How do you say “Brexit” auf Deutsch?

I was in Frankfurt a couple months back to host a client roundtable and there was a palpable rubbing of hands in anticipation of a possible Brexit. It reminded me of the time I had spent in Frankfurt in the late 1980s, right after university, back when the only real skyscrapers in town belonged to Deutsche Bank. There was a real sense in that era that with the coming together of the European Union in 1992, Frankfurt stood to emerge as a global financial hub.

Obviously, London was to usurp that role. For reasons of language, geography, regulation and infrastructure, that ascendance seems in retrospect to have been inevitable. And yet now, with the UK vote in favor of Brexit, London’s preeminence appears to be at risk.

Jangled announcements of redundancies by a few large banks belie the fact that once the dust settles, financial institutions will shift into a wait and see mode. Yet to say that much remains to be determined is as interesting as saying that the original Star Wars movies were better than the litany of duds that followed.

I hate to fault my friends in Frankfurt, who have fostered the growth of a robust fintech sector and capital markets businesses, for seeing opportunity in the UK decision to step away from the Continent. Schadenfreude is after all, a German word. But I believe that Frankfurt’s aspirations are overdone. Wasn’t it just a few months ago that HSBC and a few other institutions were threatening to decamp Britain for Hong Kong and Singapore? Wisely, they decided to stay. The acquisition of the London Stock Exchange by the Deutsche Börse was another vote of confidence in London.

The ties between the UK and Europe are thick (London is home to second largest community of French citizens after Paris) and mutually beneficial. They are unlikely to be undone by this plebiscite. Yes, the vote will give heart to seccessionists elsewhere in Europe, and increase the fissiparous tendencies (look for another Scottish independence referendum) already present in the UK.

But it’s important to take the long view. The UK has survived, even thrived, in the wake of greater challenges, including strikes, war and the loss of global empire. It is a mature democracy that hosts a financial services hub unrivalled in the world history. Surely it can work through this Brexit.

To Brexit and beyond!

So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.

French effort to use Blockchain for SMEs could have relevance for emerging markets

The recent news that a French consortium is beginning work on building post-trade infrastructure for trading of SME stocks in Europe will be of great interest to market participants across the world. The consortium comprises of BNP Paribas Securities Services, Euronext, Société Générale, Caisse des Dépôts, Euroclear, S2iEM and Paris Europlace.

There have been several notable developments with regard to experiments and adoption of Blockchain and distributed ledger technology in the leading capital markets globally. However, the signficance of this particular announcement lies in the fact that it tries to address the needs of the a sector that usually struggles to obtain easy access to the capital markets. If successful, such a project could drastically reduce the time taken for post-trade operations, slash costs and generally make it easier for SMEs to raise funds.

In a recent Celent report, we had found that most of the leading global post-trade providers believed that it was still a little early to expect major changes due to Blockchain technology. While this may be true, the current development would be of a lot of interest to the emerging markets around the world. In several such countries, the cost of accessing capital markets is comparatively high and the technology is also often found lagging, as in the case of European SMEs. If the French effort becomes successful, it could pave the way for application of Blockchain technology to specific tasks in emerging markets, not just to enable SMEs to raise capital better, but to help the overall market to leapfrog in terms of modernizing the market infrastructure.

Regulators and market participants in emerging markets should now see Blockchain and distributed ledger technology as a relevant means for streamlining their trading infrastructure. To that end, it is also important that they encourage firms within their jurisdiction to experiment and adopt such technology for specific local applications and requirements, and not just wait to see how it evolves in mature markets in the next few years. 

The next wave of fintech disruption

The bank has traditionally sat in the center of the broader financial world.  The post-crisis challenges have allowed fintech firms to capture market share in traditional banking endeavours such as payments, lending, investments, and financial planning. First wave fintech disruptors with no asset base or legacy banking infrastructure have made significant inroads into challenging banks in their core businesses. Banks have reacted in a variety of ways to these challenges with disparate degrees of success, but only those actively partnering with and supporting fintech innovators have gained a competitive edge.

Similarly, exchanges have stood at the centre of the capital markets for much of human history. The years of connectivity, combined with the earth-shaking changes in the ability of firms to access capital and a global regulatory model that has focused on risk mitigation, have created an ideal world for next wave disruptors to bring solutions to complex trading, liquidity, regulatory, and operational problems that have been difficult for incumbent firms to solve on their own. This investment is going toward blockchain, RegTech, AI and other tools for driving change in the capital markets.

As it has happened with banks, those market infrastructure providers that decide to embrace, leverage and coexist with upcoming fintech firms will be able to further their historical strengths and stay at the core of financial markets.

Since 2008, capital flow into fintech investments has grown sixfold. Last year, about $19 billion in capital was invested in fintech across approximately 1,200 deals, nearly doubling funding flows in 2014. We have seen banks partnering with fintech, filling gaps and bringing critical experience and enterprise scale to these endeavours. Major parts of the financial services ecosystem run the risk of being transformed by pioneering financial technology firms. At the same time, strategic firms have developed innovation centers of excellence, laboratories, and their own CVC funding vehicles to invest and guide in areas of core interest to these firms. CVCs now represent 25% of global fintech capital flows.

This week the Deutsche Bourse announced the creation of its CVC DB1 to fund innovativation in the capital markets. Celent, on behalf of Deutsche Bourse, explores this next wave of fintech in the capital markets and highlights the power of future collaboration between leading financial infrastructure players and fintech firms.

Future of Fintech in the Capital Markets can be downloaded from the DB1 Ventures website. I look forward to your comments.

Canada experiments with putting fiat currency on Blockchain

In keeping with the recent focus on Canada in the wealth management blogs, I would like to make note of a significant piece of news with regard to Blockchain and distributed ledger technology. For some time, the use of fiat currency on the blockchain has been touted as a necessary step for the development of distributed ledger technology. While central banks in the UK and the US have taken the lead in discussions on this matter in the past, the Canadian central bank, Bank of Canada, has recently revealed that it is planning to experiment with the use of fiat currency on blockchain. It will use blockchain technology developed by the well-known R3 consortium for interbank payments, involving some of the leading commercial banks in Canada. While this is more of an evolutionary step than a revolutionary one, it shows the growing willingness of central banks to take Blockchain seriously. If the experiment does prove successful, the possibility of interbank payments using Blockchain in a real-life scenario is quite likely. Even though the use of such technology by retail customers in this context is still someway off, Blockchain proponents would realise the significance of this announcement. It should also encourage further innovation within the sector. 

Capital One Rolls Out a Bank Built Robo

In a blog post yesterday I took automated advisors to task for the black and white way (advisor-assisted “hybrid” model versus “digital only”) they have framed the robo debate. Imagine my surprise when I saw that Capital One’s brokerage arm had launched a platform addressing this very complaint.

The Capital One robo combines a digital interface with telephone access to advisors. It’s an advanced take on the hybrid models offered by Personal Capital and Vanguard, both of which use digital technology (iPads, smartphones and other interfaces) to enhance and scale the contribution of the individual advisor.

What these models do not do is digitize advice delivery. Yes, they deploy algorithms to develop risk based portfolios, but firms have been doing this for ages. The defining characteristic of robo (as opposed to automated) advice is the removal of the real life advisor.

Robot with Benefits

The Capital One robo or robot is a step in that direction in that it automates the entire portfolio manufacturing process, while giving investors the options of getting a wise uncle (or aunt) on the phone to discuss it. This process spans risk profiling and portfolio construction on the front end to compliance and funding at the back.

Needless to say, clients pay for the privilege, to the tune of 90 basis points. This is not much less than the average US advisor charges for his services, and it is a given that other firms will replicate this model, and at half the price. In the meantime, give Capital One kudos for being the first US based bank (Bank of Montreal, whom I discuss in a recent report, was the first in North America) to roll out a homegrown, pure play robo advisory platform.

Keeping up with the Canadians

In my last blog post I described the challenge posed by robo-advisors to the bank dominated wealth management industry in Canada. Here I share observations from my recent report, Thawing Market, The Growth of Robo Advice in Canada, while exploring the implications for other markets as well. The robo advisory business in Canada lags several […]Continue reading...

Is this the best time for an event such as Brexit?

It is difficult to read financial news at present without coming across extensive coverage of the Brexit referendum in the UK and its possible impact. As part of the financial sector, capital markets could be at the forefront in terms of bearing the impact of any likely change. There are already widespread claims of how London could […]Continue reading...

Is exchange consolidation desirable for global markets?

The CEO of Deutsche Börse made some very interesting remarks at the recent IDX derivatives industry conference in London. He argued that the proposed merger between Deutsche Börse and LSE would aid the development of trading in global markets because it would unite and harmonize the European capital markets, which are more fragmented than those […]Continue reading...

Robo Advice Comes to Canada

Newly elected Canadian Prime Minister Justin Trudeau took heat back home earlier this year for imploring his Davos audience to recognize Canada not for its resources, but for its resourcefulness. Yet the intent of his statement was less to diminish the contribution of the energy sector to the Canadian economy than to underscore its distorting […]Continue reading...