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Industry roundup: 15 January

ECB digital euro consultation receives record level of public feedback

The European Central Bank (ECB) has concluded its public consultation on the digital euro and will now analyse in detail the large number of responses. Some 8,221 citizens, firms and industry associations submitted responses to an online questionnaire, a record for ECB public consultations.

The public consultation was launched on 12 October 2020, following the publication of the Eurosystem report on a digital euro. The ECB will publish an analysis of the public consultation in the spring, which will serve as an important input for the ECB’s Governing Council when deciding whether to launch a digital euro project.

An initial analysis of raw data shows that privacy of payments ranked highest among the requested features of a potential digital euro (41% of replies), followed by security (17%) and pan-European reach (10%).

“The high number of responses to our survey shows the great interest of Europe’s citizens and firms in shaping the vision of a digital euro,” said Fabio Panetta, member of the ECB’s Executive Board and Chair of the task force on a digital euro. “The opinions of citizens, businesses and all stakeholders are of utmost importance for us as we assess which use cases a digital euro might best serve.”

The Eurosystem task force, bringing together experts from the ECB and 19 national central banks of the euro area, identified possible scenarios that would require the issuance of a digital euro. These scenarios include an increased demand for electronic payments in the euro area that would require a European risk-free digital means of payment, a significant decline in the use of cash as a means of payment in the euro area, the launch of global private means of payment that might raise regulatory concerns and pose risks for financial stability and consumer protection, and a broad take-up of central bank digital currencies issued by other central banks.

A digital euro would be an electronic form of central bank money accessible to all citizens and firms - like banknotes, but in a digital form - to make their daily payments in a fast, easy and secure way. It would complement cash, not replace it. The ECB says that the Eurosystem will continue to issue cash in any case. A digital euro would be designed to combine the efficiency of a digital payment instrument with the safety of central bank money. The protection of privacy would be a key priority, so that the digital euro can help maintain trust in payments in the digital age.

 

DTCC identifies risk management priorities for a post-pandemic environment

The Depository Trust & Clearing Corporation (DTCC) has identified what it sees as key priorities that financial market infrastructures (FMIs) should focus on in the coming years to proactively and effectively manage risk in a post-pandemic environment.

In the white paper 'COVID-19: Impact and Implications for Financial Market Infrastructures', DTCC explains that FMIs around the globe performed remarkably well amid unprecedented market volatility and record trade volumes in the wake of the coronavirus outbreak. However, the pandemic’s considerable impact on the macroeconomic environment and systemic vulnerabilities will likely cause structural changes to the financial services industry, as well as the regulatory landscape and legislative agendas.

In response, DTCC has identified the following challenges and implications for FMIs, which play a crucial role in safeguarding global financial stability:

  • The impact of the pandemic on markets was a real-life stress test for FMI risk management regimes, and lessons learned from this crisis should be factored into risk models moving forward.
  • The market turmoil observed in March 2020 provided additional data on margin procyclicality and illustrated that providing greater margin transparency to clients is key to helping them navigate extreme volatility.
  • FMIs should take an enhanced sector-specific approach to managing.
  • FMIs should constantly reassess clearing member’s available liquidity, which can deteriorate quickly in periods of market stress.
  • An extended remote working environment creates new operational risks with respect to cyber security, third-party dependencies and other aspects, which must continue to be managed.

The paper also notes that the longer-term effects of the pandemic will likely reverberate through the financial industry for years to come and could weigh on the financial sector’s profitability, potentially contributing to further consolidation within the industry.

 

KBC Bank chooses Finastra for LIBOR transition

KBC Bank, a Belgium-based bank with operations across Europe, US and Asia Pacific, has chosen Finastra to help manage its transition through the upcoming interbank references rates changes. It has selected Fusion Loan IQ Alternate Reference Rates (ARR) module to manage new rates and to expand its lending business. The bank has also opted for the Fusion LIBOR Transition Calculator to help calculate rates ahead of the transition period.

Fusion Loan IQ is Finastra’s solution for commercial lending. It aims to alleviate the high costs of system and process redundancy within commercial lending operations, as well as increasing transparency, improving risk management and simplifying entry into new markets or business lines. The latest version of the solution, enhanced to support ARR, provides banks with core capabilities to issue new loans using the replacement rates, allowing them to begin to transition their existing LIBOR portfolio safely.

Fusion LIBOR Transition Calculator should help KBC Bank manage the transition before the ARR module is rolled out. It enables market participants to calculate their own ARR or Risk-Free Rates (RFR) and interest accruals. The calculator service independently accesses the ARR/RFR from external official sources, such as the Federal Reserve Bank of New York, for the secured overnight financing rate (SOFR). It then calculates compounded in arrears rates and daily non-cumulative compounded rates, along with corresponding interest accrual amounts for a set of inputs. Depending upon the rate method chosen, the calculator has the flexibility to calculate the daily compounding rates for the whole period or only for the end date. It follows Finastra’s Fusion Loan IQ ARR calculations, which gives market participants consistent and accurate results.

Built on FusionFabric.cloud, Finastra’s open innovation platform, the calculator’s open API facilitates the integration with systems that don’t yet have a solution in place for calculating ARR/RFR rates.

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