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European Union agrees carbon border tax – Industry roundup: 15 December

EU plans to tax carbon at its borders

The European Union (EU) has agreed a political deal to impose a carbon tax on imports of polluting goods such as steel and cement, a world-first scheme aiming to support European industries as they decarbonise.

Negotiators from EU countries and the European Parliament reached a deal earlier this week after all-night talks in Brussels, on the law to impose CO2 emissions costs on imports of iron and steel, cement, fertilisers, aluminium and electricity.

Companies importing those goods into the EU will be required to buy certificates to cover their embedded CO2 emissions. The scheme is designed to apply the same CO2 cost to overseas firms and domestic EU industries – with the latter already required to buy permits from the EU carbon market when they pollute.

Mohammed Chahim, European Parliament’s lead negotiator on the law, said the border tariff would be crucial to EU efforts to combat climate change. “It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry,” he added.

The stated aim of the levy is to prevent European industry from being undercut by cheaper goods made in countries with less stringent environmental regulations.

It will also apply to imported hydrogen, which was omitted from the original EU proposal but which EU lawmakers pushed for during negotiations.

Some details on the law are still being finalised in related negotiations on a reform of the EU carbon market. It will apply from 1 October 2023 but with a transition period where importers must report but are not yet taxed.

Currently, the EU gives domestic industry free CO2 permits to protect them from foreign competition but plans to phase out those free permits when the carbon border tariff is phased in, to comply with World Trade Organisation (WTO) rules. How quickly that phase-in happens will be decided in the carbon market talks.

Brussels has said countries could be exempted if they have equivalent climate change policies to the EU and suggested the US could dodge the levy on this basis. The proposals will affect the EU’s neighbours in Eastern Europe and North Africa the most. Ukraine and Turkey are drawing up carbon pricing mechanisms to avoid being taxed.

UK’s main banks retain grip of FX

The UK’s major banks, including Barclays, Citi, HSBC and Lloyds are successfully defending their share of the country’s highly competitive business FX market – at least for now – according to a survey by the banking research firm East & Partners.

However, more than one in four UK enterprises nominates a non-bank as their primary spot FX provider such as American Express, Wise, WorldFirst, Monex, Atlantic Partners Asia or Convera in the small- to medium enterprise (SME) and microbusiness segments, at 25% and 28% respectively.  (28%).

Challenger brands outside of the banks in UK are even more prominent as secondary spot FX providers for one-off or infrequent needs, gaining a 33% relationship share cumulatively in both segments. That relationship share total is comprised of 16 major non-bank FX offerings and a standalone “other” aggregate category of single named entities which continues to expand rapidly.

East & Partners research, based on direct interviews with 2,224 British importers and exporters, reveals which non-bank providers capture the greatest relationship share. The analysis also outlines key providers growing at the fastest pace in the face of a concerted fight back from prominent high street, domestic and international banks.

Following a period of hard-won relationship share gains by this growing cohort of non-bank providers, banks are clearly pushing back via “stickier” risk product relationships in forward FX and FX options.

Hedging activity is lifting in response to rising concern towards FX volatility stemming from higher inflation and interest rates. Despite mounting headwinds in the form of recessionary risks and geopolitical tensions, FX volumes remain elevated according to the Bank for International Settlements (BIS) Triennial Central Bank FX Survey.

Global FX turnover averaged US$7.5 trillion per day in April 2022 according to the latest BIS report, marking an increase of 14% from three years earlier and London remains the preeminent hub for FX.

“The number of single named FX providers has ballooned to 30 in the ultra-competitive UK business FX market, over double the number of any other market captured as part of our Global Business FX research” commented East & Partners Global Head of Markets Analysis, Martin Smith.

“CFOs and treasurers continue to actively spread their wallet across multiple providers for spot FX execution. While major non-banks have successfully got a foot in the door, ongoing growth will be predicated on overcoming perennial pain points including frustration with onboarding procedures, specific FX platform functionality and advice for managing currency exposure when expanding into new trade corridors” Smith added.

Brazil plans 2024 launch of CBDC

The Central Bank of Brazil plans to introduce a central bank digital currency (CBDC) by 2024, bank President Roberto Campos Neto confirmed this week at a conference hosted by Brazilian news site Poder360.

The bank will conduct a pilot programme working with several financial institutions before starting wider use of the CBDC, a digital currency issued by a central bank, Campos Neto said. “I think that this digitised, paid-in, integrated system, with inclusion, will help a lot in the development and inclusion of people in the financial world,” he added.

Brazil’s population is estimated at 214 million, of which more than 30 million still have no bank accounts, and no credit or debit cards. However, in 2020 the central bank launched PIX, an instant payments infrastructure that is available 24/7 and which has proved highly successful.

Today PIX has more than 122 million active users, or 57% of the Brazilian population. Thanks to this innovation, 40% of users made their first electronic transfer ever, which denotes the enormous potential of technology for financial inclusion. Its success saw PIX quickly become a benchmark for other countries and it has been praised by the Bank of International Settlements (BIS).

In March 2022 Brazil chose nine partners to help it develop a digital currency. When the CBDC is issued, the country will join the Bahamas, Nigeria, Eastern Caribbean and Jamaica as nations that have already issued their own CBDCs. Many countries are exploring the technology, and the recent collapse of crypto exchange FTX has convinced some to push ahead with what they regard as a risk-free alternative to crypto.

“Greater inclusion, lower cost, intermediation, competition with reduced barriers to entry, efficiency in risk control, monetisation of data and complete tokenisation of financial assets and contracts,” Campos Neto said. “This is what we see in this digital economy in Brazil.”

Europe's central banks follow Fed’s 0.50% rate hike

The Bank of England (BoE), which last month stepped up its recent policy of interest rate increases with a 75 basis points (bps) rise, has continued to follow the US Federal Reserve’s lead this month with a 50bps hike, which lifts the UK rate from 3.0% to 3.5%.

Members of the BoE’s monetary policy committee (MPC) were persuaded that a more conservative stance is sufficient after inflation data showed that the UK consumer prices index (CPI), which in the 12 months to October 2022 rose by 11.1%, eased back to 10.7% last month against a predicted figure of 10.9%.

The European Central Bank (ECB) also announced today that it would increase its main lending rate by another 50bps. The latest hike, the fourth this year, means that eurozone interest rates have been lifted from zero to 2.5% in just six months. The latest increase was, however, less than the 75bps hike announced in October, suggesting inflation across the bloc may be showing signs of peaking. According to the latest flash estimate, euro area inflation fell to 10% in November from a record high of 10.6% the previous month.

On Wednesday the US Federal Reserve announced a 50bps rise after four consecutive three-quarter point increases, taking the federal funds rate – which is what banks charge each other for overnight loans -- to a range of 4.25% to 4.5%, a restrictive level intended to slow economic growth without pushing the US economy into recession.

At a news conference, Fed Chair Jerome Powell said recent data showing US inflation easing in October and November was welcome. “The report is very much what we expected and hoped for," he said.

However, Powell added: “It will take substantially more evidence to provide confidence that inflation is on a sustained downward path.” The Fed was looking for several further reports that further confirmed the easing of inflationary pressures.

Elsewhere, Switzerland’s central bank, the Swiss National Bank, has also hiked its policy rate from 0.50% to 1%. The rise was a slowdown from the bank’s three-quarter-point increase in September, its biggest ever that ended several years of negative interest rates.

The SNB said that while inflation has eased in recent months, Switzerland's consumer prices still rose by 3% in November — above its target but much lower than the rates reported in the eurozone, the US and the UK.

Argo Blockchain on verge of collapse

The share price of Argo Blockchain remains volatile after a sharp fall earlier this week when it revealed that it is teetering on the brink of bankruptcy due to a rapid depletion of its cash reserves.

The bitcoin mining firm) is in advanced negotiations to sell some of its assets and carry out an equipment financing transaction to strengthen its balance sheet and improve its liquidity, the company said in a filing with the London Stock Exchange (LSE) on Monday.

The London-based company hopes that it will be able to make these moves outside of a voluntary Chapter 11 bankruptcy filing in the US, but there is no reassurance it will be able to do so.

Argo also noted that draft materials saying the company had filed for bankruptcy protection had accidentally been published to its website last week, leading to the temporary suspension of trading in the shares last Friday in both the UK and the US.

As part of the process, the company has hired the firm of McDermott Will & Emery as legal advisers, Berkeley Research Group as financial advisers and Stifel GMP and its affiliate, Miller Buckfire, as investment bankers.

Argo has been attempting since late August to raise between US$25 million and US$35 million and last month it became evident that it needed the funds to survive. After the failure of a deal in October to raise US$27 million for US$27 million, the firm warned it might soon have negative cash flow.

Argo has built a mega bitcoin mining facility in West Texas, dubbed Helios. The facility began operating in May and planned to reach 800 megawatts (MW) of energy consumption and 20 exahash/second (EH/s) of computing power. This would have made Argo one of the world's biggest miners.

However, the firm quickly found costs from the facility exceeding revenue, such that margins narrowed in the following few months. That has been a common problem in the industry as the price of energy has soared and the price of bitcoin has slumped. Argo felt the impact of higher energy costs particularly hard as it had no fixed rate power agreement in place for the Helios facility.

UK warning of ‘exotic’ forex derivative losses triggered by mini budget

Legal disputes between banks and their business customers are expected following the drop in the value of sterling against the US dollar and its volatility against other currencies, claims business daily City AM.

The paper reports that the volatility of currencies over recent months – particularly following the mini budget unveiled in late September when Liz Truss briefly held the post of UK prime minister – will have led to many businesses facing substantial losses from complex forex derivatives contracts they had entered into on the understanding they were an appropriate means of hedging their forex exposure.

While businesses commonly enter into forex hedging arrangements to reduce the financial impact of currency fluctuations, many more exotic derivatives will perform in unexpected ways during periods of high volatility. 

These exotic derivatives usually have an element of gearing, which requires any customer on the “wrong side” of the trade to pay the bank a sum based on a multiple of the original sum, according to international law firm RPC. 

Further, the customer’s potential gains (and the bank’s losses) are capped by a “knock out” provision, which terminates the transaction if a certain “trigger” point is reached, the lawyers told City AM.

However, there is no equivalent “knock out” provision to protect the customer and the potential losses (and the bank’s profits) are, therefore, unlimited. 

Complex forex derivative products, such as Target Redemption Forwards (TRFs or TARFs) or Target Redemption Notes (TRNs), are said to be unnecessarily complex and sophisticated for many businesses and may be a source of mis- selling claims.

The International Monetary Fund has previously described these kinds of forex derivatives as ‘products from hell” and warned that they do not properly function as a hedge.

Volatility in sterling after the UK’s mini budget on 23 September caused major disruption to international businesses that bought forex derivatives in an bid to manage currency exposure. The pound fell to $1.03 against the dollar and €1.08 against the euro in September 2022. Athough Sterling has since rallied, this is unlikely to have helped businesses caught on the wrong side at the time.

“Exotic FX derivative products, rather than a low-risk hedge, can represent a high-stakes gamble,” RPC Partner Jonathan Cary told the business daily.

We’ve recently experienced incredibly turbulent market conditions. It is apparent that many of the banks’ own sales teams don’t themselves fully understand these products or they have had little real regard to whether they are suitable for their clients.”

J P Morgan Asset Management signs deal with Trovata

Investment management giant J P Morgan Asset Management, which has US$2.3 trillion of assets under management and Trovata, a bank-connected platform that makes it easier for finance and treasury professionals to manage cash, announced they are partnering to help joint customers tap into Morgan Money’s services to access higher yields on corporate investing amidst rising interest rates.

Trovata will host the Morgan Money corporate investing and trading solution as the first third-party app on its platform. Joint customers can determine their liquidity needs using Trovata, then take action to invest seamlessly using the services offered by Morgan Money.

Users will have the ability to transact across their global portfolio in real time and compare funds across multiple managers, currencies, durations, or settlement options. In addition, investment balances and transactions from Morgan Money will flow into Trovata in real time so that operating and investing activities can be monitored and managed in one place, delivering a unified experience for managing operating cash flows and investments.

“Now more than ever, corporate treasury investors need a fully integrated trading solution for their liquidity needs,” said Paul Przybylski, Head of Product Strategy and Morgan Money at J P Morgan Asset Management. “Bringing two of the newest and fastest growing experiences in corporate finance and treasury together makes for a powerful combination for our customers.”

Trovata’s customers, like Square, Etsy, and Krispy Kreme, use its platform as a single source of truth for balances, transactions, and cash flow trends from all their banks and accounts. Trovata helps its users organize bank transactions into their various cash flow types. These data “tags” make it easy for customers to build powerful cash forecasting models essential for determining liquidity thresholds sufficient for keeping enough cash on hand to pay the bills.

A release noted that: “armed with this intelligence, finance and treasury professionals can now take action by investing any excess cash using Morgan Money. With the rapid rise in interest rates, businesses could potentially generate as much as 3-4% of low-risk interest income or “yield” on its idle cash from operations.”

Open banking “fundamental” to future of P2P

Open banking will become “an absolute fundamental” for peer-to-peer (P2P) lenders over the years ahead as credit risk modelling evolves, predicts the commercial director of UK fintech Clearscore.

Tim Kelleway told Peer2Peer Finance News that the general principles of the lending market will shift over the decade ahead. Rather than loan applications being based on credit risk data from direct risk agencies, open banking will play a much bigger part.

“We are helping users understand that if they connect their bank data and put it into the hands of lenders, then lenders can get a broader picture of their own financial footprint and this can potentially lead to better deals,” said Kelleway.

“Open banking offers a real time version of someone’s finances. It allows lenders to see income shocks and spending shocks, which is increasingly relevant at the moment during the cost-of-living crisis.”

Kelleway noted that the adoption of open banking has been relatively slow but fintechs such as Clearscore can help to stimulate growth. Last year, the firm introduced its own supplementary score which sits alongside the credit score of prospective borrowers, a service is powered by open banking.

“We champion open banking because we think it’s good for people so that they can get access to better credit,” he added.

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