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TRADING FIRMS CANNOT AFFORD MIFID II COMPLIANCE COMPLACENCY

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TRADING FIRMS CANNOT AFFORD MIFID II COMPLIANCE COMPLACENCY

By Eric Berdeaux, OXIAL and Frederic Ponzo, GreySpark Partners

Eric Berdeaux

Eric Berdeaux

The second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) is one of the most talked about pieces of legislation in the capital markets industry, intended by the EU to bring new levels of transparency to buyside and sellside trading activities across all the major asset classes.

However, some buyside market participants have been slow to respond to the need to begin implementing the directive’s requirements into their markets-facing and operational activities, claiming that their EU member state-level regulators have not provided them with enough information around the practicalities of how to do so.

Specifically, 54% of EU-based asset management firms do not believe that they were given enough information by their national competent authority (NCA) on how to respond appropriately to MiFID II’s requirements, according the findings of a survey covering 562 European asset managers conducted by market research aggregator RSRCHXchange.

According to the survey, only 7.1% of the 562 asset managers claimed that they will be MiFID II-compliant in time for the Jan. 3, 2018 deadline, while 44.2% of the survey respondents said that they are still planning to wait until after the compliance deadline passes to begin implementing the regulation’s mandates.

It’s of the highest importance for asset managers – as well as all EU capital markets entities covered by MiFID II – to achieve a level of clarity urgently as to the precise nature of their MiFID II compliance requirements and to then put in motion an operational plan to act on those needs.

Ignorance is not an excuse

Many bank and non-bank trading firms cite a lack of information about MiFID II’s requirements as an excuse for not addressing them, while others admit to simply not being prepared for the January 2018 compliance deadline.

However, the reality of a firm’s lack of MiFID II preparedness is typically more complex than simple excuses relating to a lack of awareness of the directive’s specific mandates and the effect that they are likely to have on the business and trading model. For any firm, achieving MiFID II compliance is a complex affair that requires mastery over the company’s internal and external trading data and client data, all of which demands that effort be refocused away from making money for clients.

MiFID II cannot be approached as a one-off project

In many cases, trading firms are approaching MiFID II implementation as a one-off project. However, when viewed in totality alongside complementary EU directives and regulations such as the General Data Protection Act, the Market Abuse Directive and Regulation, and updates to the UCITS and PRIIPs requirements, achieving compliance with the Markets in Financial Instruments Regulation (MiFIR) – which is the rule set that NCAs must use to implement MiFID II at the EU member state level – means that many trading firms are facing a lengthy, on-going process of being compliance ready for decades to come. Instead, MiFID II signals the start of a new era of regulation in which compliance is a perpetual operational activity that must be continually managed and run effectively.

To do so, trading firms needto be systematic andup-to-date with the specific actions that they must take on a case-by-case basis. This work can be done using a spreadsheet, database or SharePoint, but it requires human input, and humans are fallible. But, if firms use automated tools that take away the hassle of managing compliance, then the risk associated with falling out of compliance is managed significantly more efficiently.

Getting started – if you haven’t already

The first step in achieving MiFID II compliance is to assess which areas of the trading firm’s business face the most complex implementation tasks and to then prioritise those tasks appropriately.

First, the business should look at its overall governance systems; specifically, it must work to answer questions such as‘What is the current structure and process around governance? Who is responsible for what?Who is in charge?’ and, crucially,‘Who is liable for non-compliance?’At a more granular, operational level, firms trading algorithmically must understand how MiFID II changes the rules around how different algos are governed.

Second, it is vital for the business to know its entire estate; specifically,‘What do you have?’ and ‘Where are the holes?’To answer these questions, a complete inventory of all automated trading tools, algorithms and models will stand any firm in great stead when readying itself for MiFID II. This exercise must be thorough – it is worse to perfectly document 90% of your estate than to partially document 100% of it.

You also need to dedicate resources to do the work, to take the first pass at logging all the required information.Relying on traders to give up time from their day jobs is a recipe for disaster, and so this element needs a bespoke resource to manage it effectively.

For any trading firm failing to comply with MiFID II, there will most likely be some initial leniency from local and EU-level regulators as long as organisations can demonstrate that they are making progress. But, beyond a short-term grace period,regulators are bound to levy heavy fines or even the retraction of a passporting license.

This means that any organisation affected by MiFID II must lose the complacency, not hide behind a perceived lack of information about requirements, pull their finger out and get started ASAP.

Eric Berdeaux is CEO of new generation GRC firm, OXIAL and Frederic Ponzo is managing partner, London, at financial markets consultancy, GreySpark Partners.

Trading

Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 1

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 2

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 3

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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