share – whilst CME, the Chicago-based group, launched in European markets in 2012 with a multi-asset derivatives offering spanning trading and clearing services – posing a direct challenge to incumbent operators.

Against this backdrop, it is clear to see why these two institutions are seeking to pool capital, technology and people to compete directly with global exchanges, particularly from the US. It is well known that this drive towards exchange consolidation is likely to result in a small number of major operators, reducing market fragmentation, something noted by Rolet in 2011.

“In five years there’ll be three, four international exchange groups with global distribution capabilities,” he said in an article in the Telegraph.

But what about end-users?

Whilst the rationale behind a potential merger has commercial objectives, it is also likely to deliver cost synergies, particularly for core customers such as large investment banks and asset managers.

For example, the introduction of new regulation designed to implement greater risk controls on global derivatives markets has placed steeper margin requirements on banks – creating a glut of capital warehoused in major clearing providers such as LCH Clearnet and Eurex Clearing. Whilst the LSEG statement specifically noted that both firms would remain as separate entities, a merger could allow banks with portfolios in each CCP to reduce net margins and free up capital that can be used more profitably elsewhere.

Whilst a deal will deliver greater operational efficiencies to LSEG, Deutsche Börse and their respective customers, it is likely to trigger further consolidation as smaller exchanges rush to pool resources and as a result, introduce a new era dominated by a handful of major global players.

The best and brightest celebrated at Bloomberg Innovators 2016

Chatsworth was delighted to share an evening with a remarkable and talented group of people brought together at Bloomberg Innovators 2016 yesterday evening.

The shared DNA of each business seemed to be the energy levels, levels of staff engagement and love for what they do. Not to mention an intense focus on the product, customer service and the desire to shake up the incumbent competition or best it.

We were there with the team from Cambridge Quantum Computing to celebrate their I recognition as one of the top 50 innovators of 2016.

Full marks to the SevenHills team and Bloomberg’s Nate Lanxon for pulling the evening together and helming a great event.

Global banks form distributed ledger partnership

Blockchain technology could transform financial markets…if the industry works together

The news, reported in the  Financial Times, that nine major banks have formed a partnership to invest in and explore the potential for digital ledgers in wholesale financial market is game-changing stuff.

Chatsworth client, R3, has brought together some of the sharpest minds from across electronic financial markets, digital currencies and cryptology with the backing of banks including JPMorgan, Barclays, UBS and Credit Suisse.

The creation of digital currencies like Bitcoin have attracted considerable attention. But it is the distributed ledgers underlying these payment systems which look to be the significant innovation.

Distributed ledgers allow for the distribution, verification and record keeping of transaction information. As most financial assets today of course exist only as digital records, distributed ledgers could be applied to wholesale financial markets to transform the way records are kept, queries and reported.

There has been a feeding frenzy of interest and outside investment in applying the technologies developed to drive digital currencies to financial markets, but so far they all appear to lack understanding of the problems they hope to solve and an infatuation with immature technology for its own sake. The R3 project stands out as the first serious commitment by the banks to work towards a common understanding of how best apply this emerging technology to the global financial system.

Distributed ledger technologies may well transform financial markets but the technology and standards must be secure, scalable and adaptable. The R3 project includes a collaborative lab environment or “sandbox” to test and validate distributed ledger prototypes and protocols.

Success needs a highly scientific and methodical approach with understanding and careful analysis of the sector and the problems which need to be solved, before the development and deployment of a financial-grade shared ledger solution.

It is not just the number and size of banks and the scale of their investment which sets the R3 project apart. It is collegiate approach to defining what success looks like and then building it the right way.