Capital Markets: Major Developments

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Part
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Major Developments in Capital Markets - Part 1

Banco Santander's blockchain bond, the Members Exchange, the FXCore back-office solution, HSBC's blockchain-based letter of credit, and Vanguard's peer-to-peer Forex trading platform are some of the major developments affecting the capital markets space in 2019.

BANCO SANTANDER ISSUES END-TO-END BLOCKCHAIN BOND

  • The Spanish bank Banco Santander has issued a $20 million end-to-end blockchain bond, making it the first institution to use a public blockchain to manage all aspects of a bond issue.
  • Santander used the Ethereum blockchain not only to represent the $20 million debt issuance, but it also settled the transaction with digital tokens representing cash held in a custody account.
  • This is a significant development because it streamlines the entire process of issuing securities on a blockchain. Other banks have previously issued securities on a blockchain while settling the trade through an analog legacy system, which makes the entire process much more complicated.
  • Santander said that such a bond significantly reduces the number of intermediaries involved in a transaction, making the entire issuing process faster and cheaper.

A GROUP OF LEADING FINANCIAL SERVICES COMPANIES PLANS TO LAUNCH WORLD'S FIRST MEMBER-OWNED EQUITIES EXCHANGE

  • Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS, and Virtu Financial have joined forces to launch MEMX or Members Exchange.
  • MEMX will be the world's first exchange that will be owned entirely by market participants, or the companies that formed the group in this case.
  • The companies state that, if successful, MEMX will greatly increase competition in capital markets and reduce fixed costs for all participants.
  • The development is significant because it has the potential to align the interests of individual and institutional investors with other market participants.

KOOLTRA CREATES A BACK-OFFICE SOLUTION FOR FX BROKERS IN THE CLOUD

  • Kooltra, a Canadian SaaS firm launched its FXCore solution. FXCore is a cloud-based platform that provides back-office functionality to Forex brokers.
  • The platform enables data storage in the cloud, and it also offers other infrastructure facilities. This enables brokers to focus more on their clients without worrying about the functionality of their IT systems.
  • Kooltra has already entered into contracts with several FX brokers that will use FXCore. The brokers will gain access to a suite of data analytics solutions that enable them to track total revenue, leads, FTDs, conversion rates, deposits and profit, among other things.
  • Kooltra claims that its FXCore platform is perfectly positioned to disrupt the Forex industry. It stated that FXCore allows its broker clients to start running their FX businesses in as little as two weeks. In the past, starting a Forex brokerage involved entering into multi-year, multi-million dollar contracts for platforms that take months, if not years to implement.

HSBC COMPLETES THE FIRST YUAN-DENOMINATED LETTER OF CREDIT TRANSACTION ON BLOCKCHAIN

  • HSBC bank has successfully processed the first yuan-denominated blockchain letter of credit. The transaction involved the export of LCD parts from Hong Kong to mainland China.
  • The bank used the Voltron trade finance platform, developed by eight banks including BNP Paribas, and Standard Chartered along with HSBC.
  • HSBC said that it can reasonably expect to have a fully-working solution by the end of 2019, or early 2020.
  • If successful, the blockchain letter of credit could significantly reduce transaction costs, as well as increase processing speeds. This particular transaction was completed in 24 hours, while it would usually take five to ten days using conventional means.

VANGUARD PILOTS A SOLUTION THAT COULD DISRUPT THE POSITION OF BANKS IN THE FOREX MARKET

  • Vanguard started testing a product that allows asset managers to trade currencies directly, completely bypassing investment banks in the process.
  • If successful, the peer-to-peer trading platform would "mark a leap in the evolution of the FX market." This is mostly due to the fact that big banks, acting as intermediaries, take a large cut from each transaction.
  • This development is significant because the $6 trillion currency market is currently dominated by big investment banks like JPMorgan Chase & Co, and Vanguard's platform is aiming to eliminate them from Forex transactions.
  • Analysts think that the blockchain-based peer-to-peer platform would have even more of an impact on swaps and forwards than on spot trading. This is because matching traders with opposite interests is much more difficult when trades need to be executed instantly, as they do in spot markets.
Part
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Part
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Major Developments in Capital Markets - Part 2

In 2019, Enel issued the world's first general-purpose sustainability development goal (SDG) linked bond on the capital market. The White House also disclosed plans to reduce United States capital markets' portfolio flowing into China. The year 2019 has seen significant developments related to mergers and activities aimed to offer cryptocurrency-denominated bonds. The various impacts of these developments are below.

WORLDS ISSUES FIRST SDG LINKED BOND, SETS KPI

  • The Italian international energy company Enel issued the first-ever KPI-linked bond to promote the UN's Sustainable Development Goals.
  • This development is significant because the funds raised through this transaction are not tagged to any specific use of proceeds. The bond resembles a sustainability-linked loan (SLL), and interest rates vary with the performance of its KPI. This mechanism has never been used for a bond before.
  • Most interestingly, Enel would allow investors to hold it accountable for the KPI-linked bond strategy using a coupon "step-up."
  • The impact is notable as the KPI will increase the installed capacity of Enel's renewable energy to 55% from 46% of its capacity relative to the first quarter of 2019. This bond will fasten the achievement of UN SDGs and sets a standard for a new product relevant to the "sustainable finance market" and would impact other bond issuers to emulate.

WHITE HOUSE PLANS CAPITAL FLOW RIFT WITH CHINA

  • Trump administration revealed the desire to delist Chinese companies from United States stock exchanges and also limit America's involvement with the Chinese market via government pension funds.
  • This move is significant because if successful, it would have implications for billions of dollars already invested.
  • About 150 Chinese firms listed on the NASDAQ, New York Stock Exchange, and NYSE American exchange may be affected. Some Chinese companies listed in the US, like Alibaba Group Holding Ltd, Baidu Inc (BIDU.O), and JD.com Inc (JD.O), have the combined market capitalization of over $500 billion.
  • The impact of this move may pause the listing of more Chinese companies in the United States as investors wait to see the outcome of planned limitations. The move also undermines the international American Depository Receipt.

FINANCIAL LINKS BETWEEN CHINA AND THE WEST GO TIGHTER AMIDST TRADE NEGOTIATIONS

  • In 2019, as China and America resume trade negotiations, there are indications that they may blacklist each other's firms. However, China says it will open up its capital markets for more engagements from Western financial firms.
  • Ongoing trade negotiations may have a significant impact. Western brokerages that previously had limited control over their minority stakes in local Chinese firms were allowed to control 51% of their Chinese based assets in 2018. In 2019 China said it might eventually grant them full control of their stakes in local Chinese firms by 2020.
  • The impact of ongoing negotiation is wide-reaching. Financial links between China and countries in the West may grow tighter; experts believe this will erect an "economic iron curtain" that will divide/limit trade across the world.

CRYPTOCURRENCY-DENOMINATED BONDS

  • In 2019 Germany's second-largest stock exchange commenced cryptocurrency trading.
  • In 2019, LSE announced its desire to implement "blockchain technology on the platform." LSE is the oldest stock exchange in the world; it is 300 years old. In 2019, LSE acquired a company that is issuing "the world's first automated cryptocurrency-denominated bond."
  • In 2019, it became evident that NASDAQ is working with about seven major cryptocurrency exchanges. NASDAQ is investing in startup blockchain companies to gain their technology. Significantly, this investment practice ups its surveillance capability and helps clients develop their marketplace.
  • Recent collaboration activities to offer cryptocurrency-denominated bonds indicate that money and technology are inseparable. Cryptocurrency significantly impacts capital markets positively by improving the visibility of trading/exchange activities.
  • The impact of crypto in stocks management is significantly decreasing market volatility, and strengthening "the value of assets" for investors.

EXPERTS EXPECT WORST-CASE SCENARIO FOR MARKETS AND MAJOR INDUSTRIES

  • In 2019, the United States imposed new tariffs on Chinese goods and products with "another tidal wave of tariffs." America accused China of rampant industrial espionage as well as "massive state intervention in markets."
  • The most recent $300 billion worth of tariffs imposed after June's crackup in trade negotiations between America and Beijing significantly heightened duties. These duties cover over half a trillion dollars in the value of goods "that Americans buy from China" yearly.
  • The impact of the above interplay of rival forces in the US-China capital markets will lead to the loss (expected worst-case) of two million jobs. The US-China trade crackup may slash the United States "GDP growth by a full percentage point" and negatively affect markets and major industries across the Pacific.
  • "Decreased US oil-and-gas exploration" is set to occur if duties on barite increase to 25%.

RESEARCH STRATEGY

The research process reviewed credible news publications and financial/economic resources such as Financial Observer, Chicago Business web, among other resources. The study investigated developments in the capital markets space in 2019. Events/developments reported by multiple sources and implemented by significant organizations in the capital markets are included. The scope and impact of various developments were also studied. The study also contains the first general-purpose SDG linked bond. It has successfully placed a US$1.5 billion bond on the United States capital market and has developed a KPI that is an example to other bond issuers. The KPI seeks to increase the renewable energy installed capacity of Enel to a minimum of 55% from 46% in 2019. Developments, including collaboration and provision of cryptocurrency-denominated bonds, are in the study. They are implemented by several market players, including the London Stock Exchange, one of the oldest stock exchanges in the world, and other companies. (LSE is 300 years old). Cryptocurrency aims to improve trading exchange visibility. White House plan on capital market rift with China is in the study because it may affect over 150 Chinese companies with a combined market capitalization of over $500 billion. The expected worst-case scenario of trade negotiations between China and the US is in the research. It may cost several million jobs, affect the growth of US GDP, and negatively affect markets and industries across both sides of the Pacific.
Part
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Part
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Major Developments in Capital Markets - Part 3

All identified major developments in the capital markets space in 2019 are related to the applications of blockchain technology. This new technology appears to have gained a strong foothold in the world of traditional finance, as more and more capital market players are experimenting with it.

BANKS ARE INVESTING ABOUT $50 MILLION IN A BLOCKCHAIN FOR DIGITAL CASH SETTLEMENTS

  • Reuters reported, citing people familiar with the matter, that a consortium of banks is investing around $50 million to develop a digital cash system for settling financial transactions using blockchain technology.
  • The project was first proposed by UBS Group AG. Other banks that have been involved in at least some phases of the project include Banco Santander, Bank of New York Mellon Corp, State Street Corp, Credit Suisse Group AG, Barclays PLC, HSBC Holdings Plc and Deutsche Bank AG. However, it is unknown which banks participated in the latest investment.
  • The system uses a digital cash instrument to settle transactions, making the process cheaper and less complex.
  • The project attracted interest from major global investment banks and, if successful, it stands to revolutionize the way in which securities and international payments are settled in the global financial system.

JP MORGAN CHASE WILL CREATE ITS OWN CRYPTOCURRENCY

  • Banking giant JPMorgan Chase & Co said that it plans to use blockchain technology to enable the instant transfer of payments for its corporate banking clients.
  • The cryptocurrency, dubbed JPM Coin, will be issued to JPMorgan's clients upon depositing money at the bank. The clients will be able to use it for transactions over the network with other JPMorgan clients. The coins will also be redeemable for US dollars at a fixed 1:1 ratio, keeping the value of the cryptocurrency stable over time.
  • The launch of JPM Coin would make JP Morgan Chase one of the first global banks to incorporate cryptocurrency technology into its core business. It would also help blockchain technology gain a firmer ground in the world of traditional finance.

FRANKLIN TEMPLETON PLANS TO LAUNCH A MONEY MARKET FUND ON A BLOCKCHAIN

  • Franklin Templeton Investments has filed a preliminary prospectus with the SEC for a government money market fund with a focus on blockchain-based shares, the Franklin Blockchain Enabled US Government Money Fund.
  • The fund will invest in US government securities, repurchase agreements and blockchain-based shares. Actually, the fund will allocate at least 99.5% of its total assets in government securities, cash and repurchase agreements. It will not, however, invest in cryptocurrencies.
  • Funds that invest in blockchain-based shares, although new, are not unique. However, Franklin Templeton's fund would be the first of its kind to track the ownership of the fund's shares on a blockchain. The asset manager chose the Stellar blockchain network for this purpose.
  • Franklin Templeton expects that the development would increase transparency and reduce settlement times. Clients will be able to buy and redeem shares of the fund through a special app, that also acts as a blockchain wallet.
Part
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Part
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Major Developments in Capital Markets - Part 4

HSBC's new blockchain solution's acceptance by banks and financial institutions in daily operations, China's proposed overhaul of its futures market, and Switzerland's FINMA's issuance of banking and securities dealers' licenses to pure-play blockchain service providers for the first time, are some major developments in the capital markets space in 2019.

HSBC SETTLES $250 BILLION OF FX TRADES ON BLOCKCHAIN PLATFORM

  • In January 2019, HSBC settled about 3 million FX trades valued at $250 billion using its new blockchain solution called HSBC FX Everywhere, suggesting that banks and financial institutions are accepting the technology in day-to-day operations.
  • HSBC had used the solution to orchestrate payments across its internal balance sheet over the past year.
  • The technology uses a shared permissioned ledger to modify the process around intra-company FX activity, automating various manual procedures and decreasing dependence on external settlement networks.
  • Due to a successful implementation inside the bank, HSBC's interim global head of FX and commodities stated that the bank was exploring ways to help its multinational clients who similarly have "multiple treasury centers and cross-border supply chains," implement the technology for better management of FX flows within their organizations.

CHINA PLANS BIGGEST FUTURES MARKET OVERHAUL SINCE 2015 CLAMPDOWN

  • China is proposing significant changes to its futures market that would unban unhedged bearish trades and grant global investors unparalleled access to trade equity-index and commodity futures without requiring a government-approved quota, paving the way for wagers on stock-market volatility.
  • This proposed overhaul, which is the biggest since a chaotic crackdown by its regulators in 2015, indicates that despite escalations in its trade war with the US, China is making efforts to open its financial system.
  • With greater access to index futures, China would hope to attract as much foreign capital as it can get, especially as there has been reluctance by some international investors to increase their exposure due to a deficiency of hedging tools.
  • Approvals for majority foreign control for onshore financial services ventures are already underway, and the authorities intend to scrap foreign ownership limits of futures firms, life insurers, securities firms, fund firms in 2020.

IN FIRST, SWISS REGULATOR ISSUES BANKING LICENSE TO TWO BLOCKCHAIN FIRMS

  • In August 2019, the Financial Market Supervisory Authority (FINMA) in Switzerland announced that it had issued banking and securities dealers' licenses to SEBA Crypto and Sygnum, two new blockchain firms.
  • The significance of this announcement is that this was the first time the regulator had issued such licenses to "pure-play blockchain service providers," allowing the blockchain firms to render services to institutional and professional customers.
  • The license is a breakthrough for the whole digital asset market ecosystem, with SEBA Crypto expected to begin operations in October this year officially.
  • The license also allows Sygnum to be able to raise new capital through the production of asset tokens based on existing financial assets, thereby reducing the cost of raising capital and enhancing liquidity for issuers and investors.


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