The Banker Shorts – Week ending February 17, 2023

Last week the EU faced derivatives clearing challenges, Basel III reforms were set for 2025, gender diversity in European banks was still a poor show, and the key to ESG compliance started with definitions. Meanwhile, the Provenance Blockchain foundation’s CEO sees a decentralised future.

Opinions range from the European liquidity landscape, investing for biodiversity, planning for a digital future and modern trade finance, while time itself gets the ‘as-a-Service’ treatment. 

Our global coverage offers insights into the Middle East and Latin America. 

Trending topics 

• EU changes tack on euro derivatives clearing in London – Patrick Mulholland | Click here to read

In the aftermath of the 2008 financial crisis, it was judged by the leaders of the G20 that “increasingly complex and opaque financial products, and consequent excessive leverage” had combined to cause a systemic risk within the global financial system. In response, they convened at the Pittsburgh summit in September 2009 and resolved that OTC derivatives must be cleared through CCPs to improve market transparency and mitigate risk.

As a result, “a whole new world” was created for the clearance of derivatives, according to Nicolas Véron, a senior fellow at both Bruegel and the Peterson Institute for International Economics, think-tanks based in Brussels and Washington DC, respectively. “There’s now an extraordinary concentration of risk in CCPs, which have become massively important and critically systemic in a way they weren’t before.

“Maybe that’s good, because risk is no longer with individual banks. But maybe it’s bad, because if something really bad happens to one of those CCPs, who knows what the outcome will be. There’s no precedent of CCP failures.”

• Basel III reforms go-live aimed at 2025 – James King | Click here to read

The implementation of the final Basel III reforms may be dogged by uncertainty and delay, but 2023 promises to deliver much-needed progress in some advanced economies.

By the middle of the year, the EU is expected to complete trilogue negotiations to determine its final regulatory stance, while the US looks set to publish its initial proposals within a similar timeframe. The UK, meanwhile, will see the Prudential Regulation Authority’s consultation period for its proposals terminate in March 2023, before it finalises its approach in the following months.

“There’s a patchwork quilt being assembled, when you look globally,” says Jared Chebib, partner in consultancy EY’s UK financial services practice. As Mr Chebib has previously noted, this lack of regulatory consistency will deliver few positives for the market or financial sector stability, as the friction and costs of doing business across borders increases. 

• Moving the needle on gender diversity in Europe’s banks – Anita Hawser | Click here to read

Mare Heinluht, head of diversity and inclusion at Swedbank in Sweden, says nobody likes the word ‘quotas’ and nobody wants to be a quota. “It really is borderline insulting,” she says.

So, if hard quotas aren’t the answer, what is? “Targets, rather than quotas, create cultural change faster,” suggests Ms Cairns. “Voluntary adoption means a lot of top-down support, plus there isn’t the stigma of ‘She’s a quota appointee’.”

• Provenance Blockchain Foundation CEO: decentralised infrastructure layers are the future of finance – Liz Lumley | Click here to read

Financial services still “rely on all these legacy systems where everybody is reconciling the state of truth”, says Provenance Blockchain Foundation’s CEO Morgan McKenney. “There is a lot of time between when a transaction happens and when it’s actually settled, meaning when it’s finalised, and all of that time creates a lot of uncertainty and costs.”

She argues that rather than the “system of intermediated trust” the industry relies on today, a decentralised platform allows customers to not only “own the asset, but control the asset”, allowing parties to transact without having to know anything about each other “beyond the fact that you have the digital asset that I want. That’s incredibly liberating — it’s very powerful,” she adds. “It’s disruptive to how financial systems work today and it will eventually materially lower the cost to serve in financial services. It will really open up access.”

• To comply with ESG you first need to understand it – Philippa Nuttall | Click here to read

ESG is generally bandied about as a homogeneous unit. Yet, in reality, it contains three separate goals that do not necessarily go hand-in-hand and whose pertinence are skewed differently depending on the region in question. 

“Emerging markets have less stringent and less complicated regulatory requirements than Europe, and their banking and societal needs are totally different,” says Christian Toben, Commerzbank’s head of financial institutions in emerging markets. While in Europe, the ‘E’ is generally at the forefront of considerations, the ‘S’ is very important for emerging markets — and the more emerging they are, the more they are focused on ‘S’, he says. “And an ‘S’ goal does not necessarily mean an ‘E’ goal.”

Opinion sharers

• How is Europe’s liquidity landscape changing? – Joy Macknight | Click here to read

In a rocky year for the European markets, liquidity has remained centred on the main indexes in 2022. But there has been a significant shift in how liquidity trades in the region, according to a report from Liquidnet.

In 2022, the European equities market reached a €53.4bn average daily value, an increase of 8.2% on 2021’s daily value. But what trends are being seen as to where and what volume is being traded?

Market liquidity remained centred on the main indexes in 2022, according to a recent from Liquidnet, a global institutional investment network, entitled ‘Liquidity landscape 2023: What next for European markets?’, which covers equities only.

• The criticality of time as a measurable asset – Chris Skinner | Click here to read 

The core of what makes traceable-time-as-a-service (TTaaS) work is the use of atomic clocks. Atomic clocks are a little bit different to the clock in your home or the watch on your wrist. This is because most normal clocks use quartz crystals, which vibrate at a precise frequency when voltage is applied to them. Atomic clocks, however, use the more stable vibrations of atoms to achieve greater accuracy. The result is that they can identify time to a very exact level.

• Can biodiversity markets deliver for both nature and investors? – Katie Kedward | Click here to read

While conservation urgently needs investment, creating nature-related financial markets holds its own challenges and cannot be seen as a panacea, writes Katie Kedward.

• Digitisation can drive a global trade revolution – Thani Al Zeyoudi | Click here to read

This post-pandemic moment is the perfect time to modernise the global trading system, writes the UAE minister of state for foreign trade.

• Funding the digital highway’s new phase – Denis de Paillerets and Benoit Tanguy | Click here to read

Rocketing demand for data and further expansion of digital infrastructure will require creative financing solutions in a more challenging environment, writes Société Générale.

Globe at a glance

• Vibrant tech sector cushions fall in Middle East deals in 2022 – John Everington | Click here to read

Surging sovereign wealth fund coffers sustained Middle East deal-making in 2022, while banking consolidation slowed to a trickle. 

• Latin America’s economic challenges for 2023 – Barbara Pianese | Click here to read

Short- and long-term economic challenges and shifting growth paradigms are the topics of discussion for the Latam economists participating in The Banker’s roundtable.