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Capital Markets: The Last Frontier for Digital Transformation in Financial Services

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Capital Markets: The Last Frontier for Digital Transformation in Financial Services 1

By Dr. Avtar Singh Sehra, CEO, Nivaura

The last decade has seen financial services undergo vast digital transformation. New technologies and a greater ability to digitise and automate processes have brought greater efficiency and effectiveness to the sector, as well as enabling the creation of new, value-added consumer and B2B products.

Capital markets, however, remain largely unchanged. The industry is constrained by legacy processes that often involve substantial manual data input and document/spreadsheet management, which is inefficient in comparison to digital and automated operations. These inefficiencies have been squeezing capital market participants’ margins for far too long.

The current state of affairs

As it stands, a typical primary capital markets execution is a linear and sequential process involving multiple stakeholders, who repeatedly convey information back and forth manually to draft and execute legal documents, and then manage data input into multiple systems. This data is then sent across multiple institutions across the transaction lifecycle from pre-trade to post-trade, where it is again extracted and transformed to perform further lifecycle management activities. The processes that occur after drafting relevant documentation, such as clearing and record-keeping, are also manual and time consuming, with parties having to review documents individually.

There are some exceptions to this. For example, within commercial paper and certificates of deposit, there is some level of automation in how deals are executed, and data is transmitted from a dealer into post trade processes. In addition, high volume, structured, self-led transactions may be standardised to some degree. However, even with these isolated islands of partial automation, the general debt capital markets (DCM) issuance process remains highly manual and is in desperate need of digitisation and automation to increase its effectiveness and efficiency.

Not only do these repeated manual processes require significant human resources, but they are also prone to error. Humans, for all our gifts compared to machines, will never be able to achieve consistent 100% accuracy when it comes to complex data and document management processes. However, before we can even begin to discuss automating manual activities, they must first be digitised. This is crucial because it enables the capture of structured data throughout the transaction lifecycle. Only structured data can be easily leveraged for advanced automation, from simple if-then logic, to advanced machine learning technologies for complex cognitive decision making e.g., extracting data from complex documents.

Considering the evolution that the rest of the financial sector has undergone over the last twenty years when it comes to digitisation and automation, it’s hard to understand why capital markets have been left behind until now. But change is finally coming.

A turning point

2020 saw the winds of change begin to blow across the capital markets industry. In a first for the sector, a group representing all participants of primary capital market transactions is collaborating on a data standard to be used in legal documents as well as down-stream systems and transactions data flow: General-purpose Legal Mark-up Language (GLML). This collaboration is taking place under the umbrella of the GLML Consortium, whose founding members include magic circle law firms and capital markets infrastructure technology vendors.

GLML is a ‘mark-up language’: a type of human and machine-readable syntax developed to be easy for a lawyer (or, indeed, anyone else) to implement in documentation with little training, and without requiring coding experience. It enables users to easily turn their existing contractual templates, including precedents and pro formas, into machine readable files, which can then be used to create transactions with structured data from the outset that can map to a standardized taxonomy for transmission across the pre- or post-trade process. Any word processor or editor (including Microsoft Word) can be used to apply GLML, allowing drafters to create and maintain “GLML’d” templates in the same way they approach traditional documentation.

Fundamentally, GLML permits the accurate extraction of key data from legal documentation, allowing it to be passed to relevant intermediaries in a standard and automated and seamless manner.

The wider implications of GLML

At first glance, it’s easy to underestimate the impact that a standard like GLML could have on the capital markets industry, but enormous benefits come from what it will enable.

First, GLML enables the accurate creation of structured data, which is usually produced and executed in an unstructured way in debt capital markets transactions. GLML therefore allows data to be passed between relevant transaction participants and financial market infrastructures automatically and seamlessly, and thus easily mapped to other formats. This alone will make capital markets workflows much more efficient, increasing profit margins and freeing up human resources to focus on value-add tasks and projects. Furthermore, as the volume of structured data increases, we gain further capabilities to enable increasing automation using AI tools.

Second, GLML enables capital markets participants, from dealers and borrowers to lawyers, to communicate easily, and collaborate throughout the capital raising process on digital platforms. This again reduces human error caused by data input, extraction and transformation.

Third, but perhaps most importantly, is that GLML as an open standard drives expansion of the ecosystem and enables innovation. For example, if one were to invest in digitising and automating all their capital markets documents through “low-code” or “no-code” tools, they would be locked into one vendor’s tools and standards. This means that, as the industry changes and new services emerge, or if you simply want to convert generated data to other formats, significant further effort is required. This slows down adoption of such tools and makes communication and interactions between multiple parties more challenging.

It is accepted that a lack of standards creates friction in a market, which limits interaction, flexibility, agility and innovation. One of the most obvious examples of this is seen in the emergence of the World Wide Web, which is underpinned by HTTP/HTML and led to the explosive adoption of the internet in the 90s. We can even go further back than this, where the lack of “standard”, or, more accurately, lack of a common railway gauge (rail width), led to significant challenges in the early railways. When a line of one gauge met a line of a different gauge, trains couldn’t run through without some form of conversion, which would normally lead to passengers having to change trains. This resulted in significant delays, inconvenience and cost. Widespread adoption of railways globally did not come until a standard gauge was created.

GLML will achieve for capital markets what HTTP did for the internet. It will support the simplification and ultimately democratisation of capital markets, ensuring the demand for capital can be efficiently and effectively connected to the supply.

GLML, as an open data standard, is the first step to digitising and automating the lifecycle of the issuance process. Today, capital markets processes are outdated, leading to vast and unnecessary cost and risk. Evolution is both essential and inevitable and, driven by GLML, 2021 will be the year that the debt capital markets transform for good as the industry converges around a common standard.

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Dollar extends decline as risk appetite favors equities

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Dollar extends decline as risk appetite favors equities 2

By Stephen Culp

NEW YORK (Reuters) – The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite attracted buyers to equities and away from the safe-haven greenback.

The U.S. dollar has been weighed down by a string of soft labor market data, even as President Joe Biden’s proposed $1.9 trillion spending package takes shape.

“What the foreign exchange market is looking at in the short term, is the dollar is going to be weak despite progress in the economy because this country has a huge deficit problem,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “The dollar index could easily test the lows of last September.”

Also weighing on the dollar, the real yield gap between the United States and Germany is at its tightest since March, analysts said, despite the recent rise in U.S. Treasury yields.

Bitcoin continues to hover at record highs, and the world’s largest cryptocurrency was last up 2.6% at $52,931.46, nearing $1 trillion in market capitalization.

Its smaller rival, ethereum, was last down 1.0% at $1,920.13.

The digital currencies have gained about 82% and 1,400%, respectively, year to date, leading some analysts to warn of a speculative bubble.

“There may be a place for (cryptocurrencies) somewhere down the road, but the theories that cryptos will replace paper currency are far-fetched,” Cardillo added. “It’s total speculation at this point and people are going to pay the price.”

The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.15% at $0.7858, touching its highest since March 2018.

The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.

Sterling rose to an almost three-year high amid Britain’s aggressive vaccination programme. It had last gained 0.34% to $1.40.

The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.29% to $1.2126.

The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.

(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Emelia Sithole-Matarise)

 

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Bitcoin hits $1 trillion market cap, soars to another record high

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Bitcoin hits $1 trillion market cap, soars to another record high 3

By Gertrude Chavez-Dreyfuss and Tom Wilson

NEW YORK/LONDON (Reuters) – Bitcoin touched a market capitalization of $1 trillion as it hit yet another record high on Friday, countering analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.

The world’s most popular cryptocurrency jumped to an all-time high above $54,000, setting it on course for a weekly jump of more than 11%. It has surged roughly 64% so far this month and was last up 5.5% at $54,405.

Bitcoin’s gains have been fueled by signs it is gaining acceptance among mainstream investors and companies, from Tesla and Mastercard to BNY Mellon.

All digital coins combined have a market cap of around $1.7 trillion.

“If you really believe there’s a store of value in bitcoin, then there’s still a lot of upside,” said John Wu, president of AVA Labs, an open-source platform for creating financial applications using blockchain technology.

“If you look at gold, it has a market cap $9 or $10 trillion. Even if bitcoin gets to half of gold’s market cap, that still growth of 4X, or $200,000. So I don’t know when it stops rising,” he added.

Still, many analysts and investors remain skeptical of the patchily regulated and highly volatile digital asset, which is little used for commerce.

Analysts at JP Morgan said bitcoin’s current prices were well above estimates of fair value. Mainstream adoption increases bitcoin’s correlation with cyclical assets, which rise and fall with economic changes, in turn reducing benefits of diversifying into crypto, the investment bank said in a memo.

“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” JP Morgan said.

Bitcoin is an “economic side show,” it added, calling innovation in financial technology and the growth of digital platforms into credit and payments “the real financial transformational story of the COVID-19 era.”

Other investors this week said bitcoin’s volatility presents a hurdle for it to become a widespread means of payment.

On Thursday, Tesla boss Elon Musk – whose tweets have fueled bitcoin’s rally – said owning the digital coin was only a little better than holding cash. He also defended Tesla’s recent purchase of $1.5 billion of bitcoin, which ignited mainstream interest in the digital currency.

Bitcoin proponents argue the cryptocurrency is “digital gold” that can hedge against the risk of inflation sparked by massive central bank and government stimulus packages designed to counter COVID-19.

Yet bitcoin would need to rise to $146,000 in the long-term for its market cap to equal the total private-sector investment in gold via exchange-traded funds or bars and coins, according to JP Morgan.

Rival cryptocurrency ether traded down 0.3%, at $1,934.67, still near a record of $1,951 reached earlier on Friday. It has been lifted by growing institutional interest, after its futures were launched on the Chicago Mercantile Exchange.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Tom Wilson in London; Editing by Dan Grebler)

 

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UK retail sales drop, NatWest loss dampen FTSE 100 mood

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UK retail sales drop, NatWest loss dampen FTSE 100 mood 4

By Shivani Kumaresan and Amal S

(Reuters) – The FTSE 100 was muted on Friday as a bigger-than-expected drop in January retail sales underscored the business damage from a prolonged nationwide lockdown, while NatWest group fell after swinging to an annual loss.

The commodity-heavy FTSE 100 was flat as gains in miners Anglo American, Rio Tinto and BHP Group capped losses.

Oil producers BP and Royal Dutch Shell fell 1.2% and 0.5%, respectively as crude prices slid.

Data on Friday showed British retail sales tumbled much more than expected in January as non-essential shops went back into coronavirus lockdowns. Flash readings of business activity data, due at 0930 GMT, are likely to show the services sector struggling to return to growth in February.

“The 8.2% fall was considerably higher than we’d expected (around 4%), and provides clear evidence the hit to consumer spending is noticeably larger than it was during the November restrictions,” said James Smith, market economist at ING.

He added focus will now be on UK’s COVID-19 vaccination program and easing of restrictions, to drive economic recovery.

The FTSE 100 has recovered nearly 35% from its March 2020 lows but has been largely range-bound since the beginning of this year as a nationwide lockdown hurt business activity, undermining hopes of economic growth in the second half of the year.

The domestically-focused mid-cap FTSE 250 index rose 0.2%, with consumer and industrials stocks leading gains.

NatWest fell 0.6% after the financial services provider swung to a full-year loss for 2020 after COVID-19 lockdowns crunched household spending.

Segro Plc rose 1.7% after the real estate investment trust reported a near 11% jump in annual profit for 2020.

Banking group TBC Bank fell 2.3% after a slump in annual underlying profit due to lower interest rates and limited lending growth in the fourth quarter from the COVID-19 pandemic.

(Reporting by Shivani Kumaresan and Amal S in Bengaluru; Editing by Vinay Dwivedi and Krishna Chandra Eluri)

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