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Industry roundup: 10 February

Russia looks to regulate cryptocurrencies

In what appears a major change of policy, Russia has announced that it intends to regulate cryptocurrencies rather than outlaw them. The government’s plan to license crypto exchanges and tax large transactions is supported by Russia's central bank, which recently again called for a ban to be imposed on crypto mining and trading.

A document setting out basic principles for the regulation of cryptocurrencies appeared on the government’s official website late on 8 February.  Russia’s altered stance comes only days after India took a step towards legalising cryptocurrencies by proposing a 30% tax on digital asset transfers which, although hefty, was nonetheless seen as a major concession.

Marcus Sotiriou, analyst at the UK-based digital asset broker GlobalBlock says that Russia’s government and central bank have reached agreement to draft legislation by 18 February, which “is in contrast to the central bank’s proposal last month, suggesting that miners and other crypto businesses should be banned due to the threat to the country’s financial system. However, a draft document said that crypto’s use as legal money will only be possible following proper identity checks via the country’s banking system or licensed intermediaries – it will be considered a criminal offence to transact outside these parameters.”

He added that the change of attitude comes after authorities in Moscow project that Russia could earn US$13 billion per year in taxes from the Russian crypto market, which analysts calculate to be valued at over US$214 billion, or about 12% of the total value of the global crypto market.

Russia’s move comes only days after India took a step towards legalising crypto. Presenting the Union Budget on 1 February India’s finance minister, Nirmala Sitharaman, announced that a tax rate of 30% will be applied to digital asset transfers. Although substantial, introducing the marks a major concession by the world’s fifth-largest economy in recognising the crypto market as legitimate.

By contrast, as recently as last month the Bank of Russia was still adopting an aggressive anti-crypto stance. The central bank’s report described cryptocurrencies as a threat to Russia's financial stability and rife with fraud. The regulator suggested banning cryptocurrency trading and mining in Russia and instead giving Russians access to the digital rouble, the central bank digital currency (CBDC)being developed by the Bank of Russia, and digital assets issued inside the country by licensed companies.

The government’s newly-published blueprint is therefore a marked policy change. It proposes allowing cryptocurrency purchases in Russia to take place, but only through locally registered and licensed companies so that users are fully verified and information about their transactions can be made available to government agencies. The document does not address cryptocurrency mining and many of the stipulations will require parliament to pass new laws.


RBI restores India’s liquidity framework

The Reserve Bank of India (RBI) has announced a package of measures in what analysts regard as “another step towards policy normalisation” following the emergency measures taken in response to Covid-19 business disruption.

Having begun the rebalancing of excess liquidity conditions in August 2021, India’s central bank has now announced the restoration of its revised liquidity management framework.

“With the progressive return of normalcy, including transient demand for liquidity from the RBI, it is logical to restore the revised liquidity management framework in order to make it more flexible and agile,” the Bank’s Governor Shaktikanta Das said at the conclusion of its Monetary Policy Committee meeting.

The RBI has announced that:

  • Variable rate repo operations of varying tenors will now be conducted as and when needed within the cash reserve ratio (CRR) maintenance cycle;
  • Variable rate repo and reverse repo operations of 14-day tenor will operate as the main liquidity management tool based on liquidity conditions and will be conducted to coincide with the CRR maintenance cycle;
  • These main 14-day operations will be supported by fine-tuning operations to tide over any unanticipated liquidity changes during the reserve maintenance period. Operations of longer maturity will also be conducted, as and when needed;
  • From 1 March the fixed rate reverse repo facility and the marginal standing facility will only be available from 5.30 pm to 11.59 pm daily, revised from the current timing of 9.00 am to 11.59 pm.

“Market participants are advised to shift balances out of the fixed rate reverse repo into variable rate reverse repo auctions and avail the automated sweep-in and sweep-out (ASISO) facility in the e-Kuber portal for operational convenience,” Das said.

Announced in August 2020, the ASISO facility provides greater flexibility to banks in managing their day-end cash balances to meet reserve requirements. It enables banks to pre-set a specific or range amount of money they wish to maintain at the end of the day. Any shortfall or excess amount will automatically trigger bids or offers at the marginal standing facility or the reverse repo window.

Rahul Bajoria, Chief India Economist at Barclays, commented that the RBI’s liquidity changes are “signalling its desire to reduce its hand-holding of markets for managing liquidity, and leave institutions to more actively manage their own liquidity requirements”.


Biotechs ‘facing cash crunch’

Many biotech companies – those that use living organisms and molecular biology for producing healthcare-related products – are increasingly facing a cash crunch and are struggling to attract funding as so-called ‘tourist’ investors, who were attracted to the sector by its early successes in developing anti-Covid vaccines, desert the sector according to the Financial Times.

The business daily reports that “dozens” of biotech companies are running low on cash and face an uphill struggle to raise fresh funds as the sector has recently been abandoned by many investors who bought shares in the early months of the pandemic.

The FT adds that the majority of biotech companies are lossmaking yet have been able to raise a record US$32.7bn in initial public offerings (IPOs) over the past two years, according to financial markets data specialist Refinitiv. However, 83% of recently listed US biotech and pharma stocks are now trading below their IPO price. Biotech companies that listed in 2021 are typically trading at 37% below their IPO price, against a 22% fall for all newly US-listed companies.

Many of these companies raised money via IPOs with the assumption that they would subsequently be able to tap investors for fresh funds in future share sales as their drugs progressed through the research and development cycle. Their ability to do so has been hampered as the biotech sector has fallen out of favour with retail investors and generalist money managers

Geraldine O’Keeffe, a partner at healthcare investment firm LSP, told the FT that biotech shares had suffered a “complete bloodbath across the board”. The Nasdaq Biotechnology index has fallen more than a fifth since peaking in February 2021 versus respective rises of 3% and 17% for the Nasdaq and S&P 500. “I think everybody is holding their breath and waiting to see if it has bottomed out and will bounce from here,” said O’Keefe. “It can’t get much lower — but we thought that every day in January and it kept going down.”

The sharp drop has meant in some cases that investors are attaching a market valuation to some biotech companies that is lower than their cash reserves. Investment bank Jefferies recently identified 31 listed biotechs with a market capitalisation above US$100 million that are trading at negative enterprise values.

The paper reports that the biotech sell-off has been triggered by a confluence of factors, with investors seeking safer assets as central banks start to raise interest rates in response to resurgent inflation. Some analysts believe that industry stocks became overvalued at the peak of the pandemic when positive news about Covid-19 vaccines and treatments helped lift the sector overall. To these can be added concerns over increased regulatory scrutiny of drug pricing and anti-competitive practices, which are also buffeting a sector reliant on a steady stream of merger and acquisition deals to stay afloat.


UK fintechs complete proof of concept for DLT

Three UK fintechs – Fnality, Nivaura and Adhara – have partnered with banks NatWest  and Santander to execute the first cross-chain pilot debt transaction on public Ethereum and Fnality Payment System.

The completion of the pilot proof of concept (POC) involves the issuance of a tokenised security on a public blockchain, with the payment leg conducted through a new, distributed ledger technology (DLT)-enabled payments system.

Fnality – the firm creating a network of distributed payment systems using blockchain technology – partnered with Nivaura – which develops low-code/no-code transaction management workflow automation technology for primary markets – to structure, execute and settle a tokenised primary securities issuance, with the payment leg settled in a test central bank money-backed digital asset.

Fnality also partnered with Adhara – a software company that provides real time, multi-currency, liquidity management and international payment solutions – to facilitate the payment leg via the creation of an Ecosystem TestNet. The TestNet is an early working and live example of how Fnality’s DLT-based payment systems will help facilitate several benefits and use cases, including intraday liquidity savings, end-to-end repurchase agreements, and interbank intraday FX swaps. 

It has been adopted alongside Nivaura’s product by Santander and NatWest for the purposes of this POC to demonstrate, in what has traditionally been a time-intensive and manual process, a near-instant solution that structures, executes, and settles trades on a T=0 basis.


Deutsche Bank ‘joins ICBC and Macquarie on commodities risk’

Deutsche Bank, which withdrew from most commodities trading risk business more than eight years ago, was recently involved in a complex derivatives trade that enabled a corporate client to hedge energy price moves according to International Financing Review.

Citing sources familiar with the matter, IFR comments that Deutsche Bank’s involvement would mark a rare foray into these markets for the German lender and suggests it may still retain an appetite to take on commodities trading risk.

The report states that Deutsche was one of a handful of banks involved in the so-called deal contingent hedge for a corporate client, sources said, a risky type of derivative structure that banks provide to companies and investors to reduce their exposure to swings in financial markets around the time of major corporate events such as merger and acquisition deals. It follows a steep rise in commodity prices over the past year that bankers say has increased the appeal of commodity-linked hedges for corporate treasurers.

IFR’s sources said that Industrial and Commercial Bank of China (ICBC) and Macquarie were other bank participants in the deal. Macquarie has an extensive presence across commodities markets, while ICBC is active in metals as well as crude oil and related refined products, according to the companies’ websites. However, spokespeople for Deutsche and Macquarie declined to comment on the report and an ICBC spokesman was unobtainable.

The report notes that Deutsche discontinued most of its commodity business in late 2013 under a cost-cutting initiative but said at the time that it would retain its precious metals and financial derivatives businesses. Following a revival in its fixed income division in the past two years, analysts have suggested that Deutsche could begin taking on more commodity business and sources say the bank has considered restarting its base metals trading business.

However, sources at Deutsche told IFR that does not intend to get back into energy trading and has no plans to increase its risk exposure in this area. They characterised the deal contingent energy transaction as one of a handful of hedging trades that the bank has always provided to corporate clients occasionally to support its financing business.

Deutsche is a major player in the far larger market for deal contingent FX hedges, where companies and investors engaging in cross-border M&A use derivatives to reduce their exposure to exchange-rate swings between a deal’s announcement and its completion.


Volante and FIMBank extend Cloud payments  

Cloud payments and financial messaging specialist Volante Technologies and trade finance provider FIMBank announced they will extend their relationship with Volante deploying additional payment rails and components from the Volante Payments as a Service (PaaS) cloud-native payments processing platform. 

Their collaboration began in 2018 when FIMBank selected Volante’s service, running in the cloud on Microsoft Azure, to process inbound and outbound SEPA payments for the bank’s corporate customers. A press release says that “building on the success of this relationship, the bank will now use the service to facilitate their switch to clearing and settlement via the Central Bank of Malta.

“We collaborated with Volante to help us implement the first step of our innovation programme - processing SEPA payments in the cloud,” said FIMBank’s chief information officer (CIO), Gilbert Coleiro. “Volante’s PaaS is now a core part of our mission-critical payments business. Its extensibility will allow us to easily participate in new schemes like SEPA instant, expand cross-border capabilities, and smooth our migration to ISO 20022. By doing so, we will be able to deliver data-rich 24x7 instant payment experiences to corporations, no matter where or when they do business.”

Commenting on the deal, Gareth Lodge, Senior Analyst, Global Payments, Celent noted:  “Banks and financial institutions face stiff competition for corporate business on all fronts: larger global banks, smaller challengers, fintechs and bigtechs. The key to rising above the competition is rapid payments modernisation.

“More than ever, that means adopting cloud-native as-a-service platforms for payments processing, particularly instant payments. The benefits are clear: faster time to value, greater resilience and scalability, lower costs, higher margins, and ultimately superior customer satisfaction and market share.”

Etrading Software goes for growth

Etrading Software, which focuses on technology solutions and management services for new capital markets infrastructure platforms, announced the expansion of its platform technology business with partnerships on new products and sectors. The company is also adding to its senior management team and named James Haskell as new chief operating officer (COO) and David Lane as new chief technology officer (CTO), both of whom are joining Etrading Software’s board.

The London-based company, which is active in Europe and Asia, designs, builds and operates technology solutions for the front office for fixed income OTC markets, allowing clients to keep full governance and control using transparent and vendor-neutral solutions.

Etrading commented that its technology-led solutions aim to address complex and constantly evolving market and regulatory challenges, by assisting market participants and public authorities in implementing new global regulatory and data standards such as the Unique Product Identifier (UPI) and ISO’s new digital asset standard, the Digital Token Identifier (DTI).  

It added that is also increasingly partnering with clients, through technology, to deliver products which build on Etrading Software’s experience in the full life cycle of a start-up from idea generation, investment, planning, building, operating and governance. 

The company is creating more technology platforms with partnerships in the markets space, such as the EPIC Loan Systems platform, and the WIC trading platform in the loans space and an expansion through the DTI into the digital asset world.

“Loans platforms are bringing much needed digitisation and automation to loan trading workflows, as are partnerships with loan market participants,” it comments. “The WIC trading platform, for example, is the latest step toward electronification of manual, error prone workflows for the loan market, providing market participants with an automated, reliable and user-friendly choice when trading loans.

The company “continues to focus on the intersection of technology, workflow and data, creating platforms which allow users to leverage the power of their own data as well as third party data feeds and connectivity to make better trading decisions and connect to their clients, and is again partnering with market participants to make this happen.”

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