SWIFT’s blockchain PoC could transform international payments

SWIFT has just added 22 new members to its Global Payments Innovation (GPI) project.

Banks have, for some time, been looking at a way to monitor their intraday payments, global positions, and liquidity exposures more effectively. This is in line with rules set out by the Basel Committee on Banking Supervision (BCBS), which require banks to take into account metrics such as currencies and intraday exposures at correspondent banks.

Currently, a lack of intraday reporting coverage means banks have no way of monitoring the position of their Nostro accounts in real-time throughout the day.

If this vitally important sector is to be revitalised, finding a solution to monitoring payments in real-time, which can give banks more control and more confidence in managing their correspondent and corporate banking relationships, is vital.

There has been significant progress made on this front from one of the utilities at the center of the international financial system. SWIFT, the global provider of secure financial messaging and compliance services, has just added 22 new members to its Global Payments Innovation (GPI) project.

This could help transform the nature of international payments as we know it.

SWIFT launched a proof of concept (PoC) for its blockchain initiative earlier this year with six partner banks, as part of the SWIFT GPI, to provide the first system enabling real time monitoring of Nostro accounts.

There is growing momentum behind the project. Last week, a further 22 banks, including Lloyds in the UK, JPMorgan Chase in the US, Standard Bank in South Africa and Westpac Banking Corporation in Australia, all joined the PoC.

There is a lot of enthusiasm and anticipation about the outcome of the PoC. If banks could manage their Nostro account liquidity in real-time, it would allow them to accurately gauge how much money is required in each account at any given point. This would enable them to free up significant funds for other investments and reduce the cost of correspondent banking.

This PoC is a key example of the way in which industry leaders across the financial markets have been bringing the industry together to collaborate on projects using new technologies to tackle industry wide problems.

Although there are other companies launching similar initiatives, SWIFT benefits from its long-standing position of trust and neutrality at the heart of the financial sector. As a result, it is able to bring together banks, technology providers (such as Hyperledger which developed the blockchain technology for this PoC) and other industry stakeholders to find innovative and meaningful ways of introducing potentially transformative technologies.

“The proof of concept is about the accounts banks hold between themselves,” says Wim Raymaekers, Global Head of Banking Market at SWIFT. “Banks are exchanging information today; what we want to see with blockchain is those status information reports being exchanged, as banks don’t always know the levels of their Nostro accounts on a per transaction basis. Most often, banks get that information at the end of the day but they also want to know how much money is in their accounts in real-time.”

The results of this initial PoC are due to be announced at Sibos later in Toronto in October. We look forward to seeing them with great interest.

 

Chatsworth congratulates Pragma and Cobalt on FX Week e-FX Award wins

Leading industry trade publication FX Week has announced the winners of its prestigious e-FX Awards, which included two of Chatsworth’s foreign exchange clients.

The awards recognise firms from across the foreign exchange industry for their excellence and innovation in the world’s most liquid financial market.

Announcing the award winners, FX Week editor Eva Szalay said technology in the market was “booming”, pointing out that “innovation has been extended to small start-ups, as well as the largest players” and highlighted the market’s “genuine desire to become more transparent, more competent and highly innovative”.

Innovation was certainly in evidence from algorithmic trading technology provider Pragma Securities, which was named Best independent algorithmic trading technology provider, and post-trade distributed ledger technology company Cobalt, which was awarded e-FX initiative of the year award.

Pragma

Reflecting on the increasing sophistication amongst the buy-side and the push for best execution in FX, Pragma has seen rapid growth and expansion over the past 12 months.

The company serves banks, brokers and sophisticated buy-side institutions, and identifies its value proposition around transparency and control as differentiating features.

It added a number of new capabilities to its Pragma360 algorithmic trading platform. This includes algorithmic trading non-deliverable forwards (NDFs), which offers traders better execution when investing in popular emerging market currencies.

It has also expanded its international client base through a new connectivity presence at Equinix’s LD6 data centre in London, providing lower latency connection to London based FX matching engines.

Cobalt

Cobalt has a very eye-catching proposition – it uses distributed ledger technology to cut 80% of the costs of post-trade reporting.

Founded by former Traiana executive Andy Coyne, and Adrian Patten, the company is offering to completely revolutionise the costly and time-consuming way in which post-trade FX services are conducted, cutting out duplication by storing records of all transactions on a single distributed ledger.

“I think if we are successful, the biggest impact will be on trading and Cobalt will increase volumes. Post-trade costs are a tax on trading and the idea that you can charge someone 50 cents to a buck for sending an unencrypted message to the back office is ridiculous.

“So if we can reduce those costs by dollars per transaction, that will feed into increasing volumes,” Patten tells FX Week.

The team at Chatsworth would like to congratulate both Cobalt and Pragma on their well-deserved award wins.

Previse completes a seed funding round worth £2 million.

Small businesses are the backbone of the UK economy, generating some 50% of private sector turnover and employing three out of five private sector workers.

However, these businesses are held back by late payments from their large corporate clients. With 60% of SMEs paid late by corporates, businesses are left strapped for cash to meet their own payment obligations, such as wages, stock and rent. This cash flow crisis forces 50,000 UK companies a year to go to the wall. 

Banks play a role in easing the problem, offering larger suppliers short-term financing or buying the invoices directly from suppliers for a substantial discount, a practice known as factoring. Both these solutions are expensive for the supplier, however, which pushes up prices for the whole payments chain. In addition, given the fragmented and high-risk nature of the SME credit market, only the largest suppliers are able to secure credit.

This means that, according to the world bank, there is $2.4 trillion in unmet demand for financing from SMEs globally.

Enter Previse. The company, which this week announced the successful completion of a £2 million seed round, is harnessing the power of artificial intelligence (AI) technology to allow banks to meet the financing needs of SME suppliers in a scalable and low-risk way.

Previse uses advanced AI and hundreds of millions of data points to score the likelihood that a corporate buyer will be able to pay a supplier’s invoice. This score is then provided to banks and other funders who use that information to instantly pay the SME on behalf of the large corporate. The supplier receives their money the day they issue their invoice, giving them complete cash flow confidence.

The effect is that “instant, frictionless and efficient payments become the new standard for B2B payments,” according to Paul Christensen, co-founder and CEO of Previse.

The rest of the payments chain benefits as well. By offering such a service, buyers can negotiate a discount on their purchasing costs and banks can reach much deeper into the SME credit market without blowing their risk exposure. The net effect could be a several billion-pound boost to the UK economy every year.

To find out more about Previse seed funding please click here

Chatsworth is proud to support London Tech Week

Chatsworth is proud to support London Tech Week and the vision to create the world’s leading smart city.

With Brexit and an uncertain outcome in the UK election this month, a cloud has continued to loom large over the UK economy. Frankly, we’re a little over all the doom and gloom so we’re happy to report that one industry that continues to thrive in the midst of uncertainty is the UK’s financial technology (fintech) sector.

London remains Europe’s leading city for foreign direct investment into the technology sector, attracting significantly more investment projects than any other European city, in each year during the last decade.

The Chatsworth team knows “a bit” about FinTech. We’ve specialised in it for over a decade and it remains our pinpoint focus.

We set up in London before expanding across the pond and we’re delighted that international investors rank London as a leading global tech hub, with London featuring in the three highest ranked cities with the potential to produce the next global tech giant.[1]

This week, the sector received a further boost of confidence from Sadiq Khan, Mayor of London, who launched London Tech Week, a week-long celebration promoting London’s role at the epicenter of innovation and technology.

This year’s festival is expected to be bigger than ever before and attract more than 50,000 visitors to hundreds of events across London. Artificial Intelligence (AI), connected vehicles, and regtech are just some of the events on the agenda, alongside a range of networking opportunities. The full program of events for the week is available here.

Speaking at the annual event, the Mayor outlined his vision for London to maintain its influence and expertise, and become “the world’s leading smart city”.

He also reassured the global tech community that London remains open to talent and investment from all over the world, pledging to do everything in his power to safeguard London’s global competitiveness and status as a leader in innovation…

Since its launch in 2014 London Tech Week has included more than 700 events and has welcomed delegations from around the world. Congrats once more to all involved.

Chatsworth client R3 secures record-breaking USD 107 investment in distributed ledger technology

We are delighted to announce that Chatsworth client R3 has secured one of the largest ever Series A investments in the global fintech industry, raising USD 107 million from over 40 institutions across the globe.

R3 is leading a consortium of banks and other financial institutions working together to develop a new operating system for the financial services industry based on distributed ledger technology (DLT), which was borne out of blockchain – the infrastructure that enables the transfer of virtual currencies such as Bitcoin.

Chatsworth has handled global PR for R3 since its launch in September 2015. During the last eighteen months we have worked closely with the financial, business and technology media to raise awareness and understanding of R3’s unique approach and technology as it sought to grow its network of members and investors.

Drawing on R3’s team of expert spokespeople, Chatsworth positioned the company and its members as thought leaders in this revolutionary technological field, securing thousands of pieces of coverage including tier 1 outlets such as the Wall Street Journal, FT, Bloomberg, Reuters and the Economist. R3 is now widely seen as the leading voice on distributed ledger technology, with its spokespeople regularly called upon to provide expert commentary in the press.

The awareness generated by this coverage helped fuel the momentum to drive R3’s growth from a fintech startup with eight finance and technology veterans and nine bank members to a global team of 110 professionals serving over 80 global financial institutions and regulators on six continents.

This massive investment marks the next stage in R3’s evolution. Many of the world’s largest financial firms have come together not just with capital support, but with a robust commitment to work with R3 in developing foundational industry solutions that will be the building blocks of the new financial services infrastructure.

We look forward to continuing our work with R3 as they take distributed ledger technology off the drawing board and onto the trading floor.

Cybersecurity: Is a flaw in human psychology to blame?

A fascinating analysis of cybercrime and cybersecurity this week from Michael Daniel, the president of The Cyber Threat Alliance.

Writing in the Harvard Business Review, Mr Daniel postulates that we have only just begun to comprehend the scale of the issue and that it is our perception of the online world versus the physical which is to blame.

Cyberspace operates according to different rules than the physical world and is more than just a technical problem, but is as much about economics and human psychology.

“The borders in cyberspace don’t follow the same lines we have imposed on the physical world –  they are marked by routers, firewalls, and other gateways. Proximity is a matter of who’s connected along what paths, not their physical location. The same principles of cyberspace that allow businesses to reach their customers directly also allow bad guys to reach businesses directly”

He poses six key framework questions which he argues need answering before we can effectively tackle the problem:

  • What is the right division of responsibility between governments and the private sector in terms of defence?
  • What standard of care should we expect companies to exercise in handling our data?
  • How should regulators approach cybersecurity in their industries?
  • What actions are acceptable for governments, companies, and individuals to take and which actions are not?
  • Who is responsible for software flaws?
  • How do we hold individuals and organisations accountable across international boundaries?

In our experience, financial firms which are typically hyper-competitive are highly adept at solving industry issues when they recognise the group threat and work together.

Co-operation and co-ordination across borders backed by resolve, human capital and investment is key to solve these issues is critical.

The financial systems, both systemically and at the individual firm level, remain at risk and it is clear that any system is only as strong as its weakness link.

Chatsworth is proud to support Clerkenwell Design Week – 23–25 May

This week sees the best of London’s design crowd descend on our hood for Clerkenwell Design Week.

This is a world-class showcase of the leading UK and international designers, brands and companies across showroom events, exhibitions, live talks, workshops and installations.

Chatsworth is showcasing the best of our design for business. We help connect financial technology brands with audiences and users through our digital design and user experience.

Contact us for more information and don’t forget to register for the event.

The potential benefits for corporates in algorithmic trading

Curtis Pfeiffer, Chief Business Officer at Pragma Securities, explains to FX-MM how corporates could stand to benefit from using algorithms for FX execution.

Why should corporates consider using algorithms for FX execution?

Corporations want to maximise profit, and a penny saved is a penny earned. Algorithmic trading can contribute to the bottom line by significantly reducing FX trading costs. Corporations trade on the order of $70 trillion a year – roughly the same as the total global GDP. On such large amounts, basis points matter.

That’s why, to fulfil their mission, corporate treasurers are increasingly focused on ensuring that they get best execution on their FX transactions, which includes using the best available trading tools and practices.

What advantages do algorithms have over other trading techniques?

With the speed at which trading is conducted today, the proliferation of trading venues, and sheer levels of information that is processed, it is simply impossible for a human trader to stay on top of all the data that the market is generating.

There are four core benefits to algo execution:

  • Breaking up a large order into multiple smaller pieces means, on average, paying less than trading in a block
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Building algorithms on top of an aggregated liquidity pool effectively narrows the spreads being traded on
  • Algorithms have the ability to provide liquidity as well as to take prices, allowing patient traders to capture part of the bid-offer spread
  • Automation frees treasurers and traders to focus more of their time on those issues where human intelligence and judgement add the most value.
What factors should investors consider when choosing an FX algorithm?

First, corporations should understand the bank’s liquidity model for their algorithmic offering – principal, agency or hybrid.

Bank algos access liquidity differently depending on the model. A pure principal algo accesses just the host bank’s liquidity, which also provides indirect access to other liquidity pools in the marketplace. Agency models do not interact with the host bank’s liquidity, but are able to provide liquidity on ECNs as well as taking prices, potentially capturing part of the bid-offer spread for the customer.

Hybrid models can offer the best of both worlds, though customers should understand how the bank manages its dual role as principal and agent. Corporations should assess the liquidity pool underlying each bank’s algorithms to determine which model will be most effective.

Second, corporations should be satisfied that their bank provider has first class algorithmic trading tools – either through a major investment it has made in algorithmic trading research and development internally, or by partnering with an algorithmic technology specialist. Smart algos have sophisticated order placement logic, change their behaviour based on pair and time-specific liquidity patterns, and make intelligent and dynamic use of the real-time liquidity available across venues – for example based on order fulfilment rates.

Provided liquidity and investment checks out, corporations can consider algorithmic trading as another service their banks provide, and direct flow as part of the overall banking relationship.

Finally, best practice is to use TCA after the fact to track performance across bank providers and make sure all is as expected.

To read more, please visit the FX-MM website here.

Flying the nest – twenty years of independence for The Old Lady

Twenty years ago this month, buoyed by a historic landslide victory in the 1997 general election, Chancellor of the Exchequer Gordon Brown made the surprise announcement: the Bank of England (BoE), affectionately referred to as The Old Lady, would become independent for the first time in its history.

The plans for independence were made in great secrecy. According to Mervyn King, the BoE governor at the time, Eddie George, was only told about it the day before Brown announced the decision. However, the move was hailed by both the BoE and financial markets, strengthening its credibility and creating more stability around monetary policy decisions.

Coping with crisis

However, perhaps the most volatile period over the past twenty years was the 2008 financial crisis and the subsequent fallout. This transformed the Bank’s way of working both internally and in its relationship with the politicians, financial markets and other stakeholders.

Some accused the Bank of being slow to respond to the crisis, and Katie Barker, a member of the BoE’s Monetary Policy Committee for nine years, described a “terrible group think” which prevented it from seeing the crisis emerging.

However, the Old Lady’s response to the crisis proved to be defining. A major quantitative easing (QE) programme and a prolonged period of record low interest rates have been the central pillars of the UK’s post-crisis recovery program. Many have since acknowledged have played in underpinning stability and economic growth.

Although there have been changes in personnel and processes in subsequent years, overall, the Bank emerged from the crisis with its reputation enhanced. Post-crisis reforms have further centralised its power, including returning responsibility for prudential oversight to the bank from the now-disbanded Financial Services Authority.

Looking forward

With the arrival of its new governor, Mark Carney, from Canada, the Bank has also improved its working relationship with government and strengthened internal management practices.

This is good news, as major challenges lie ahead for Mr Carney and the central bank. He has already come under unprecedented criticism from some Parliamentarians for his outspoken warnings in the build-up to the EU referendum in 2016.

Managing the markets and the economy as Britain exits the EU will require a careful touch and Mr Carney will no-doubt face high levels of scrutiny from both the press and politicians.

In addition, the Bank is not immune to a growing scepticism in the political class around the whole notion of central bank independence. The response of banks to the financial crisis, particularly QE, has become a political issue in the US, Europe and now the UK Prime Minister Theresa May has argued that it has meant “people with assets have got richer” while “people without them have suffered”.

Given its enhanced role in overseeing banking and monetary policy, some, such as former Strictly Come Dancing star Ed Balls, believe that the blame for the next financial crisis will be placed, fairly or not, squarely at the door of the Bank of England.

Despite the ups and downs, the Bank has helped to successfully steer the UK economy since flying the nest. It is now also transforming itself into a global leader in fintech regulation, setting up a fintech accelerator last year. Recently the bank also launched a plan to de-risk Sterling payments with its blueprint for a new real-time gross settlement system to improve sterling payment.

With careful management and this continued focus on evolving with the rapidly changing financial services market, we look forward to another twenty years of an independent central Bank.

Mark Carney on realising the potential of fintech

Regulatory support for the growth of fintech in London has certainly been evident in recent years.

Democratisation of financial services, greater consumer choice, lower costs and greater resilience of financial infrastructure are just some of the reasons why the Bank of England (BoE) is encouraging financial technology (fintech) development in the UK.

That’s according to Governor Mark Carney, who addressed an audience of fintech entrepreneurs, regulators, politicians and banks at the UK Treasury’s inaugural International Fintech Conference in London.

Regulatory support for the growth of fintech in London has certainly been evident in recent years. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have changed their authorisation processes to support new business models, and the BoE also established a fintech accelerator last year.

To date, it has worked with a number of firms on proofs of concepts relating to cyber security, using artificial intelligence (AI) for regulatory data, and distributed ledger technology.

But what is interesting in this speech is the BoE’s focus on ensuring “the right hard and soft infrastructure are in place” – a central plank of the Governor’s vision of maintaining London’s role as the centre of fintech excellence.

“Over the centuries, we have learned that markets and innovation thrive with the right hard and soft infrastructure”, he said. “Hard infrastructure ranging from transport links to broadband and payments architecture; and soft infrastructure from the rule of law to market practices, codes of conduct, and regulatory frameworks.”

So how does this relate to fintech, one may wonder? Governor Carney continued: “With respect to soft infrastructure, the Bank is assessing how fintech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.”

On developing the right “hard infrastructure”, Carney pointed to how the BoE is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe. In particular, he highlighted how it is widening access to some of its systems to include Payment Service Providers (PSPs) in order to boost both competition and system resilience.

“The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.

“That’s important because the Bank operates the UK’s high-value payment system ‘RTGS’ (Real-Time Gross Settlement) which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.

“Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1,000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.”

Interestingly, the BoE has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks, and is working with the FCA and HM Treasury to make this a reality.

This ties in with Carney’s final example of the “soft and hard infrastructure” – coordinating advances in hard and soft infrastructure ensure the Bank can help the industry realise the true promise of fintech.

“New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.”

A full copy of Mark Carney’s speech is available here.

Regtech is booming, but is the UK missing out?

Regtech (n). Short form for the regulatory technology being created to meet regulatory monitoring, reporting and compliance.

Regtech is booming, with USD 2.99 billion invested globally across over 400 private investment deals in the last five years.

Yet despite its predominant position in almost all other areas of financial technology, the UK is still lagging behind the US when it comes to regtech investment.

Just 9% of the almost three billion invested since 2012 went to UK based companies, according to the CB Insights figures. This put it a distant second behind the US, which scooped up 78% of the total investment.

Banks are looking to reduce costs to cope with a tougher investment market and find ways to handle the flood of new rules which the January MiFID II deadline will unleash. In this environment, it is little wonder investors see the potential for technologies which promise to make compliance easier, more efficient or more reliable for the financial sector.

UK regulators appear to have spotted the opportunity as well, and the Financial Conduct Authority (FCA) is looking to do what it can to help the UK’s regtech sector catch up with its transatlantic counterpart.

The regtech industry spans a wide variety of technologies and the industry which promises to make compliance easier, more efficient or more reliable. Some companies are using artificial intelligence to help banks comply with regulation, while the R3 group of over 40 banks is looking at how distributed ledger technology (DLT) can make reporting to regulators simpler.

Some regtech firms believe that Brexit could be a big boost to the UK’s regtech industry.  With the UK’s financial sector’s relationship with the EU now in flux, both in terms of regulatory equivalence and cross boarder trade, ““Brexit is a brilliant opportunity”, sais Diana Paredes, CEO of regtech start-up Suade.

The UK regulator, the Financial Conduct Authority (FCA) has also been working to encourage the UK regtech sector. The FCA’s executive director of strategy and competition, Chris Woolard, is keen to stress the role regtech companies can play. Talking to Financial News, he said, “It’s something quite positive where firms are taking quite seriously how they apply technology to their own compliance question.”

The FCA has also been leading the way when it comes to nurturing innovation. “There are other regulators around the world that have more funds and resources, and other regulators with more powers. But it was really only the UK financial regulator that has built into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection,” Imran Gulamhuseinwala, EY’s global leader for fintech, told the Financial Times.

Most notably, in 2015, the FCA launched its ‘sandbox’ to help companies developing new technologies. The sandbox allows banks firms which require regulatory approval before being able to operate their technology to test in a live environment. This allows firms which would otherwise need to develop their full technology and achieve FCA approval before fully testing their product, to develop their technology in a way which is responsive to both the FCA’s requirements and the demands of live operation.

So far, the sandbox service has proved popular with 69 companies applying for the first cohort in 2015 and a further 77 applying for the second cohort, according to a recent statement from the FCA. Following the success of the first cohort, the FCA has begun helping regulators across the globe to develop their own sandbox programmes, including in Japan, Canada and China.

It is heartening to see the UK regulator supporting this process and creating an environment where the next generation of firms who using technology to enhance the regulatory environment and reporting/confirmation/validation processes.

Financial markets have been buffeted by scandal and repetitional damage of late. It is time to programme some trust into the source code.

TRACE and Reg ATS: the changing face of US Treasuries regulation

Nichola Hunter, Chief Operating Officer at LiquidityEdge, explores new regulation coming down the track which will significantly impact broker-dealers in US Treasuries.

Regulatory changes are afoot in the US Treasuries market. While reporting transaction data to regulators has been the norm in the equities market for decades, in October last year the SEC approved FINRA’s new reporting rule requiring UST trades to be reported by the end of the day on which they were executed.

Starting in July this year, all broker-dealers registered with the SEC that are FINRA members must report transactions through the Trade Reporting and Compliance Engine (TRACE) system. This is a major development for the UST market and one that will cause no small number of headaches amongst participants. The cost and resourcing implications of such a major change to regulatory reporting cannot be underestimated.

Broadly speaking there are two camps that argue for and against more transparency. While it would be difficult to find anyone willing to argue that increased transparency shouldn’t be encouraged for the purposes of improved regulatory oversight, less certain is the path to real time public dissemination.

Typically, professional trading firms will argue that transparency is required to enhance liquidity, improve best execution processes while reducing overall transaction costs. However, many of the dealers will argue the exact opposite, citing experiences in other markets that attest to a reduction in overall liquidity, widening of the bid/ask spread and the negative impact of transparency on their hedging strategies.

Trade reporting is not the only regulatory burden on the horizon for UST market participants. While the SEC has traditionally exempted platforms that solely trade government securities from its regulatory regime for alternative trading systems, known as Reg ATS, changes in market structure have recently prompted it to change its stance.

Reg ATS was introduced in 1998 to enhance regulatory oversight of off-exchange equities trading and improve the transparency of operations and protections for investors, with the aim of promoting a fair and competitive market. It requires platform operators to register as a broker-dealer and disclose significant details about operations, as well as committing to providing market participants with fair access to its services and liquidity pool.

UST platforms were excluded from the rules at the time due to the unique regulatory framework for government securities in the US, which involves the SEC, Department of the Treasury and federal banking regulators. However, the SEC now believes that market conditions and the broader regulatory environment have evolved to a point where it is appropriate to extend Reg ATS to the UST market. It remains to be seen if the acting or any new SEC chair will pick up the baton and move forward with this change.

At LiquidityEdge we are well positioned to adapt to a potential extension of Reg ATS to UST venues. Our platform is built on tried and tested technology, widely used in the FX market to ensure robust performance and efficient market access. Thus, the technology need to meet many of the requirements of Reg ATS is already built into the fabric of the platform.

LiquidityEdge was designed to meet the evolving needs of US Treasury market participants and facilitate a more orderly and efficient trading environment. Transparency and fair market access play crucial roles in achieving this end goal, and if regulators consult closely with both platform operators and all types of market participants before putting pen to paper, they will help build an appropriate legislative framework for today’s complex US Treasury Market.

For more information, click here for Nichola’s full article.

Sterling reigns over euro amongst central banks

Central banks view the UK as a safer prospect for investing their currency reserves, despite the uncertainty created by the Brexit vote and Article 50.

That was the key revelation from a survey of reserve managers at 80 central banks, conducted by trade publication Central Banking and HSBC.

According to the FT, concerns over political instability, weak growth and negative interest rates mean reserve managers consider sterling as a long-term, stable alternative to the euro.

This is significant for several reasons. Firstly, reserve managers at 80 central banks are responsible for investments worth more than GBP 5.1 trillion and are tasked with ensuring the value of their domestic currency is maintained. Their decisions will be closely followed by currency traders and investment managers around the world.

Secondly, sterling’s post referendum plunge was widely noted last June. However, it gained against the US dollar during the first quarter of 2017 – the first quarterly gain since June 2015 – and the bullish bets from central banks suggests a further upward correction is on the horizon. 71 per cent of respondents said the attractiveness of the pound was unchanged in the longer term.

The prospect of an imminent resurgence in sterling is backed by analysts at leading investment banks, which predicted an unwinding of near-record bets against sterling if a constructive tone was adopted by the UK and Brussels continued over Brexit negotiations. Japanese bank Nomura in particular, believes the pound is undervalued against the dollar by as much as 25 per cent.

Thirdly, the survey’s findings highlight concerns over the stability of the monetary union, which was identified as the greatest fear for 2017 for reserve managers. Some central banks have reportedly cut their entire exposure to the euro, unprecedented for the world’s second most popular currency, while others have reduced their holdings of investments denominated in euros to the bare minimum.

The survey found that the ECB’s negative interest rate policy was also key factor causing bearishness on the euro. The policy was designed to boost growth across the Eurozone but has impacted profits at banks and financial institutions across the Eurozone.

While these conclusions give reasons for both optimism and trepidation – it’s a matter of perspective, after all – they highlight the fluid and interlinked nature of politics and the currency markets.

More than GBP 3 trillion of currencies are traded every single day around the world, and its impact stretches far beyond the trading floors of the largest international banks.

Currency movements affect everything from individual pensions to the cost of daily household goods, and with politicians on both sides of The Channel spinning dealing with multiple, complex challenges, currency markets will listen intently to their every word.

Brace yourself for a period of excitement, nervousness and volatility over the next 24 months.

London’s post-Brexit future as a financial hub

UK Prime Minister Theresa May finally triggered the formal process for Britain leaving the European Union (EU) on March 29.

While the EU referendum and a post-Brexit scenario may have been something of a blow to confidence in the City, it still has plenty going for it as a financial hub. This year’s Global Financial Centres Index, an international ranking of the world’s leading financial centres, placed London top of the pile.

“London’s rating has been influenced by not knowing what will happen after the UK’s departure [from the EU],” Mark Yeandle, associate director of Z/Yen and author of the report, told The Financial Times. Despite this, London remains top of the list and, over the period which the report tracks, has even recovered some ranking points.

London also remains the world’s biggest FX market by a huge margin, according to the latest BIS Triennial report. While Brexit may result in some jobs being relocated, the industry still believes London will remain front and centre and a key financial hub.

One of the key factors which will insulate London’s FX market is its concentration of trading infrastructure and activity. “When trading becomes concentrated in a particular region and is supported by a comprehensive legal and regulatory environment it develops natural strengths that enable that particular market to function well.” says Dan Marcus, CEO of ParFX, talking to Finance Magnates. “By leaving that pool of liquidity, a firm could disadvantage themselves and their clients.”

This means that, far from vacating the city, many businesses are investing further in London’s future.

Algorithmic trading technology provider Pragma is one such company, with the New York-based firm expanding its equities and FX business to London. “Our investment in the data center at Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally,” says Pragma’s Chief Business Officer, Curtis Pfeiffer.

“Despite the uncertainty caused by Brexit, we are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” he explains.

While nothing in the negotiations has been determined at this early stage, the City will also weigh up the potential challenges of Brexit.

Continued access to the European single market through financial passporting and the ability to attract skilled technology professionals from across the EU to work in London top the list for many institutions.

“77% of my staff in London were born outside the UK. We need those people. People are very mobile. I just worry that tough negotiations will send the wrong signal.” Michael Kent, CEO of remittance service Azimo, told Financial News.

In addition, J.P. Morgan has reportedly spent the last nine months weighing up various EU cities as a potential new continental home for their operations, according to The Wall Street Journal.

Looking beyond the headlines, however, the picture is more nuanced. Most of the relocation plans announced over the past few months involve relatively small numbers of staff. For many banks and financial institutions this may be a hedging exercise rather than a wholesale exodus.

Going forward, the UK government is determined to ensure London remains a central part of the international financial landscape, and it’s worth remembering London has a number of strategic advantages which mean it is likely to continue to be the city of choice. It uses the global language of business, English; it is situated in the perfect timezone between Asia and America; and has a legal system that is world-renowned for clarity and reliability.

None of this will change; in fact, it will continue to ensure London remains open and attractive to business.

Mosaic Smart Data wins big at the 2017 FStech Awards

Data analytics technology specialist Mosaic Smart Data has won the Best Use of Data and Analytics award at the annual FStech Awards, held in London on Thursday 23rd March.

Regulatory changes and advances in technology are revolutionising fixed income, currencies and commodities (FICC) markets and driving the need for intelligent data analytics and reporting.

MSX delivers a next generation data analytics platform for FICC market participants. By delivering the insights and real-time intelligence they need to harness exponentially increasing data as well as meeting regulatory requirements, it enables trading and sales teams to significantly enhance their workflow productivity.

The platform standardises and aggregates multiple data sets to enhance audit trails and reporting, enabling banks to comply with mounting regulatory requirements.

Mosaic has fully integrated predictive analytics into MSX, enabling financial institutions to more accurately determine future market activity based on sophisticated algorithms and historical data.

After collecting the award, Matthew Hodgson, CEO and Founder of Mosaic Smart Data, said: “In today’s digital world, banks need to have a deep understanding of the business they are handling in real time. The data is there, but it needs to be standardised and have intelligent analytics applied to it. It is an incredibly intensive undertaking which requires both innovative technology and thorough insight into the bank’s business needs.”

Read more about this story at Mosaic Smart Data’s website here.

Adherence to FX Global Code will reform conduct and behaviour

As we near the final stages of the development of the foreign exchange (FX) Global Code, the ACI Financial Markets Association (ACIFMA) is leading efforts to support education and adherence. We will start by making commitment to the Code mandatory for ACIFMA members, and encourage members to prove their adherence in future. This could prove to be a turning point in reforming conduct and behaviour in foreign exchange, writes Brigid Taylor in FX Week.

As a member of the MPG, ACIFMA has both contributed and witnessed the extent to which market participants and policymakers have engaged, discussed, debated and worked together in the best interests of the wider market. This is an industry that transacts more than USD5 trillion of currencies across borders every single day. Its ability to operate smoothly is crucial to the international economy.

There was of course a broad range of views on how best to address a series of topics, such as governance, information sharing, last look and pre-hedging. An array of views is expected in any large consultation, but consensus has been achieved with the best interests of the market in mind.

The final Code will, in my view, outline principles and guidance that is effective, appropriate and strike the right balance. I expect it to act as an essential reference for market participants when conducting business in the wholesale FX markets and when developing and reviewing internal procedures.

Hardwiring adherence – the third objective

This brings us to the final objective set out at the beginning of the process: develop proposals to promote and incentivise adherence to the Code.

For this to happen, it is essential that individuals (i) commit to adhering to the Code; (ii) receive the appropriate training and education so they are clear on what is expected and understand how to comply; and (iii) sign up to a solution where senior managers are able to observe and address any training and educational gaps amongst their subordinates.

This is where the ACI Financial Markets Association (ACIFMA) can play a central role. With a track record in delivering training, education, attestation and best practice principles that stretches back more than half a century, we represent more than 9000 individuals in 60+ countries.

There are several ways we intend to achieve this. Firstly, we will make it a prerequisite for individuals to commit to adhering to the FX Global Code as part of their membership. This means a meaningful proportion of the market – over 9,000 FX professionals around the world – will sign up immediately after the code is launched and commit to understanding, implementing and abiding by the new principles.

There is an urgent need to restore ethics in financial markets and the FX market is aware of its responsibilities to its clients and stakeholders. The significance of the enormous effort undertaken over the past three years should not be underestimated; to date, the level of leadership and engagement has been exemplary. I expect the FX Global Code to be a turning point in reforming conduct and behaviour in foreign exchange and develop a renewed sense of trust in this important sector of any economy.

To read the full article by Brigid, please visit the FX Week website here.

Can we hardwire trust into our financial systems? SxSW Tech Briefing

This year there were no big headline tech launches to speak of which is unusual for an event which in years gone by saw the launch of Twitter and Foursquare, to take but two.

But this year, the tone and content was quite different. The changing political landscape loomed large, chiefly with the ‘tech under Trump’ work stream but also with keynote speeches from Joe Biden and Corey Booker.

For 2017, the recurring theme was on a pervasive lack of trust and transparency between individuals and organisations, as well as between society and its governments.

Various barometers of sentiment reveal that we are at a historical low for trust in institutions such as banks and the media.

Four panels and presentations focused on the technology variously known as Blockchain or Distributed Ledger and how it can be applied to hardwire and build trust into our systems and interactions.

Discussions ranged from how this tech enables individual contribution, makes it easy to collaborate, decentralises power and creates hope for increasing equality.

There were hands-on workshops and introductions to some of the protocols, coding and design challenges in creating distributed data structures.

As a recap on ‘Blockchain’, it is effectively a record of assets, or any other kind of content, that is shared, replicated and encrypted so it becomes a verified and immutable source of truth. The blocks can’t be modified, but can be viewed, meaning a huge benefit lies in the added trust and transparency that provides.

Dr Tomicah Tillemann, of New America’s Bretton Woods II program is working with his team to apply the principles of blockchain to the US land registry system.

Speaking at SxSW he commented: “Institutions right now provide the facts at the foundation of our reality. I know there’s a land registry somewhere that says I own my house. I swipe my card because I know the bank will transfer the right money for me. As soon as people lose confidence, those systems start to break down really quickly.

“The exciting thing about blockchain is that it has the potential to create a layer of authentication and validation that can’t be tampered with. It’s a layer of reality locked in mathematically, and it’s locked in permanently, which is something we’ve never had before.”

IBM was also in attendance, focusing on the wider potential application of blockchain, announcing a blockchain solution with shipping container giant Maersk to track shipping containers across the world

With over 90% of goods in global trade carried by the ocean shipping industry each year, there are clear benefits to enhancing transparency and sharing information.

From the exchange of money between two parties, to documenting how goods move through a supply chain, and the making of contractual agreements, there are significant savings to be had in terms of cost and time as well as the potential to reduce risk and increase trust.

Algo trading on the rise as Pragma establishes European presence

The decision by Pragma to set up a base in London shows how the UK’s capital remains the natural hub for algorithmic currency trading despite the UK’s looming exit from the European Union.

While the debate about the future of London in a post-Brexit environment continues to rage on, there are many who continue to recognise the role of London at the centre of the USD5 trillion currency market.

Algorithmic trading in particular continues to rise in popularity. A report from Greenwich Associates found that the proportion of volume-weighted FX trading executed algorithmically has increased two and a half times in the past three years.

This trend was further highlighted by Pragma Securities, the multi-asset class provider of algorithmic solutions, which established a new connectivity presence in London to service its growing international client base.

London currently accounts for more than a third of all currency trading activity globally, according to the BIS. In a news article in FX Week, David Mechner, CEO of Pragma, expressed confidence in London and its role at the centre of European and international financial markets.

“Equinix’s LD6 site offers Pragma360 clients access to state-of-the art technology and the largest ecosystem for foreign exchange trading globally.

“The banks we service need state-of-the-art trading capabilities for their traders, and buy-side and corporate clients, making LD6 a natural fit.”

Pragma is not alone in its bullishness on London’s future, and it is clear that maintaining a data centre presence remains crucial to an institution’s trading operations, particularly for FX trading. The Financial Times recently reported on Dutch data centre operator Interxion’s £30m investment in its site in London’s Brick Lane.

Curtis Pfeiffer, Chief Business Officer at Pragma, also highlighted the benefits of proximity to London and risks of leaving London’s FX ecosystem.

“We are moving forward with this large capital expenditure because London, as the largest FX trading centre in the world, hosts the largest datacentre ecosystem for low-latency FX trading applications and we do not see that changing any time soon,” said Curtis.

“Institutions will be reluctant to leave the data centre ecosystem in London, which has increased in size significantly over the last 10 years as a result of a network effect – everyone wants their trading servers to be where everyone else’s are. By leaving that ecosystem, a firm could disadvantage themselves and their clients.”

David Rutter: 2017 the year of blockchain delivery

In the long history of humankind, those who learned to collaborate and improvise most effectively have prevailed, says David Rutter, CEO of R3.

Darwin’s point holds true. Critical mass, momentum and co-operation are absolutely essential if we are to transform financial services and the communications and transactional framework we rely on.

This was our rationale for bringing banks together to jointly develop distributed ledger technology for the financial services industry from day one.

In R3 we have created a fast moving financial technology product company with an ownership structure which provides a balanced governance, combined with the leadership and stewardship of the best technologists in their respective fields.

The spaghetti junction of shared legacy infrastructure as well as individual front, middle and back office systems is testament to the resulting mess when banks disappear into development silos.

The overall cost of maintaining this legacy infrastructure is incalculable and there is risk around every corner, embedded into the old Cobol and Fortran code under the layers of many of those systems.

That is why we came together with an initial group of nine banks in September 2015 to create R3. A highly experienced and effective technology team was assembled and ready for action two months later.

Fast forward a year and there are now over 75 members of the R3 group – with two additions in the last week alone – working together on a diverse array of projects and developing technology to address some of the most serious pain points affecting the industry.

There is no secret. We hired the best, assembled and activated a powerful and engaged membership base and connected them together to leverage the network effect distributed ledger technology delivers.

Together, we have designed, built and launched Corda, the open-source release distributed ledger platform which will set the standard for this technology in global financial markets.

This is the only platform designed by and for its users and represents the world’s largest collaborative distributed ledger effort in financial services. It is unique and it is a landmark moment for the market.

Distributed ledger technology will have such phenomenally powerful network effects that it is hard to imagine serious institutions deploying base-layer ledger software that is anything other than fully and wholeheartedly open.

The response and engagement with Corda has been exceptional and only a few weeks after open sourcing the platform we have already had a vast number of contributions from the public developer community.

Amidst the excitement of the Corda roll-out, it’s hard to ignore the running commentary on the progress of our fundraising programme.

The motivation and accuracy behind some of the noise has sometimes been questionable, but such is the nature of working on such high-profile projects. It’s a complement to be discussed and we are very happy with constructive criticism, but better when the discussion is informed and accurate.

We have always expected the make-up of the consortium to change over time – our member base is so large and so diverse, it would be unrealistic not to expect some institutions’ priorities, resources and focus to travel in different directions.

We have new members joining the project all the time and some banks may choose to change the way in which they engage with us as we move forward, but the critical mass we have built over the last year means members can be confident they are investing in developing industry standard solutions that will be the building blocks of the new financial services infrastructure.

The financial institutions that have shown the vision to join R3 are by that very action ensuring the technology we adopt is built using common code and protocols, ensuring seamless interoperability and integration.

This is a direct hedge against the risk of replicating the disjointed infrastructure financial markets are forced to operate on today.

We remain focused on perfecting Corda and looking ahead to our objectives and deliverables for 2017 working together with our members.

We are on the cusp of a new era in financial technology, and over the next year banks will begin to reap the benefits that have been promised to them since the financial services industry recognized this technology’s potential to deliver efficiency, lower risk, security and cost reductions.

Let’s be clear: the power of distributed ledger technology lies in its network effect – and that goes for the build as much as the usage. The past few years were characterized by blockchain hype. Leveraging the combined power and expertise of our diverse and growing group of members, R3 will make 2017 the year of blockchain delivery.

R3’s Richard Gendal Brown named as top FinTech influencer

Silicon Republic, Ireland’s leading technology news provider, has named Richard Gendal Brown as one of the top thinkers, advisers and policymakers in the global FinTech. 

This list identified fintech thought leaders whose ideas are making an impact internationally and setting the tone for the broader European sector.

“Head of technology at R3, Richard Gendal Brown is a key figure in a burgeoning ledger industry that is revolutionising present-day banking. His move from IBM to R3 last year was a pivotal moment for the consortium.” – Silicon Republic

R3 has made its Corda distributed ledger platform open source, granting the global developer community universal access to its source code to encourage collaboration, review and contribution to the platform.

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Click for article top fintech influencers

R3’s David Rutter discusses blockchain technology at TechCrunch Disrupt 2016

David Rutter, founder and CEO of the R3 blockchain consortium took the stage in London earlier this week to discuss the progress of his company and underscore Wall Street’s enthusiasm over distributed ledger technologies.

Speaking at TechCrunch’s Disrupt London event, Rutter discussed R3’s distributed ledger platform Corda, spearheaded by the company’s CTO Richard Gendal Brown, the former executive architect for industry innovation and business development for IBM.

 Corda, which was open sourced last week, is a financial grade distributed ledger platform that records, executes and manages institutions’ financial agreements in perfect synchrony with their peers. It was designed from the ground up to address the specific needs of the financial services industry, and is the result of over a year of close collaboration between R3 and its consortium of over 70 of the world’s leading banks and financial institutions.

Rutter talked at length about how the platform had been heavily inspired by and captures the benefits of blockchain systems, but with design choices that make it able to meet the needs of regulated financial institutions. Crucially, Corda restricts access to data within an agreement to only those explicitly entitled to it, rather than the entire network. Rutter described it as the “plumbing and infrastructure for the future of finance.”

Asked what was wrong with the current “plumbing,” Rutter stressed that there’s simply too much room for improvement. Citing a McKinsey study, saying that its shows banks spend on the order of $3.6 trillion globally supporting their transactions, he likened current technologies to “spaghetti string.”

Rutter went on to say that R3 sees a “once in a generation” opportunity to help banks move to a secure financial infrastructure in the cloud – one that enables them to process and track nearly any kind of trade or money transfer nearly instantly, at less cost, rather than have to set aside money until each transaction is settled.

It’s a “panacea for regulators,” he added. “The way [things] work now, we record [transactions] on paper or enter them into a system” and there’s plenty of room for “shenanigans.” Meanwhile, he insisted, with distributed ledger technology, “the idea of hiding a ticket or manipulating a trade will be a thing of the past.”

Richard Gendal Brown on the open sourcing of Corda

R3

R3, Richard Gendal Brown, Cheif Technology Officer

R3 has made its Corda distributed ledger platform open source, granting the global developer community universal access to its source code to encourage collaboration, review and contribution to the platform.

Richard Brown, R3 Chief Technology Officer, provides an overview of the platform and the journey the R3 consortium members have taken towards the open sourcing of the distributed ledger platform.  

 Corda is a financial grade distributed ledger that records, executes and manages institutions’ financial agreements in perfect synchrony with their peers. It was built in close collaboration with over 70 banks and financial institutions and is already by far the biggest collaborative effort of its kind in the distributed ledger space.

It is captures the benefits of blockchain systems, but with design choices that make it able to meet the needs of regulated financial institutions.

Crucially, Corda restricts access to data within an agreement to only those who need to validate it. Financial agreements on Corda take the form of smart contracts, linking business logic and data to associated legal prose in order to ensure that the financial agreements on the platform are rooted firmly in law.

David Rutter, CEO of R3 comments: “The successful application of distributed ledger technology to financial services relies on new solutions being able to integrate and work seamlessly with each other, otherwise the disjointed infrastructure financial markets are forced to operate with today will simply be replicated with different technology. The applications being built therefore need to be based on common, open, interoperable platforms – much like the common protocols on which the internet operates today. Open sourcing Corda is the next step in making Corda one of these platforms”.

 

Russian institutions flock to join R3 consortium

Payment processor QIWI becomes the first Russian company to join the consortium’s global network.

R3, the global blockchain consortium behind the development and application of distributed ledger technology in financial markets, has expanded its membership with the addition of its first Russian member.

QiWi’s online payment system is one of the most widely used payment systems in Russia. It is used to make online purchases and pay for loans, mobile bills, and even home utilities, and offers terminals where users can make payments as they would on their mobile device.

QIWI is a payment services provider and the first Russian institution to collaborate with R3. It has long recognized the benefits of blockchain technology; earlier in July, the firm expressed interest in joining the blockchain consortium created by the Central Bank of Russia.

“Our goal with R3 is to explore this emerging technology space as we shape the future of payments and transactions throughout collaborative research with other members of the consortium,” says Sergey Solonin, QIWI’s chief executive officer. “We believe that blockchain projects that we are currently working on can be applied on one of the R3 platforms and have great potential to be favorably perceived by regulated financial institutions.”

The firm joins over 60 leading financial institutions, who collaborate in R3’s lab environment, R3’s Lab and Research Centre.

David Rutter, CEO of R3, said “The addition of QIWI is a further milestone for R3 … as we expand our network of consortium members and continue to develop truly global applications for this groundbreaking technology.”

Illuminating Markets – a vision for cash and collateral management

Roberto Verrillo, Head of Strategy and Markets at Elixium, outlines his view on the key issues in the repo and collateral market.

Changes to the regulatory environment that have already taken place, and those that will occur over the next few years, have put us on a path that will change the industry forever. The impact on how the industry executes its business has been fundamentally changed.

The result of these changes has been an almost uniform decline in profitability for investment banks. Many operations have already begun efforts to re-structure large areas of their business to maintain return on equity (ROE) levels that are acceptable to their shareholders. This process will continue for several years yet.

I suggest reading ICMA’s excellent report written by Andy Hill “Perspectives from the eye of the storm” for more information about the current and future evolution of the repo market.

Basel III significantly increases the cost of doing business, taxing risk and market-making via increased capital requirements and increasing the cost to certain activities by requiring higher quality and amounts of capital. (See leverage ratio and liquidity coverage/net stable funding ratio -Basel III[1]). The more balance sheet intensive a particular business area is, the higher the “hurdle rate” for returns should be. In this regard market making (via capital costs for holding positions) and repo stand out.

Many firms have not yet implemented an exhaustive study of what these hurdle rates ought to be. These are not standard across the industry but are firm specific and are calculated using varying inputs particular to each individual institution and their relevant regulatory requirements. Ultimately these metrics will decide what each institution’s balance sheet will be and the required ROE.

We believe that as this process of re-pricing and charging business areas for the regulatory cost of partaking in certain businesses (and transactions) progresses, the market will find many more institutions cutting back and re-structuring their current business models, or simply pulling out of certain markets or product lines altogether.

NSFR (Net Stable Funding Requirement) rules under Basel III are calibrated such that longer-term liabilities are assumed to be more stable than short term liabilities. This will lead to greater demand for longer dated deposits, particularly corporate deposits which are treated favourably for banks under the rules.

NSFR provides for different, Available Stable Funding (ASF) and Required Stable Funding (RSF), weightings depending on the type of counterparty and the residual maturity of the transaction. This will make many financing transactions that are still viable under current regulatory capital treatment extremely onerous. Fifty percent RSF weightings will be applied to all loans (including reverse-repos) to non-banks, regardless of the residual maturity of the transaction, and independent of the underlying asset. In other words, this would mean that all reverse-repos with non-banks under one-year maturity would require the provision of stable funding against 50% of the value of the reverse-repo. For example, a bank transacting a $100 million overnight reverse in AAA government bonds with an insurance company or hedge fund would carry a requirement for $50 million of (long term) stable funding, even if this reverse was match-funded by repo.

The FRTB (Fundamental Review of the Trading Book) due to be implemented in local regulation by 2019, is a supervisory framework for the next generation of market risk regulatory capital rules for international banks. It will add further granularity to this process by identifying how profitable each business is within an institution at a “desk Level”.

It will also overhaul the standardised approach to market risk, forcing big banks to calculate and report it for the first time, radically altering the way that modelling approval is granted and policed, Value-at-risk (VAR) will be replaced with expected shortfall (ES) as the standard risk measure, redefining the boundary between banking and trading books. Approval by the regulator will be required, at a desk level, for banks to operate using their own internal models.

An ISDA study of 21 sample Banks concluded that, as a result of FRTB implementation, the overall increase in market risk capital, would be between 1.5x and 2.4x compared to current levels.

Current implication for repo

The cost of providing balance sheet to customers that may simply require a home for their cash has become increasingly prohibitive, leaving some banks having to turn away short term deposits/repo’s and/or charge what might look like unreasonable costs for either accepting said deposits or only offering the facility to clients from whom they generate revenue on other products as part of a wider relationship.

Because of this lack of willingness to, or difficulty in, pricing collateral transactions, many of these transactions have become economically unviable. Backward-dated pricing and resulting dysfunctional collateral markets are in evidence not only during reporting periods such as month, quarter, half and year end, but increasingly over a “normal” date run – volumes and liquidity are both showing signs of drying up.

“Previously, business lines might have been kept as part of the core business strategy, even if they did not meet the hurdle rate for returns. But in time banks will become more ruthless and cost aware about whether these activities can be a valid part of a long-term business model.

“Repo, as a standalone product, is no longer profitable. Repo desks have gone from being profit centres to cost centres. This has already happened; whether yet realised or not” – Andy Hill -ICMA.

“The provision of repo pricing and liquidity by banks has become more of a value-added service for clients, largely subsidised by other, more profitable businesses. “ ICMA quarterly report Q4 2015 – pages 25-28.”

Improving efficiency

There has been an exodus of banks from non-core businesses, but even in areas where they remain active, banks can make significant cost savings by accessing liquidity pool providers (such as Elixium) for distribution.

Harmonisation of settlement

Basel rules are implemented as the Capital Requirements Directive in Europe and the specific capital requirements for EU firms are based on their MiFID permissions.

There is increasing interest secured financing transactions, with the market moving from unsecured to secured financing and impending enactment of regulation surrounding the margining of OTC products. There is a stream of regulation that will have a significant impact on collateralised markets which involves harmonisation of settlement discipline regimes across Europe. The industry will have to identify an efficient operating model to manage these changes.

“4.6 Market access and interoperability

Activity description

The activity covers market practices or legislation that obligate or restrict the settlement of (stock exchange and/or central counterparty-cleared) transactions in a specific issuer CSD. The consequence for foreign investors, custodians and/or investor CSDs in such (issuer) markets is that access to settlement flows is restricted owing to the unfair competitive advantages established in those issuer markets. The restriction implies that entities wishing to offer settlement services on these securities need to become participants in the issuer CSD or central counterparty.”

Page 46 ECB Harmonisation Progress Report 13/04/15

http://www.ecb.europa.eu/paym/t2s/progress/pdf/ag/fifth_harmonisation_progress_report_2015_04.pdf?986629e468a824c5d0069151574ead5c

In an environment of litigation and lawsuits is it reasonable to suggest to pension funds, hedge funds, sovereign wealth funds asset managers, CCPs, corporate treasurers, local authorities and other government entities such as public utilities should be precluded from access to a transparent trading facility for the re-investment of their short end cash and or securities or for sourcing collateral/margin?

http://www.reuters.com/article/2015/11/26/interestrateswaps-lawsuit-idUSL1N13K2IE20151126

In Europe, EMIR sets out a legislative framework for Central Counterparties (CCPs), trade repositories and OTC derivatives. This framework includes new requirements covering capital requirements, risk managements and organisation.

MiFID2 will be introduced with a view to de-restricting market access on a non-discriminatory basis. There is a requirement for Multilateral Trading Facilities to implement non-discriminatory rules regarding access to its facility.

MiFID2 introduces additional pre and post-trade transparency requirements for a number of financial instruments, these proposals aim to create a level playing field for the regulation of all organised trading. The trading obligation in Europe will be introduced in the Markets in Financial Instruments Regulation (MiFIR).

Mandatory Swaps Margining and the effect of Mandatory Swaps clearing on collateral markets;

Initial Margin (IM) and Variation Margin (VM) for uncleared OTC derivatives will be phased in from September 2016 through to June 2021. The US will start IM from September 2016 for the largest of counterparties but the EU has delayed the start of IM until June next year.

Clearing banks that traditionally put up money to support default funds within CCP’s are increasingly reluctant to do so as they have to hold a significant amount of capital on their balance sheet to support this business.

Variation margin to CCPs must be in the form of cash – there is a need for collateral to cash transformation and the size of the potential problem cannot be underestimated as banks step away from providing balance sheet to support short dated, low margin repo activity.

CCPs are working to engage buyside counterparties via differing initiatives be they sponsored or direct CCP membership.

It is envisaged that mandatory swaps clearing in Europe could create unprecedented demand for high quality liquid assets (HQLA) and its transformation, for use in initial and variation margining of swaps.

Eventually CCPs may offer cross-netting capabilities across a range of products.

Elixium – re-engineering collateral markets.

Elixium is an all to all collateral trading platform that addresses the current fragmentary nature of the market.

Standardised processes and protocols facilitate a transparent, efficient marketplace that simplifies the process of ‎rapid counterparty diversification amongst all institutions seeking to raise cash or collateral.

Connecting traditional players with new entrants and addressing the growing demand and supply of cash and collateral presents an exciting opportunity for Elixium.

The repo and collateral market is a critical source of funding for many institutions but remains balance sheet intensive. As institutions come under pressure as a result of regulatory changes such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, a reduction in balance sheets has impacted the depth and cost of liquidity available.

It is broadly accepted that the market will see more buy-side entrants, and all-to-all trading. The Elixium all-to-all marketplace has been developed specifically to facilitate access to a much wider counterparty base, which previously, have been restricted from direct participation by overly complicated legal and restrictive trading structures.

Legacy trading models are no longer as relevant in today’s market as they once were. As regulation creates new challenges and reshapes the traditional repo market-making model, stakeholders are trying to adapt and innovate both to meet those challenges and to exploit potential new opportunities.

Roberto Verrillo is head of strategy and markets at Elixium.

[1] Basel III is the global framework of principals that are agreed internationally which local regulators are consequently expected to implement into local law. It is worth noting that the US and EU are not 100% aligned on leverage ratio. (See CRD IV for the EU rules)

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.

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.

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%.

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

ParFX adds Citi and JP Morgan as founding members

Citi and JP Morgan have joined ParFX as founding members, the trading venue said on Wednesday, taking the number of core members to 14 and bringing the company closer to introducing prime brokerage clients in the coming months. The less-than-a-year-old platform says the addition of Citi and JP Morgan represents a validation of the idea that foreign exchange trading is changing and the platform is gaining momentum.