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BLOCKCHAIN AND DLTS MUST EVOLVE TO MEET THE NEEDS OF CORPORATE FINANCE AND FX

BLOCKCHAIN AND DLTS MUST EVOLVE TO MEET THE NEEDS OF CORPORATE FINANCE AND FX

By Wolfgang Koester

C-level executives and board members are investing billions of dollars into blockchain, and it’s easy to understand why. How could any corporate leader looking for trust, transparency and efficiency in their operations, resist a technology that promises trust, transparency and efficiency?

Yet, despite the excitement around blockchain/distributed ledger technology (DLT), it is not yet the panacea finance professionals have been waiting for. Despite being available for nearly a decade, it remains a work in progress.

Blockchain and Beyond

For the uninitiated, a DLT essentially replaces a centralized ledger system with peer-to-peer, digital databases. DLT allows key information – once housed in static repositories– to be stored in data “blocks,” that reside across vast networks, or “chains,” of computers.This ensures no one single individual or entity has complete control over key data. Instead, the new technology enables data to be owned and overseen by all stakeholders, each of whom has full visibility into every transaction, payment or entry.

Not only does this facilitate transparency, it also enables reconciliation to occur quickly and free of friction. Additionally, costly middlemen can be eliminated.

Consider how appealing these features – access, visibility, efficiency – are to CFOs, corporate treasurers and treasury managers who must manage a litany of financial activities across numerous ERPs, entities, continents and time zones.The appeal of DLT helps explain why 80 percent of financial executives predict their companies will be using blockchain by 2020. Any technology that can deliver greater visibility into transactions and exposures while facilitating more efficient settlements would be a welcome addition to any treasury team’s toolbox.

However, concerns about DLT linger for treasury executives and those concerns must be addressed before blockchain/DLT is fully embraced by corporate finance teams.

For instance, although eliminating needless middleman sounds like a giant leap towards efficiency, regulators and compliance officers actually take comfort knowing that middlemen are included in trade settlements and other processes, ensuring the appropriate “t’s” are crossed and “i’s” are dotted. Additionally, although “open-source,” peer-to-peer architecture facilitates collaboration, it can also trigger compliance-related anxieties for executives who may be concerned that too many stakeholders have access to proprietary data and confidential information. (This explains the growing popularity of “private DLT,” which restricts access, but – as any true DLT proponent will tell you –reducing access to a digital ledger undermines part of the technology’s appeal.) Finally, scalability remains a concern: Each day corporate finance teams are asked to negotiate high volumes of complex trades and settlements. It remains unclear if today’s DLT can accommodate the intense demands treasury teams face when executing foreign exchange (FX)trades.

Future Incarnations of DLT

These concerns may seem granular to some board members and C-level executives, but details like these are important to treasury managers tasked with managing FX.

In the first half of 2017 alone, according to FiREapps research, North American and European corporations lost more than $14 billion due to FX-related losses. Such losses may get overlooked in the cloud of hype that now surrounds blockchain. Despite their best efforts and expertise, many corporate finance professionals are still challenged when it comes to containing the impact that currency volatility has on earnings per shares (EPS) or EBITDA. This stems in a large part from the fact that many corporations continue to rely on manual processes to manage currency exposures.

So, in one respect, any new technology – such as blockchain – that promises to replace manual currency risk management programs will be enthusiastically embraced by C-level executives. But blockchain is not yet sophisticated enough to do that. Not yet, anyway.

I mention blockchain as it continues to capture the lion’s share of headlines because it supports Bitcoin, the first digital currency. But Bitcoin is only one of many digital currencies now available(there are currently more than 1500 cryptocurrencies on the market)and blockchain is only one DLT of many.

For instance, cryptocurrency IOTA receives less attention than Bitcoin despite the fact IOTAis the fourth most valuable digital currency (as of January 2018). And IOTA is not even supported by a traditional DLT; instead, it is supported by “The Tangle”, which is a directed acyclic graph, or DAG. Proponents of The Tangleare already calling it the “next generation” of blockchain because they insist it is far more fluid, scalable and efficient than any DLT. (This rendering shows The Tangle in action).

Time will tell, but the popularity and sophistication of IOTA and DAG underscore the evolving nature of digital ledgers and why corporate executives should treat DLT as a work in progress.

How many digital ledgers are now available or in development? That is impossible to say, but last year new DLT start-ups attracted five times as much venture capital as did new equity opportunities combined, meaning the DLT bandwagon – and the problems they solve – will continue to grow.

This is why eager executives (as well as those who may still be on the fence) should be enthusiastic about DLTs, but they must also recognize the technology is evolving. Just as America Online (AOL) was a primitive precursor to today’s highly-advanced search engine algorithms, current DLT – as exciting as it is – offers only a glimpse of the promise that tomorrow’s distributed ledger technology will deliver.

So, if DLT is far from its full maturity, should board members and C-level executives curb their DLT enthusiasm? The answer is “no.” As the World Bank stated earlier this year, “Waiting for ‘perfect’ DLT solutions could mean missing an opportunity to help shape it.” Or, as Bain and Company concluded in 2017,“the [DLT] winners will be those that push the pace of change, rather than resist it.”

CFOs should welcome DLT – just as they should stay abreast of all the latest treasury technology. By being proactive, corporate executives can have a hand in shaping the evolving DLT, ensuring it meets the real needs of their treasury teams.

About the Author

Wolfgang Koester is the CEO and co-founder of FiREapps. He has more than 30 years of extensive experience in currency markets and working with numerous global Fortune 1000 companies and government entities. Prior to co-founding FiREapps, he served as President of GFTA Trendanalysen Inc., a quantitative currency management company. Koester has been named as one of the “100 Most Influential People in Finance” by Treasury & Risk magazine and is regularly included in Global Finance’s annual “Who’s Who in Foreign Exchange.” He is a frequent speaker at industry and academic events and his work has appeared in The Economist, The Wall Street Journal, Financial Times, Treasury & Risk and AFP Exchange among other industry publications. He is a regular commentator on CNN, CNBC, Fox Business and Bloomberg.

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Economic recovery likely to prove a ‘stuttering’ affair

Economic recovery likely to prove a ‘stuttering’ affair 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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European trading firms begin coming to terms with the new normal

European trading firms begin coming to terms with the new normal 2

By Terry Ewin, Vice President EMEA, IPC

In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.

The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.

We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.

Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.

In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.

Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.

Currently, many European trading firms are taking what could be described as a two-pronged approach.

The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.

The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.

It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.

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Currency movements and more: How Covid-19 has affected the financial markets

Currency movements and more: How Covid-19 has affected the financial markets 3

The COVID-19 pandemic has been more than a health crisis. With people forced to stay indoors and all but the most essential services stopped for multiple weeks, economies have suffered and financial markets have crashed. Perhaps the most public and spectacular fall from grace during the early stages of the pandemic was oil. With travel bans in place around the world and no one filling up at the pumps, the price of oil plummeted.

Prior to global lockdowns, US oil prices were trading at $18 per barrel. By mid-April, the value had dropped to -$38. The crash was not only a shocking demonstrating of COVID-19’s impact but the first time crude oil’s price had fallen below zero. A rebound was inevitable, and many traders were quick to take long positions, which meant futures prices remained high. However, with stocks piling up and demand sinking, trading prices suffered. Unsurprisingly, it’s not the only market that’s taken a knock since COVID-19 struck.

Financial Markets Fluctuate During Pandemic

Shares in major companies have dipped. The Institute for Fiscal Studies compiled a round-up of price movements for industries listed by the London Stock Exchange. Tourism and Leisure have seen share prices drop by more than 20%. Major airlines, including BA, EasyJet and Ryanair have all been forced to make redundancies in the wake of falling share prices. The automotive industry has also taken a knock, as have retailers, mining and the media. However, in among the dark, there have been some patches of light.

The forex market has been a mixed bag. As it always is, the US dollar has remained a strong investment option. With emerging markets feeling the strain, traders have poured their money into traditionally strong currency pairs like EUR/USD. Looking at the data, IG’s EUR/USD price charts show a sharp drop in mid-March from 1.14 to 1.07. However, after the initial shock of COVID-19 lockdowns, the currency pair has steadily increased in value back up to 1.12 (June 25, 2020). The dominance of the dollar has been seen as a cause for concern among some financial experts. In essence, the crisis has highlighted the world’s reliance on it.

Currency Movements Divide Economies

Currency movements and more: How Covid-19 has affected the financial markets 4

In any walk of life, a single point of authority is dangerous. Indeed, if reliance turns into overreliance, it can cause a supply issue (not enough dollars to go around. More significantly, it could cause a power shift that gives the US too much control over economic policies in other countries. Fortunately, other currencies have performed well during the pandemic. Alongside USD and EUR, the GBP has also shown a degree of strength throughout the crisis. However, these positive movements haven’t been shared by all currencies.

The South African rand took a 32% hit during the early stages of the pandemic, while the Mexican peso and Brazilian real dropped 24% and 23%, respectively. Like the forex market, other sectors have experienced contrasting fortunes. Yes, shares in airlines and automotive manufacturers have fallen, but food and drug retailers have seen stocks rise. In fact, at one point, orange juice was the top performer across multiple indices. With the health benefits of vitamin C a hot topic, futures prices for orange juice jump up by 30%. The sudden surge had analysts predicting 60% gains as we move into a post-COVID-19 world.

Looking Towards the Future through Financial Markets

The future is always unknown and, due to COVID-19, it’s more uncertain than ever. However, the financial markets do provide an indication of how things may change. The performance of USD and EUR in the forex markets suggest there could be a lot more trade deals negotiated between the US and Europe. The surge in orange juice futures suggest that health and wellness will become a much more important part of our lives. Even though it was already a multi-billion-dollar industry, the realisation that a virus can alter the face of humanity has given more people pause for thought.

Then, of course, there’s the move towards remote working and socially distance entertainment. From Zoom to Slack, more people will be working and playing from home in the coming years. The world is always changing, but recent have events have made us appreciate this fact more than ever. The financial markets aren’t a crystal ball, but they can offer a glimpse into what we can expect in a post-COVID-19 world.

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