Plan for bigger BRICS at heart of Johannesburg summit

Leaders from five of the world’s five leading emerging economies – Brazil, Russia, India China and South Africa, dubbed d the BRICS - will attend its 15th economic summit today in Johannesburg. Plans to expand the bloc and challenge the developed world’s dominance, in particular the US dollar, will top the agenda. BRICS countries account for more than 40% of the world’s population and about 26% of the global economy

The two-day summit is being hosted by the South African president, Cyril Ramaphosa, and brings together the prime minister of India, Narendra Modi, as well the presidents of China, Xi Jinping, and Brazil, Luiz Inácio Lula da Silva. Leaders of other countries in Africa, Asia and the Middle East are also attending, many hoping to be invited to join the bloc.

Russia is being represented by its foreign minister, Sergei Lavrov, after Vladimir Putin decided to attend via video rather than travel to Johannesburg to avoid forcing South Africa to choose between fulfilling conflicting obligations as hosts of the summit and as a member of the International Criminal Court (ICC). In March, following an investigation of war crimes, crimes against humanity and genocide, the ICC issued arrest warrants for Putin and Maria Lvova-Belova, Russian Commissioner for Children's Rights.

China’s President Xi Jinping is combining attendance at the summit with a state trip to South Africa. It marks Xi’s second international trip of 2023, after he travelled to Russia in March. The Chinese president previously visited South Africa in 2018 as he sought to enhance his country’s diplomatic and economic ties in Africa.

Many of the discussions at the BRICS summit will focus on how to turn a loose club of nations accounting for a quarter of the global economy into a geopolitical force that can challenge the developed world’s dominance. A total of 69 countries have been invited to Johannesburg including all African states, and expansion is expected to be high on the agenda. Algeria, Saudi Arabia, Argentina and Ethiopia are among many countries to have shown interest in joining the group either formally or informally.

China, seeking to expand its geopolitical influence amid its ongoing rivalry with the US, has said it “welcomes more like-minded partners to join the ‘BRICS family’ at an early date”. Russia also supports expansion, while Brazil has resisted, fearing it could undermine the group’s stature. India has adopted a neutral stance.

China-has also been at the forefront of “de-dollarisation”, or attempts to shift away from the US dollar and use either an alternative currency or a new one to help ward off Washington’s alleged currency weaponisation.

The dollar’s dominance in global trade looks to be challenged by the expansion of the BRIC bloc, reports the South China Morning Post citing research by ING t. “We suspect the subject of ‘de-dollarisation’ might gain some traction this summer when senior leaders of the BBRICS nations meet,” the Dutch bank’s analysts Chris Turner, Dmitry Dolgin and James Wilson wrote in a note last week.

In May this year, the Association of Southeast Asian Nations (ASEAN) held its 42nd Summit, in which its members signed an agreement to accelerate the enhancement of regional payment connectivity and increase the use of local currencies.

Ultimately, the move aims to reduce reliance on the likes of the US dollar – which has become a less attractive option due to significant increases in interest rates by the US Federal Reserve. In response, countries in the region have had to resort to raising their own interest rates to tackle the threat of depreciation of their currencies. However, reducing reliance on the US currency will be no easy feat.

Turkey begins reversal from FX-protected lira scheme

Turkey’s central bank has begun rolling back a government-backed scheme that safeguards Turkish lira (TRY) deposits against foreign exchange depreciation, marking another move toward more orthodox policies following a shift toward interest rate hikes.

The Central Bank of the Republic of Türkiye (CBRT) said that it lifted targets applied to banks for certain levels of conversions of foreign-exchange deposits to the lira-protection scheme, known as KKM, which was introduced in late 2021.

The scheme, sought to keep dollarisation at bay by encouraging people to keep their savings in lira through guarantees to compensate for losses from decline against hard currencies

In a reversal, the central bank now wants lenders to set a new goal of transitioning KKM accounts into regular lira accounts, in part by dissuading companies and individuals from renewing the KKM accounts. According to a separate decree in the Official Gazette, the central bank also raised lenders' reserve requirement ratios for FX deposits, further nudging customers into regular lira accounts.

For FX accounts with up to one-month maturities, the reserve ratio was raised to 29% from 25%, the presidency's Official Gazette said. Those up to a year have a 25% ratio.

The volume of deposits under the scheme has reached about TRY 3.35 trillion (US$124 billion), in the week to August 11, according to the Banking Regulation and Supervision Agency (BDDK) data. The currency has been stable over the last month and closed last week at 27.02 against the US dollar after declining 44% in 2021 and 30% in 2022.

Since winning re-election in May, President Recep Tayyip Erdoğan has appointed Mehmet Şimşek, who is highly regarded by financial markets as the new Treasury and Finance Minister, as well as a new central bank governor, Hafize Gaye Erkan, a former senior US-based bank executive, in moves seen as heralding the switch to a tighter interest rate policy.

Since then the CBRT has raised borrowing costs by 900 basis points to 17.5%, and according to local economic analysts, is expected to further raise interest rates during a meeting scheduled for this Thursday.

The Bank said the KKM move would "enforce macro-financial stability by supporting lira deposits" and pledged more such steps in line with the principles announced by the Monetary Policy Committee.

In this framework, the CBRT aims to transition from accounts supported by currency protection to accounts in Turkish lira and renew a certain proportion of currency-protected accounts, thus shifting focus toward increasing lira share levels without currency protection.

 

Citi survey highlights challenges from accelerated settlements

Citi has issued the third edition of its “Securities Services Evolution” whitepaper series, which shows the securities ecosystem faces challenging times ahead. The whitepaper finds that accelerated settlement is the single largest area of focus across all financial market infrastructures (FMIs) and market participants globally, with 77% of respondents expecting a major impact on their business.

“Our research shows that the rapidly accelerating move to T+1 in major markets poses significant challenges to industry participants, leaving an urgent need to drive innovation, automation and efficiencies in global operating models,” said Okan Pekin, Global Head of Securities Services at Citi.

The whitepaper includes quantitative and qualitative data gathered from 12 FMIs and industry participants (fintech, taskforces, banks) and almost 500 market participants from banks, broker-dealers, asset managers, custodians and institutional investors around the world. "Collectively, these insights continue to provide valuable insights into developments across the global securities market ecosystem," a rfelease from Citi noted.

While the impact of acceleration remains the primary focus, a consensus is also emerging as to how best to prepare for it. Participants are focusing on clients and counterparties in the first instance; followed by in-house platforms and processes; and evaluating staffing and location strategies. For example, 69% of those surveyed are focused on automating and standardizing client communications while 64% are looking to upgrade /replace technology platforms.

Other findings from this year’s whitepaper include:

• For the past three years, cash, funding and liquidity management have been cited as the greatest obstacle to achieving a shortened settlement cycle
• 80% of market participants expect a notable impact on their securities lending and borrowing business - one of the single most impacted area by the move to T+1
• 74% of respondents are engaging in Distributed Ledger Technology (DLT) and digital asset initiatives (increased from 47% last year) in a clear sign that DLT momentum continues to grow
• 38% of market participants are today live with digital asset offerings vs 22% for DLT
• Growing belief across the industry that digital money (central bank digital currencies (CBDCs), bank and non-bank issued stable coins) is maturing quickly – with 87% seeing them as a viable means to support securities settlement (vs 72% last year)

“As market infrastructures continue to evolve, it’s increasingly important for industry participants to work in partnership to strengthen the stability of the overall ecosystem,” said Matthew Bax, Global Head of Custody for Securities Services at Citi. “Supporting innovation while maximising global consistency of the client experience remains core to our Securities Services offering.”

A copy of Securities Services Evolution 2003 is available here: 

ARM files for IPO on Nasdaq

Arm, the chip design company owned by Japanese multinational SoftBank, has filed for an initial public offering (IPO) on the Nasdaq exchange in what is expected to be one of the largest IPOs in recent years.

The filing comes 18 months after Nvidia, the Silicon Valley chip maker, abandoned its offerto buy Arm for US$40 billion. The US Federal Trade Commission (FTC) had sued to stop the deal.

Arm did not list a prospective share price in its filing. The company reported US$2.68 billion in revenue for the fiscal year to March 2023, just below its US$2.70 billion the year before. Last quarter, Arm had net income of 10 cents per share, down from 22 cents the previous year.

The UK-based company filed confidentially for a listing in the US earlier this year after previously announcing it would go public in the US over the UK., dealing a blow to the London Stock Exchange (LSE).

Arm is one of the world’s most important chip companies. It sells licenses to an instruction set at the heart of nearly every mobile chip, and increasingly, PC and server chips as well. In recent years, it has aimed to sell more complete chip designs, which is more lucrative.

‘’SoftBank’s filing to list Arm in New York will cement disappointment that London has been shunned, even though the decision was announced back in March,” commented Susannah Streeter, head of money and markets at UK financial services provider Hargreaves Lansdown. “Arm was very much seen as a British success story, but SoftBank is pulling no sentimental punches here and wants the best bang for its buck.

“The Japanese conglomerate had been holding out for the best market conditions and although they look a little more clement compared to the volatility which hit the tech sector last year, recent summer weakness is clearly pushing the firm to list Arm sooner rather than later. The obsession with all things artificial intelligence (AI) is still super-strong and the semi-conductor designer will be using AI as its calling card to entice investors as it heads towards the launch. Arm technology is already powering many AI applications and it plans to be instrumental in the next wave of innovation.”

 

Germany calls for tighter foreign investment controls

Germany’s Economy Minister Robert Habeck has said that he wants to tighten the process for reviewing foreign investments with a new law that would aim to enhance economic security, according to a ministry document seen by Reuters.

The effort comes as Berlin urges companies to reduce their reliance on China and as the government examines whether its current set of regulations is sufficient to encourage this.

It also reflects a broader push in the West to reduce strategic dependence on China - which policymakers have labelled "de-risking" - amid concerns about increasing Chinese expansiveness in the Indo-Pacific region and about broader possible supply chain disruptions.

Germany has at times been seen as a weak link in the Western approach to China, given the strong business ties with its single biggest trading partner. An effort by China’s Cosco Shipping Ports for instance to buy a stake in a goods terminal in Hamburg, the country's largest port, was ultimately approved by Berlin in June although the holding was smaller than planned.

"Investment reviews have gained enormously in importance in Germany, Europe and internationally in recent years," the document said.

Reuters reports that as part of the law under review, investments would be audited in which an investor gains access to a domestic company's goods or technologies through contractual agreements, rather than through the acquisition of voting shares - already the subject of sufficient regulatory control.

In addition, the ministry is also considering checking the security significance of new factories built in Germany by foreign companies, as well as whether security-critical research cooperation deals need to be scrutinised.

 

Swift accelerates cross-border payments processing

Swift has announced strong progress toward goals set by the G20 for enhancing cross-border payments, reporting that 89% of transactions processed on its network reach recipient banks within an hour.

It is already well ahead of speed targets set by the Financial Stability Board (FSB) to achieve one-hour processing for 75% of international payments by 2027, it added in a release The momentum underscores work by Swift, which connects more than 11,500 institutions in over 200 countries, to expedite delivery and enable banks to offer a better service to their end-customers. It also challenges misperceptions that payments are often required to travel through chains of intermediary banks to their final destination. Swift data shows that 84% of all payments on the network are conducted directly or with a single intermediary.

But while in-flight processing between originating and beneficiary banks has significantly accelerated, Swift added that there is still more to be done at industry level to fully achieve the bar set by the G20. At present only 60% of wholesale payments reach customer accounts in that timeframe due to delays at the beneficiary leg caused by issues including regulatory controls, batch processing and opening hours of market infrastructures.

Thierry Chilosi, Chief Strategy Officer at Swift, said: “Our strategy to transform cross border payments is delivering tangible results. Swift already exceeds the G20 target on speed for processing on our own network, and we are well on track towards meeting the other targets.

“The G20 roadmap to enhance international payments recognises the critical role these transactions play in the growth of the global economy – and how necessary industry-wide collaboration is to achieving tangible improvements. Swift will continue to work closely with the financial community to meet these targets and foster a more inclusive global economy built upon the seamless movement of value across the world.”

In addition to helping the financial services industry meet the G20’s target for speed through services like Payment Pre-validation and Swift GPI. Swift continues to support industry efforts to address other challenges identified by the G20.

 

Puerto Rico “close to deal” on US$9 billion utility debt

Puerto Rico’s bankrupt power utility, which needs to restructure nearly US$9 billion of debt, is closing in on a deal with at least two bondholders as soon as this Friday, according to reports.

BlackRock Financial Management and Taconic Capital Advisors are expected to reach a settlement with the island’s financial oversight board by a Friday deadline on how to restructure the debt of Puerto Rico’s Electric Power Authority, aka Prepa, according to a person familiar with the negotiations,

A successful deal would mark a step forward for the board, which is managing Prepa’s bankruptcy as the island struggles to modernise its aging power grid to help boost its battered economy. The board has reached a tentative restructuring agreement with investors of “substantial amounts” of utility debt, according to its lawyers in a court document filed Tlast week.

But Prepa needs to get the majority of its creditors to endorse the deal and there have already been rumblings of discontent about the debt-restructuring proposal from members of an ad hoc group of bondholders and insurers not yet brought into the proposal.

GoldenTree Asset Management, which held US$825 million of Prepa debt as of August 14, claims it has been shut out of bondholder negotiations, according to court documents. While Dominic Federico, Assured Guaranty’s chief executive officer, described the power utility’s current offer in an August 9 earnings call as “insulting” and said the insurer would seek litigation. The company guaranteed US$446 million of Prepa’s net par debt, as of March 31.

 

CBA prepares for Powerboard launch

Australia’s Commonwealth Bank (CBA) will launch a new payments service known as Powerboard next month as it looks to protect its grip on transaction data.

Powerboard, which was first announced in December and is in its pilot stage this year, is described an interface for businesses to manage payment collection from various providers, including from buy now pay later (BNPL) services, while allowing CBA to keep visibility of critical data used to assess credit risk.

CBA’ group executive for business banking, Mike Vacy-Lyle, admitted that getting the product out to the market had been complex. “It is a much tricker sell, as you do need specialist salespeople, so it is a longer sales conversation with the customer,” he said. “But we will be going out to the market in early September, and we will start distributing the product at scale. It will be a serious game changer for the mid-market.”

He added that CBA “probably sweat payments more than any of our competitors – it is certainly the conversation that I am involved in the most at the moment”.

Although National Australia Bank (NAB) remains the country’s biggest business bank by loans, CBA has the largest “main financial institution” (MFI) market share and the largest deposit book. Powerboard is core to its plan to catch up with NAB on lending and to win more business transaction accounts. This would provide the insights to let the bank deepen its relationships – and then lend.

CBA said in its full-year results last week that 90% of its A$35 billion (US$22.5 billion) in new lending to businesses over 2022-23 went to customers who already had a transaction account.

“We are all about the primacy of relationship,” said Vacy-Lyle. “We want to make sure we keep the MFI, and we conduct the [payments] orchestration direct with customers, on the back of information we have.”
 

Zimbabwe to take 30% of carbon credit revenue

Zimbabwe will allow developers of carbon credits to keep as much as 70% of the proceeds for the first decade of the project, with 30% paid as an environmental levy, the government said in new regulations marking a change of policy.

It comes three months after Zimbabwe upset the US$2-billion carbon credit market by suddenly cancelling projects and claiming half of all proceeds. The country now says it will accept a smaller share of revenue and has begun the process of reinstating scrapped projects.

In revised regulations, the government now says that projects have 60 days to reapply for reinstatement and it would now keep 30% of proceeds in the form of an environment levy for the first 10 years of their operation. Developers, while retaining 70% of proceeds, are required to invest a quarter of their earnings in community projects. Fresh negotiations will be held in the 11th year.

This represents a retreat from the government’s rule change in May, under which foreign developers were told they could keep only 30% of proceeds while handing over a minimum of 20% to local partners. Zimbabwe’s decree alarmed investors and prompted various countries, including Malawi and Zambia, to announce that they might take a similar approach.