Over the last decade, FinTech has proven a gamechanger for multiple sectors in financial services, ushering in more efficient and cost-effective services in everything from banking to payments, loans and foreign exchange (FX). While at a wholesale level, financial technology has proven revolutionary in areas such as trading technology, the world of institutional Money Markets has remained relatively untouched by new solutions. So how can a market which continues to rely so heavily on traditional voice brokerage benefit from the type of new technology already a fact of everyday life in many other parts of the financial system?
A structural problem
Unsecured MoneyMarket lending and borrowing is one of the least modernised or digitized parts of the financial system. It is a EUR 114 BN a day market in Europe that is critical to the day-to-day functioning of the economy, yet it has remained largely reliant on voice brokerage and bilateral trading.
What this means in real-terms is that banks, corporates, pension funds, insurance companies and asset managers that require unsecured funding or wish to put cash to work on a short-term basis still face difficulty finding the right counterparties and accessing liquidity.
A lack of control over spreads and an ability to gain a comprehensive view of best execution compound the issue, concentrating risk and increasing trading costs for both borrowers and lenders.
Revealingly, Money Markets studies that have been undertaken by The Bank of England (BoE) and European Central Bank (ECB) have shown that participants think the market is not working efficiently enough, with half of banks responding to an ECB study saying the unsecured euro Money Market is not efficient or limited in its efficiency. These results can be partly attributed to a lack of cross border trade in Money Markets. According to the same study, 45% of transactions still occurring within national silos (I.E borrower and lender from the same country) in Europe, despite the EU single market.
The structural problem with the model was unveiled by the advent of the 2008 financial crisis, where a breakdown of trust between financial institutions triggered a massive liquidity shortfall in the interbank lending market. As we now know, subsequent regulation designed to prevent future systematic crises, had a significant impact on dealers in the form of balance sheet constraints, limiting their ability to act as a market maker. Despite these events, the way in which Money Markets operate has remained largely unchanged, with 50% of volume still handled via direct trading and 35% voice-brokered, with minimal take up of electronic trading.[i]
While structural deficiencies continue to frustrate counterparties, in a very low-rate environment, companies want to ensure they guarantee the best short-term return on short term investment. As such, the market is becoming increasingly important for corporates wanting to generate stronger returns from cash stock piles that amounted to a massive EUR 974 BN in Europe in 2017, according to Moodys. But despite growing demand, a lack of viable electronic trading options is hampering the ability to identify appropriate counterparties and allow those parties to transact at an acceptable cost.
Moreover, existing providers have focused almost exclusively on offering clients request for quote (RFQ). This makes effective price discovery more challengingfor those seeking to understand the fair market rates for short term lending and borrowing at a given time.
A lack of dollar funding
Access to US dollar funding is putting further pressure on the model and has become more of a challenge for many European banks, especially smaller ones, given the tougher credit environment. While the dollar is often the currency of choice for companies in Europe – non-US banks are overall twice as dependent as U.S ones on wholesale/short-term deposits for their overall dollar balance sheet.
Due to a lack of dollar funding internationally, many financial institutions must rely heavily on less stable funding sources to support their international dollar balance sheets, such as interbank deposits, commercial paper and swaps. In addition, US tax reform could reduce the pool of corporate liquidity in Europe.
These combined strains and inefficiencies demonstrate the pressing need for a new model that delivers the type of efficiency, cost benefits and regulatory compliance financial institutions have enjoyed in multiple other markets for years.
Building a digital network
When we turn to just how these markets will evolve – I see two key trends emerging. The first is that Financial Institutions are beginning to explore new, more efficient ways to lend or borrow capital on a short-term basis and this can only lead to an overall healthier and more efficient functioning of the market. Electronic platforms are not only becoming more popular because they offer greater price discovery, market transparency and proof of best execution (a key requirement nowadays by both clients and regulators), but also because they provide greater access to deeper and less correlated liquidity pools. The second is the opportunity Distributed-Ledger-Technology (DLT) presents in a wide variety of applications within Money Markets. Both emerging trends are likely to offer significant and enhanced user benefits to those that require access to this fundamentally important market
By Daniel Sandmeier, CEO, Instimatch Global
[i]European Central Bank, Euro money market survey 2015
Sunak to use budget to expand apprenticeships in England
LONDON (Reuters) – British finance minister Rishi Sunak will announce more funding for apprenticeships in England when he unveils his budget next week, the government said on Friday.
Employers taking part in the Apprenticeship Initiative Scheme will from April 1 receive 3,000 pounds ($4,179) for each apprentice hired, regardless of age – an increase on current grants of between 1,500 and 2,000 pounds depending on age.
The scheme will extended by six months until the end of September, the finance ministry said.
Sunak will also announce an extra 126 million pounds for traineeships for up to 43,000 placements.
Sunak’s March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, but he will also probably signal tax rises ahead to plug the huge hole in the public finances.
Sunak is also expected to announce a “flexi-job” apprenticeship scheme, whereby apprentices can join an agency and work for multiple employers in one sector, the finance ministry said.
“We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike,” Sunak said in a statement.
(Reporting by Andy Bruce, editing by David Milliken)
UK seeks G7 consensus on digital competition after Facebook blackout
LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.
Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.
“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.
“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”
Dowden said recent events had strengthened his view that digital markets did not currently function properly.
He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.
“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.
Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.
“Nick strongly agreed with the Secretary of Stateâ€™s (Dowden’s) assertion that the governmentâ€™s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.
Britain will host a meeting of G7 leaders in June.
It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.
The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.
Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.
(Reporting by William James; Editing by Gareth Jones and John Stonestreet)
Britain to offer fast-track visas to bolster fintechs after Brexit
By Huw Jones
LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.
Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.
“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.
Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.
Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.
The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.
It also recommends more flexible listing rules for fintechs to catch up with New York.
“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.
“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)
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