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

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. 

Asian post-trade landscape: CCPs, CSDs aiming for global standards

Asian post-trade landscape: CCPs, CSDs aiming for global standards
The Asian financial services market is highly fragmented along national boundaries. Lack of unified political will has resulted in regulatory and market practices that vary widely among the countries. The trading landscape in the Asian countries has undergone radical transformation in the last 10 to 15 years. As the countries in the region slowly open up their economies to the outside world, investors from the developed economies have flocked to emerging Asian countries in search of higher returns and portfolio diversification needs. This has resulted in expansion of products and asset classes. Electronification of trading activities has resulted in growing demand for electronic trading tools and ever-lower latency. Consequently, trading activity is high in the Asian countries; in fact many of them rank highly in the world in terms of equity trading volume at their exchanges as well as in exchange traded and over the counter derivative turnover. Continuous evolution in the trading landscape necessitates changes in the value chain, namely the post-trade functions. Post-trade functionalities generally include clearing, settlement, and custody services that are served by central counterparty clearing houses (CCPs), central securities depositories (CSDs), and custodians. The CCPs and CSDs are fundamental in ensuring smooth, efficient, and stable operations of trading markets. Historically post-trade industry has not received adequate attention, but that is changing now due to greater regulatory focus on managing risks at systemically important institutions. In a recent report we discuss the trends and developments taking place among Asia’s CCPs and CSDs. Some of the highlights from the report include:
  • There is a great deal of “vertical integration” in the Asian post-trade industry, with exchanges holding majority stakes in most CCPs and many CSDs. There is also a trend toward “horizontal integration” among the Asian post-trade players with growing coverage of products and asset classes.
  • Asian regulators have traditionally taken a conservative approach in shaping their financial markets. Therefore since the crisis of 2008, risk management has emerged as the single most important item on the regulators’ agenda. This has brought greater attention to policies and practices at the CCPs and CSDs.
  • Liberalization of Asian economies is creating opportunities for trading and clearing new products and asset classes. The post-trade players are developing capabilities and infrastructure to support new products.
  • Almost every Asian country is mandating central clearing of OTC derivatives and reporting of trades. Incumbent national CCPs are called upon to facilitate central clearing of OTC derivatives.
  • There is not much competition in the Asian post-trade industry, and except in a few markets that is likely to be so going forward.
  • Most Asian post-trade players, particularly the CCPs, are undertaking major technology transformation initiatives spanning years and spending significant resources to upgrade and overhaul their systems and processes.
Find out more about this report here.

Challenging times for the post-trade industry: improving efficiency and achieving stability amidst growing complexity

Challenging times for the post-trade industry: improving efficiency and achieving stability amidst growing complexity
The challenges facing the CCPs and CSDs are manifold. Not only are they having to adapt to the downstream effects of changes in the trading environment, they are also presented with unique challenges impacting their business and operating models. Celent just published a research study titled “Challenging Times for the Post-Trade Industry: Improving Efficiency and Achieving Stability Amidst Growing Complexity” analyzing the global, regional, and local developments impacting the CCPs and CSDs. The changing regulatory environment is the dominant force impacting post-trade industry players. Several key regulations such as Dodd-Frank, Basel III, CRD IV, MiFID II, EMIR, CSD Regulations, and AIFMD are having impact on the way CCPs and CSDs perform. At times there is a lack of clarity and co-ordination among regulators in different jurisdictions; this results in lack of synchronization and standardization of some of the key regulations, creating confusion and making the job of responding to the changes difficult for industry participants. In addition to regulatory changes, market structure related changes  (such as T2S in Europe and shortening of settlement cycle across the world) are having significant impact on post-trade players. Though not traditionally very competitive, the post-trade industry is likely to become more competitive. Europe is leading the way in this regard, with CCP interoperability already in place and T2S and CSDR likely to do the same among the CSDs. Learning from the European example, other markets are considering introduction of competition in their CCP space by allowing international players in domestic markets. Post-trade players have been laggards compared to other parts of the capital market value chain when it comes to adoption of technology. Driven by regulatory and market forces, as well as emerging concerns around cybersecurity, they are now undergoing major reviews and upgrades in their technology and operations. We identified 12 key markets across the globe for this analysis including the US, UK, Germany, Czech Republic, Japan, Australia, Hong Kong, China, India, Brazil, Mexico, and Chile. This research is part of Celent’s ongoing coverage of the post-trade industry and was commissioned by Nasdaq , while Celent kept full editorial control. To complement Celent’s post-trade knowledge base from our existing and ongoing research, this research greatly benefitted from detailed discussions with representatives from 17 major industry participants representing different types and categories of players across the world. Find out more about the report at Celent or Nasdaq’s website.

Post-trade and the clouds over Europe

Post-trade and the clouds over Europe
Europe has been dealing lately with all the issues around the Greek debt and the possibility of a “Grexit”. While the final decision on the matter would have its significant repercussions, the uncertainty that has come with the problem in the last few months is also expected to have its own associated costs. It could also impact the long-term competitiveness of the region vis-à-vis its competitors in the US and Asia-Pacific. When we focus specifically on the capital market issues. there are several significant regulatory changes happening in the European capital markets at this point in time. EMIR, Mifid II, Basel III, T2S and CSDR are all regulations at various stages of implementation. From a post-trade point of view, several of these regulations are expected to have significant impact, especially when we talk about T2S and CSDR. However, the continuing concern over regulatory implementation in Europe is that the delay and uncertainty over when the regulations come into effect could prove costly for the region overall. An example is the delay by European Securities and Markets Authority (ESMA) in providing the draft technical standards. Similarly, the recent decision by Monte Titoli to delay joining the T2S, at least for a few months has proven to be a setback for the project, considering it was easily the largest CSD to participate in the first phase and would have been instrumental in measuring the effectiveness and success of the implementation. There is a lot of ground that the regulators and industry are trying to cover in an economy that is still suffering from the after-shocks of the financial crisis. While trying to do everything in a hurry isn’t the answer, it is important to ensure that the deadlines are kept as much as possible, otherwise on-going delays will directly impact European market’s competitiveness.

Buy side insight for Fixed Income platforms

Buy side insight for Fixed Income platforms
Time keeps becoming scarcer and we all become more selective on what conference we will attend or speak at. But yesterday, as I was by chance in Paris, I dropped by one of the potentially nth conference on fixed income, and was presently surprised by the value of its content. Congrats to Trading Screen for pulling it off. Let me share with you a few takeaways, mainly from a great buy side panel: 1) One of the buy sides (whom we all know are the ones calling the shots nowadays) summarized his selection process for choosing a new trading platform as follows: i) Who owns the platform? A bank (negative points) or a vendor (positive points if strong balance sheet). I would add exchanges (they are neutral) and interdealer brokers (for whom it is one of the only options to remain in business) to that list, but the latter will have a challenge at connecting all the buy side. I have an open question here: why wouldn’t the big buy side invest together in a platform they believe in with Equity so that they can reap the benefits of the success they will bring to it as the banks did with Tradeweb?Aren’t they in the business of investing? ii) Buy side is not an option: if the buy side doesn’t all connect together in an automated way, the success rate of the platform will be low. (c.f. who’s calling the shots). iii) The need for an independent clearing agent from ownership and/or for the functionality to choose one’s own clearing agent. Here I actually pushed the question further as a big custodian is currently rumored to be the clearing agent of a MD2C platform’s new product: should custodians be involved, should they become agent brokers since they have the assets of the AMs (and a clean balance sheet, may I add?), or be a platform? Some people in the audience laughed at that one, pretty sad considering what some of the big global custodians have in pipe, let’s assume these were brokers who have never taken the time to understand what happens “post” trade… thankfully at least two of the big buy sides in the panel actually got my point: there could be room for some innovative matching engine to team up with custodians (Algomi?). See last year’s Celent report: Innovation in Focus: The Analytics Powering Fixed Income Matching for a comparison of the functionalities of the new matching vendors. iv) Flexibility of interactivity: the buy side has to be able to choose to interact only with each other, to exclude toxic flow, to include some banks, etc. Everyday potentially in different ways. So just a switch functionality for the other side of the trade. Some new platforms thankfully already have that in their rule book/functionalities such as Bondcube or TradeCross (Trading Screen’s 2.0 version of Galaxy). In our report we actually had mentioned the “selective multicast” capability of Baymarkets for banks to select what prices to send to what client in cascades; this is an interesting adaptation for the buy side to select who to send what interest or order or request for quote to whom in cascade or not. 2) Another point that was made was that there is no first mover advantage, this is taking time to pick up as AMs are adapting to change and regulations on transparency is not final: I could not agree more as we have been having these discussions for the past 3-4 years non-stop, and the number of professionals buy and sell side interested keeps increasing. Still, at some point the big AMs will have to jump on one ship as the cost of illiquidity is becoming too expensive for their funds’ performance (nice presentation on that from an AM quant). 3) Last but not least is the cost of connectivity to all of these platforms‎, apart from the time spent to connect to them (and to convince senior management to connect to them?). This has to be corroborated also by the lack of screen space available for new entrants, the need to come in via other or incumbent screens maybe? Or via a web browser? 4) Last interesting point which is an idea we have been pushing out at Celent for a while: the buy-side could go directly to the issuers: yes, and they already do actually, for big infrastructure projects or issues whereby they already have a relationship with the issue. A platform with both and no brokers, banks to build the book and syndicate and sustain the price? CSDs and iCSDs have a role to play here: such a platform could work with Dutch auctions or even normal auction process, but it would work more in the interest of the smaller buy side than the big ones obviously, creating a level playing field… hence hard to make it pick up… SMEs and small institutions could meet on P2P lending platforms through aggregators of interest such as Orchard though. More in an upcoming report on these… As for TradeCross‎, I still need to get a demo but we already know that it will be All-to-All (but in the flexible way mentioned above, not our old definition with CLOB and level playing field), anonymous, an MTF, trading with all-in price (commission), interest and orders, multiple trading models (did they mean protocols?), spread or price or yield trading and with a web browser if need be. No go live date as of yet.

New SWIFT-Celent reports released on adoption of T2S

New SWIFT-Celent reports released on adoption of T2S
SWIFT and Celent have been closely following developments related to the implementation of the Euro system’s Target2 Securities (T2S) initiative and how market participants are gearing up in preparation for the same. As part of that we published a report titled ‘The European Post-Trade Ecosystem under T2S: Dealing with Complexity’ in March, 2013. Last week two new reports were published looking at the progress made in the last 12 months and what are still some of the open questions. The first of these two reports focuses on development pertaining to the settlement function under T2S, while the second one looks at firm strategies and arrangements for asset servicing and securities payments. These new reports, based on detailed interviews with major participants in the European post-trade environment, find that though there has been progress, the strategies of many players remain unclear. We also identify new offerings in post-trade services that are likely to emerge in the post T2S world and the drivers behind them. The press release of these reports’ launch can be found here.

Emerging Trends in the Post Trade Industry

Emerging Trends in the Post Trade Industry
We identified a number of drivers that will have significant impact on the post-trade industry going forward. While some of them act in opposite direction, some reinforce others’ impact. Based on our analysis for each of the several drivers, and interaction with several market participants, we see the following trends emerging in the post-trade business:
  • Regulatory and market pressures will force investment managers to reassess their business models. Limited revenue growth opportunities have meant they are now focusing on optimizing cost and improving efficiencies to remain competitive.
  • There is a move toward automation of processes, upgradation or replacement of legacy systems in the mid-back office, and integration of disparate systems to obtain a more holistic approach.
  • Firms are working under severe budget constraints. A large portion of the technology budget is being spent on addressing regulatory and compliance issues, often in a reactive way. Thus significant investments to achieve true process efficiency and improvement are difficult to come by in the short run. However, automation of large number of manual processes frees up resources, and some firms are looking at the problem from this perspective.
  • Budget constraints are pushing them toward considering outsourcing mid-back office operations. Given that all firms have to adhere to a same set of regulatory requirements, some vendors are considering coming up with a utility model of offering that will allow multiple firms to use a basic core platform to address many of these issues. However, customizing such an offering to suit firm specific needs, especially for large financial institutions, will be a challenge.
  • Growth of alternative trading venues is presenting new opportunities to broker-dealers. They can now internalize trades carried out between two counterparties both of whom are their clients. Institutions with large client base are best suited to take advantage of this. The number of institutions in this market is not large and going further down; therefore share of internalized trades will increase in future.
  • Regulators are trying to achieve harmonization across markets by planning to come up with common legal and tax norms. This trend is particularly visible in Europe. The success of such initiatives depends on political actors and is difficult to predict. They can potentially encourage more cross border trading which should contribute to the growth of settlement volumes.
  • There is also a move toward achieving shorter settlement cycle. While participants in most markets are either operating in, or getting ready for, a T+2 environment, plans to move to T+1 model will have major impact across the board. That is unlikely to happen in the near term.
  • Growth in volumes can be potentially offset by other developments, such as interoperability of CCPs, which can increase netting of trades and therefore suppress settlement volumes. This would be further aggravated by consolidation among market infrastructure providers.
  • Regulators are also promoting competition among market infrastructure providers, particularly among CSDs. Many of them will have to change their business models to stay alive in the market. They will be forced to compete more directly with sub custodians in the asset servicing business. Achieving scale will be important to stay alive in the business and smaller players will be driven out or get acquired.

Rising Market Concentration in the Post-Trade Industry

Rising Market Concentration in the Post-Trade Industry
Several drivers will impact the evolution of the post trade industry. Different drivers act in different directions, however, if there is one common theme that is the concentration of players in the post trade ecosystem is likely to go up over the next 5-7 years and post-trade processing will increasingly become a scale business. This trend will be particularly seen in Europe, especially among market infrastructure and custody service providers. The growing concentration will be driven primarily by adoption of T2S and implementation of CSD regulations. Dark pool regulations will take volumes back to the lit market, helping incumbent exchanges gain more share. Custody service providers will also see rising concentration. T2S will be the prime driver for this in Europe. Local custodians could find consolidation among CSDs detrimental to their role. We expect significant consolidation among local sub custodians, and the market will ultimately be left with a few regional players and some niche players in local markets. Driven by these changes, some global custodians could decide to create their own CSD. Implementation of certain regulations like Basel III, Volcker, and Liikanen proposals could reduce concentration among investment managers and broker-dealers. However, opposing forces such as adoption of best execution and reporting tools, Big Data capabilities, and improved netting capabilities will help large broker-dealers gain market share. In a market that is becoming extremely competitive, harmonized, and industrialized, it is important that participants review and reconsider their current business model. Firms are responding to these challenges in a variety of ways. In the short term broker-dealers are considering headcount reduction, asset disposals, and portfolio run-downs to stay competitive, while in the medium to long run efforts to reduce duplication between geographies and products through centralization and offshoring are gaining traction. CSDs are looking to use common infrastructure allowing for interoperability and to build connections to local CSDs to manage non-local assets for clients. In Europe some custodians and non-euro CSDs may partner with euro CSDs to gain access to T2S. Some custodians will look to buy/build CSDs to gain access to T2S in Europe; however, their number is likely to be limited. Investment in technology to adopt to the post T2S world is a consideration for many players. Celent has learned that some banks are taking this opportunity to upgrade or replace their complete technology infrastructure by taking a firm-wide strategic approach. Provision of efficient collateral management services will also become important. These developments will mean market participants will have plenty to think about. Smaller players will need to consider strategies for survival, while larger players will need to explore opportunities to gain market share in a business that is increasingly becoming one based on scale. We discuss these and many more trends in a recent report titled ‘Future of the Post-Trade Industry, Part II: Rising Market Concentration’.