Bank of England Testing Blockchain to Support Domestic Payments

The Bank of England said last week that it’s currently working on a “proof of concept” to see if its real-time gross settlement (RTGS) service will benefit from blockchain technology. The bank’s governor, Mark Carney, revealed the plans in April 2017, saying that securities settlements need innovation, and blockchain technology could produce “significant” gains regarding platform stability, efficiency, accuracy, and security. Real-time gross settlement systems are means for transferring money from one bank to another. The “real-time” aspect means there’s no annoying waiting period once your funds now reside at the recipient bank. Meanwhile, the “gross” aspect defines a one-to-one transaction and does not include transactions from other accounts. Finally, the “settlement” term simply means the transaction is final and cannot be reversed. The bank is now working with Baton Systems, Clearmatics Technologies Ltd, R3, and Token, who now have access to the proof of concept: a cloud-based system that replicates a version of its pre-funded net settlement that could eventually serve U.K. retail payment systems. Those involved with the proof of concept will explore the best way of interfacing with the platform and how to better expand the RTGS service. The Bank of England will publish a summary of its proof of concept findings later in 2018. 

Eurojust Meeting Addresses Global Action on Cyber Crime

To cope with the ever-increasing number and complexity of cybercrime cases, enhanced international judicial cooperation is required. on March 6th and 7th, 2018, participants from more than 60 countries around the world met at Eurojust to gain a better understanding of the assistance available to practitioners in the pursuit of a common criminal policy toward cybercrime and the gathering of electronic evidence. The conference was co-organised by Eurojust and the Cybercrime Programme Office of the Council of Europe (C-PROC) within the framework of the Global Action on Cybercrime Extended (GLACY+) Project. Participants and speakers were Eurojust National Members, Council of Europe officials, representatives of EU and international agencies and networks as well as authorities, engaged in international cooperation in cases involving cybercrime, electronic evidence and mutual legal assistance in criminal matters. Topics discussed included Eurojust’s mission, objectives, core tasks and work in the field of cybercrime; challenges, obstacles and constraints in international cooperation; capacity building projects of the Council of Europe; the implementation of the Budapest Convention and the role of the Cybercrime Convention Committee; cooperation with the private sector; case examples and practical experience; and the way forward. By the end of this conference, participants were able to better utilise Eurojust and the Budapest Convention in terms of judicial cooperation in cybercrime matters and electronic evidence collection through a better understanding of Eurojust’s role and tools; a better understanding of the Budapest Convention and capacity-building programmes; and an exchange of experience and case work among EU Member States and other participating countries regarding the implementation of the Budapest Convention and the use of Eurojust’s tools.

IOSCO Issues Recommendations for Transparency in Corporate Bond Markets

The Board of the International Organization of Securities Commissions (IOSCO) published its recommendations for improving the information on secondary corporate bond markets available to both regulators and the public. The recommendations seek to ensure that regulators have better access to information so they can perform their functions more effectively, and to enhance cross-border information sharing and understanding. The transparency recommendations aim to support the price discovery process and facilitate better informed investment choices. Updating IOSCO´s 2004 report on Transparency of Corporate Bond Markets, the Regulatory Reporting and Public Transparency in the Secondary Corporate Bond Markets report makes seven recommendations that emphasize the importance of ensuring the availability of information to regulators, through reporting, and to the public, through transparency requirements. The report recommends that regulatory authorities should ensure that they have access to sufficient information to perform their regulatory functions effectively. In addition, it recommends regulatory authorities should have clearer regulatory reporting and transparency frameworks to facilitate better cross-border understanding of corporate bond markets. The report also recommends that regulatory authorities should consider steps to enhance pre-trade transparency in corporate bond markets and implement regimes that require post-trade transparency. This report is part of IOSCO’s on going work aimed at improving the functioning of global corporate bond markets. Corporate bond markets are an important part of the global capital markets and a critical source of financing for companies and, consequently, for economic growth and jobs. Since 2004, corporate bond markets have been affected by changes in regulation as well as in market structure; the entrance of new participants; a shift from the traditional dealer-based principal model to an agency-based model; and the increasing use of technology. Prior to the publication of this report, IOSCO examined the liquidity of secondary bond markets and published its initial findings in March 2017. IOSCO is also conducting work to examine how liquidity in corporate bond markets might be affected under stressed conditions.


ESMA Clamps Down on CFDs and Binary Options

European Union financial markets watchdog, the European Securities and Markets Authority (ESMA), announced plans to ban ‘binary’ options sales to retail investors and restrict the sales of Contract for Differences (CFD). It said it was prohibiting the marketing, distribution and sale of binary options to retail investors, while its restrictions on CFDs would affect the marketing, sale and distribution of them. According to a story in Reuters news, the CFD moves will include leverage limits, margin close out rules and a ‘negative balance protection’ on a per account basis, as well as a requirement for firms who sell them to provide specific warnings of their risks. Binary options and CFDs are financial products that give an investor exposure to price movements in securities without actually owning the underlying assets such as a currency, commodity or stock. ESMA has said it has been concerned about how these inherently high-risk speculative products are offered to retail investors, potentially leading to significant losses and in December flagged plans to ban their sale.

Euronext Completes Irish Stock Exchange Acquisition

Euronext has completed the acquisition of 100% of the shares and voting rights of the Irish Stock Exchange (ISE) following regulatory approval. First announced in November, the €137 million deal is part of the European exchange group’s expansion and post-Brexit strategies. The ISE will join Euronext’s federal model and will operate under the new name Euronext Dublin, with Deidre Somers, formerly CEO of the ISE, having been appointed chief executive officer of the business. According to a story in The TRADE last month, CEO of Euronext Stéphane Boujnah, explained the decision to acquire the ISE was made irrespective of the UK’s departure from the European Union. Boujnah added that Euronext remains committed to London and plans to ensure banks and the wider industry in London will continue to have access to the Euronext platform. Following confirmation of the departure of its London CEO, Lee Hodgkinson, Euronext said earlier this month that its head of fixed income, rates and FX Paul Humphrey will lead the business on an interim basis. Hodgkinson, who also holds the role of head of markets and global sales with Euronext, will leave the company in April after nine years with the UK arm of the exchange operator. He has been appointed CEO of OSTC, a London-based proprietary trading firm that operates from 14 offices globally.

CME Group Seals Deal to Buy U.K.’s NEX for $5.4 Billion

CME Group Inc. has agreed to buy U.K. financial-technology company NEX Group PLC for about $5.4 billion, a deal that would put the Chicago futures-exchange giant in a commanding position in the vast market for U.S. government debt according to a story in The Wall Street Journal. The two companies said they had agreed on a deal that values NEX at £10 ($14.08) a share. Pending approvals by regulators and NEX shareholders, the deal is expected to be completed in the second half of 2018. NEX owns the biggest electronic platform for U.S. Treasury bonds trading, called BrokerTec, while CME dominates the market for interest-rate futures linked to U.S. government bond prices. Combining the two would put CME in a powerful position, as it would control the plumbing that underpins both Treasury futures and a swath of the underlying “cash” market. Combining the underlying cash securities with the trading of the listed futures would be a first in the exchange industry and could bring greater efficiencies to bond trading. Currently, Wall Street firms active in both cash Treasuries and interest-rate futures need to post cash to back their trades in two separate places. Bringing BrokerTec and CME’s futures under the same roof could lead to one unified clearing system for both kinds of trades, freeing up cash that traders could use for other purposes. U.S. government bonds are the world’s biggest debt market, with some $14.5 trillion in Treasury securities outstanding. About $535 billion of Treasuries traded each day on average in the week ended March 14, according to Federal Reserve data. CME Chief Executive Terry Duffy said the deal would “create significant value and efficiencies.” The company is targeting annual cost savings of $200 million by the end of 2021, and expects to generate new sources of revenue through accessing NEX’s customers. Besides BrokerTec, NEX runs major electronic markets for foreign-exchange trading and owns technology used to process derivatives trades. Led by Chief Executive Michael Spencer, it formerly was known as ICAP PLC. After the deal’s completion, Mr. Spencer, who described the deal as “industry changing,” will join CME’s board. For years, ICAP was the largest player in interdealer brokerage, the business of brokering deals in complex derivatives products between banks, often over the phone. But in 2016, ICAP sold its brokerage business to rival Tullett Prebon to focus on electronic trading and financial technology and rebranded itself as NEX.

ESMA Rolls Out Trading Caps for Bulk of Stock Market

The European Union’s securities watchdog said curbs on trading shares in the “dark” or off public exchanges across the European Union will be rolled out on March 12th and cover the bulk of blue-chip stocks. The European Securities and Markets Authority (ESMA) published data showing which stocks will be subject to limits on trading in “dark pools”. Trading will end up on stock exchanges such as London Stock Exchange, Deutsche Boerse or other platforms traded in the same way as bourses. The data published by ESMA shows the cap will cover over 80 percent of the most heavily traded shares. The aim is to increase transparency in share trading and stop some investors having an unfair advantage over others. The caps, part of new EU securities rules known as MiFID II introduced in January, were delayed due to insufficient data. The so-called “double volume” caps will require dark pools to suspend trading in stocks for which, on average, more than 8 percent of daily trading was transacted in the dark over the past 12 months. ESMA said a cap will apply for six months to 17 instruments whose trading on a single platform in January 2018, and 10 instruments whose trading last month, went beyond 4 percent. A further 727 instruments passed the 8 percent mark in January, and 633 in February 2018, ESMA said. Brokers and other market participants have spent months preparing algorithms and trading systems for the introduction of dark pool caps. Dark venues were originally conceived for banks or asset managers to trade large orders without the glare of transparency, which can adversely move prices before such an order is fully executed because of the time it takes. Over time much smaller orders were ending up on dark pools, raising concerns among regulators.


UK Launches New Fintech Sector Strategy

A new cryptoassets task force has been created to be the next step in ‘robo-regulation’. Their task is to make it faster and easier for fintech firms to follow complex regulations, and to create a UK-Australia ‘fintech bridge’ to help UK firms expand internationally. They are set to form part of the government’s first Fintech Sector Strategy. The Fintech Sector Strategy will include: 1) a Cryptoassets Task Force consisting of HM Treasury, the Bank of England, and the Financial Conduct Authority. This will help the UK to be at the forefront of harnessing the potential benefits of the underlying technology, while guarding against potential risks. 2) ‘Robo-regulation’ pilot schemes to help new fintech firms and the financial services industry comply with regulations by building software which would automatically ensure they follow the rules, saving them time and money 3) appointing three new Fintech Regional Envoys to ensure the benefits of fintech are felt across the UK 4) creating a set of industry standards which will enable fintech firms to more easily partner with existing banks 5) helping new, small fintech firms to provide complex financial services and thereby grow their businesses and reach new customers. Industry and government will work together to create ‘shared platforms’ which will help remove the barriers that these firms face in setting up new systems and 6) a Connect with work program developed by the government’s Fintech Delivery Panel to help fintech firms to take advantage of the UK’s diverse workforce.

Global Regulators Set Out Proposals to Stop Flash Crashes

Stock exchanges should talk to each other and have safeguards in place to mitigate bouts of extreme market volatility that can undermine investor confidence, global securities regulators proposed last Wednesday according to Reuters news. The International Organization of Securities Commissions (IOSCO) set out draft recommendations for public consultation on Wednesday to stop big market moves from becoming disorderly. IOSCO aims for a more consistent approach across financial markets and to share best practices. IOSCO, whose members include the U.S. Securities and Exchange Commission, Japan’s Financial Services Agency and Germany’s BaFin, said the use of automated trading had grown in recent years. “At the same time, there have been events of extreme, including abnormal, volatility in financial markets,” IOSCO said in a statement. It proposed trading venues like exchanges should have mechanisms to manage extreme volatility, though this could differ according to asset class and how much they are traded. While exchanges have already introduced controls, such as trading halts, or only allowing orders within certain price bands, IOSCO said these must be regularly reviewed and tweaked to reflect market changes. Regulators, market participants and, if appropriate the public, should be told when the mechanisms are triggered. “Communication amongst trading venues should be considered where the same or related securities are traded on multiple trading venues in a particular jurisdiction,” IOSCO proposed.


British and Australian Regulators Enhance Agreement on Fintech

The United Kingdom’s Financial Conduct Authority ('FCA') and ASIC have signed an Enhanced Cooperation Agreement between their Innovation Hubs to extend their existing agreement of cooperation and coordination on fintech innovation.  This agreement forms part of the broader Fintech Bridge signed by the UK Chancellor of the Exchequer and the Australian Treasurer. In this enhanced agreement, the FCA and ASIC have agreed to explore ways to quicken the licensing process in terms of the authorization of innovative businesses that are already authorized in the other jurisdiction. Where a business is a participant in either Authority's regulatory sandbox and would like to enter the other's, ASIC and the FCA will endeavor to facilitate that participation. ASIC and the FCA will also look to co-host fintech and regtech events, conduct joint policy work, and share research and experimentation. They will work to raise topics or approaches of common interest at an international level to promote greater levels of international cooperation on financial innovation. Under this new agreement ASIC and the FCA will continue to refer innovative fintech businesses to each other for advice and support via their respective Innovation Hubs. Building on cooperation agreements such as the one signed today with ASIC, the FCA also recently asked for views on the merits of creating a global sandbox. This could potentially allow firms to conduct tests in different jurisdictions at the same time and allow regulators to work together and identify and solve common cross-border regulatory problems.