Corporate concern over US election’s FX impact

UK and US corporates are concerned with the implications of the US election on the FX market, according to research from MillTechFX.

The top FX concerns around the US election for the 250 finance leaders at North American corporates surveyed were the impact of policy changes on currency values (44%), unpredictable market movements (38%) and increased volatility (37%).

Some 86% of North American corporates are adjusting their FX hedging strategies due to the election, with 66% planning on increasing hedge length and 29% planning on increasing hedge ratios. The research also found the most hedged currency pair for North American corporates ahead of the election is USD/CAD (30%).

A separate survey of 250 finance leaders at UK corporates found their top concerns around the US election to be counterparty risk in hedging transactions (40%), the impact of policy changes on currency values (37%) and unpredictable market movements (37%).

The research also showed that UK firms are clearly gearing up for a period of volatility, as over half (53%) of respondents are planning to increase their hedge length due to geopolitical factors.

“The upcoming U.S. presidential election adds a layer of complexity to FX risk management,” commented Eric Huttman, CEO of MillTechFX. “Potential shifts in policy, changes in economic direction, and new geopolitical strategies could all influence the US dollar’s value significantly. For example, speculation about a potential Trump-Vance administration suggests a possible push to weaken the US dollar, given their stance on making US exports more competitive.”

 

UK Autumn budget fears spur record outflows from equity funds

Equity funds suffered their worst month of outflows on record in October, according to the latest Fund Flow Index from Calastone. Investors sold down a net £2.71bn of their holdings, with every category of equity funds seeing outflows. The sharp outflows in October followed a weak September, which itself had seen the first outflows since October 2023.

Edward Glyn, head of global markets at Calastone, said: “Fears of a Capital Gains Tax grab in last week’s budget spurred investors to book their profits and crystallise a lower tax bill well before the Chancellor rose to her feet in the Commons. Unease in September meant the early birds took fright first, but by October investors were flocking for the exits.”

Calastone’s real-time transaction data, which covers more than 85% of the funds market, showed that sell orders surged by 36% month-on-month to a record £17.0bn (one-sixth more than the previous high). Buying activity also jumped, up 20% month-on-month. Notably, outflows ceased entirely on budget day when higher Capital Gains Tax rates came into immediate effect – sell orders dropped by 40% overnight compared to Wednesday 29th, while buying continued.

UK assets were hit hardest by far. More than one-third of this, £988m, was pulled from funds focused on UK equities, the fourth worst month on record for the sector. Meanwhile, another quarter, £733m, came from equity income funds, which are skewed towards the UK stock market. It was the third worst month for income funds.

October was the first month in more than a year that UK investors withdrew cash from US equity funds (£135m), and it was the first month in more than two years since global equity funds last saw a month of outflows (£263m). With US markets and global markets having risen strongly over the last year, this is a further indication that booking gains for tax purposes was a key motivation.

Meanwhile, fixed income funds had their best month since June 2023. Bond yields have surged in recent weeks as investors have both reassessed the wisdom of deep rate cuts from the US Federal Reserve and have also become concerned about an expected government borrowing and spending binge in the UK. Higher bond yields push bond prices down, but they also allow newly invested capital to lock into these yields. There was an investor wobble in the middle of the month when bond yields rose fastest, prompting outflows for a few days, but for the month overall, investors added £631m in October, the best month for fixed income funds since June 2023.

Money market funds, the classic safe-haven asset class – also saw higher inflows, rising to £402m in October.

 

UBS launches tokenised investment fund on Ethereum DLT

UBS Asset Management has launched UBS USD Money Market Investment Fund Token (uMINT), a money market investment built on Ethereum distributed ledger technology. 

Tokenholders can now access UBS Asset Management’s institutional grade cash management solutions underpinned by money market instruments based on a conservative, risk-managed framework.

UBS Asset Management’s global distributed ledger technology strategy is focused on leveraging public and private blockchain networks for enhanced fund issuance and distribution. As an active industry partner of The Monetary Authority of Singapore’s Project Guardian initiative, in October 2023, UBS Asset Management launched a live pilot of a tokenised Variable Capital Company (VCC) fund.

More broadly, this fund launch also forms part of the broader expansion of UBS’s tokenisation services through UBS Tokenize where in June 2023, UBS originated CNH200m of fully digital structured notes for a third-party issuer. And in November 2023, UBS completed the world’s first cross-border repurchase transaction with a natively-issued digital bond fully executed and settled on a public blockchain.

“We have seen growing investor appetite for tokenised financial assets across asset classes,” commented Thomas Kaegi, Co-Head of UBS Asset Management APAC. “Through leveraging our global capabilities and collaborating with peers and regulators, we can now provide clients with an innovative solution.”

 

Regulators urged to take the reins on fintech oversight by banking bodies

The Bank Policy Institute and The Clearing House Association have commented on partnerships between banks and fintechs in a letter to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve. 

The letter, submitted in response to a request for information, calls for the banking regulators to exercise their authority to regulate and supervise fintechs directly so that banks are not forced to serve as quasi-regulators. It also emphasises the need for more public education to help consumers better understand the potential risks of doing business with a nonbank, such as the potential unavailability of federal deposit insurance.

“We believe the combination of direct agency oversight of fintechs and consumer education is imperative to achieve our shared goal of effective fintech risk management,” the associations wrote. “The current approach, in which the agencies place all responsibility for ensuring appropriate fintech risk management on the banks, suggests that compliance is primarily a ‘bank issue’ and need not be a major concern for the fintech.”

The letter makes three primary recommendations. The first is that regulators should regulate fintechs. Banks recognise their responsibility to conduct due diligence under third-party risk management frameworks. However, banks should not be expected to independently police fintechs, the letter urges. The banking agencies should exercise their regulatory tools and authority – including the Bank Services Company Act – to establish rules, govern compliance and demand greater accountability from fintech companies, especially when the partnership involves higher-risk activities such as when a large percentage of the bank’s business is attributable to the fintech’s customers.

The letter’s second recommendation is that loopholes used by fintechs to engage in regulatory arbitrage should be eliminated. Fintechs have come to rely on partnerships with small institutions as an effective way to avoid regulation. The letter gives an example that, by partnering with an institution under $10bn in assets, fintechs can enjoy a “small bank exemption” under Regulation II of the Dodd-Frank Act. This allows fintechs to bypass limits on what they can charge to process debit and credit card transactions. The authors comment that these loopholes undermine the purpose of the regulations and should be eliminated.

The third recommendation is that banking agencies should educate consumers about what makes a bank a bank. Many fintech companies may look like banks but lack protections and benefits such as federal deposit insurance, the letter notes. Consumers should be able to easily discern whether an institution is a bank or a nonbank and should clearly understand the risks of obtaining financial products through nonbanks. Regulators should require fintechs to offer clear disclosures and support this effort through public education campaigns.

While banks increasingly partner with fintech companies to offer a product or service, the existence of these relationships is not always obvious to the end consumer. The letter focuses on circumstances where fintechs enter into arrangements with banks to facilitate providing end users with access to banking products and services. These arrangements enable fintech companies to directly provide end users with access to a range of banking products, such as checking or savings accounts, payments, lending products or digital wallets.

 

Corporate open banking receives boost in Bahrain

The Central Bank of Bahrain (CBB) has updated its Open Banking Framework, mandating all licensed banks to expose APIs for corporate accounts. The amendments also require obtaining customer consent and authentication, licensee disclosures, and reporting API performance by service providers.

Bahrain, the first country in the Middle East to introduce open banking, launched its Open Banking Framework (OBF) in October 2020, following the initial set of rules released in December 2018. The new amendments are set to bring legal entities in line with the existing open banking framework.

Under the new regulations, banks are now required to allow account information service providers (AISPs) and payment initiation service providers (PISPs) access to account information for legal entities after securing their consent. AISPs and PISPs must collaborate with banks to establish standard API specifications and operational guidelines based on Bahrain’s Open Banking Framework. 

The introduction of corporate banking APIs should allow third-party service providers (TPPs) to create new, business-aligned products and solutions such as advanced financial management tools, automated payment solutions, and data-driven insights. Moreover, it is designed to allow SMEs easier access to financing solutions by enabling fintech companies to provide personalised credit solutions based on more accurate data assessments.