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Industry roundup: 31 March

Russia to discuss bypassing SWIFT with India

Sanctions-hit Russia has issued a proposal to India that would enable the Asian country to buy Russian oil and weapons via a system developed by the Central Bank of Russia for bilateral payments, according to reports.

The plan involves rupee-rouble-denominated payments using Russia’s messaging system SPFS, said individuals familiar with the matter, who asked not to be identified in discussing confidential deliberations. They said no final decision has been taken and the issue will probably be discussed when Russian Foreign Minister Sergei Lavrov arrives in India today for a two-day visit.

Russian central bank officials are likely to visit India next week to discuss the details, the people said. The Reserve Bank of India (RBI) regularly meets with executives from its banking system to discuss matters including exposure to Russia and the risk of sanctions, another person said.

India is widely seen as keen to continue bilateral trade due to its dependency on Russian weapons and the prospect of buying cheaper oil as global prices surge. Prime Minister Narendra Modi’s government has resisted pressure from Western nations to join their sanctions, arguing that arms purchases from Russia are needed to counter China’s growing military assertiveness.

Under the proposal, roubles will be deposited into an Indian bank and converted into rupees and the same system will work in reverse, one individual said. Undecided elements include whether the exchange rate will be fixed or floating.

Russia apparently also wants India to link its Unified Payments Interface with its MIR payments system for seamless use of cards issued by Indian and Russian banks after Visa and Mastercard suspended operations, one of the people said.

Following the invasion of Ukraine, the US and the European Union have cut off seven Russian banks from the SWIFT cross-border payment system – including state-controlled VTB, Bank Rossiya and Bank Otkritie. Following the imposition of sanctions, Russia has been looking for alternate mechanisms to continue its trade hit by its assault on Ukraine.

India has so far refrained from outright condemnation of Moscow’s attack on its neighbour, saying only that Russia and Ukraine should end hostilities and seek a diplomatic solution through dialogue. However, New Delhi is under pressure from fellow members of the Quad grouping, which includes the US, Australia and Japan, to take a stronger stand against Russia as the US and its allies attempt to ramp up pressure on Moscow.

As the situation in Ukraine develops, the UK’s Association of Corporate Treasurers (ACT) has issued a checklist for members on issues they should consider in protecting their company’s assets and to mitigate any financial risks of doing business.

Big Q1 fall in corporate bonds

Global corporate bonds have lost more than US$1 trillion in the first three months of 2022 and the risks are continuing to rise, according to data from Bloomberg.

It reports that the worldwide pool of the safest corporate debt shrank by US$805 billion in Q1, while the global junk market lost US$236 billion in the same period, marking the biggest dollar decline since records began more than 20 years ago following a borrowing binge propelled by record-low funding costs.

The slump marked the biggest total return loss for high-grade bonds since Lehman Brothers' collapse in 2008 and the worst junk performance since the start of the Covid-19 pandemic. The United States investment grade market alone saw about US$440 billion in market value erased and is on track for the biggest three-month slump since 1980.

Investors in corporate bonds are reportedly bracing for further trouble after getting hammered by rampant inflation and rising yields in the first quarter. Credit remains under pressure from inflation, which is pushing central banks to boost rates, in turn risking an economic slowdown and unsettling investors.

“We are far enough from the inflation picture being clear that you can't help but think that volatility will persist,” says Brad Rogoff, a head of global research at Barclays.

Russia’s invasion of Ukraine on 24 February has intensified concerns about Europe's ability to fulfil its energy needs and is further disrupting already pressured supply chains around the world.

As losses rack up, retail investors have taken cash from bond funds and outflows are likely to intensify as they tend to lag returns by about a month, a Bank of America (BOA) strategists’ note suggests. A recent BOA survey found that inflation is currently the biggest single concern among credit investors, followed by geopolitical risk.

Yields on 10-year US Treasury and German government bonds have surged to their highest levels since 2019 and 2018 respectively. US two-year yields briefly exceeded the 10-year level this week for the first time since 2019, signalling that US rate increases by the Federal Reserve could trigger a recession.

China plans more digital yuan trials

China is expected to roll out further pilots of the digital yuan (e-CNY) later this year, including some in Zhejiang province, as part of its efforts to build a robust ecosystem for the digital currency.

The People’s Bank of China (PBoC), the country's central bank, recently announced that it will make solid efforts to advance the research and development of the e-CNY and expand the scope of digital renminbi trials in an orderly manner. A statement issued by the PBoC added that it will continuously improve the design and use of the e-CNY and gradually establish the relevant management framework.

Dong Ximiao, chief researcher at Merchants Union Consumer Finance, said the PBoC statement indicates that more regions will join in e-CNY service trials this year and the new batch of trial regions could be released soon. The 19th Asian Games, a multi-sport event to be held in Hangzhou, Zhejiang province from 10-25 September should be among the new pilot scenarios and allow foreign visitors to use the e-CNY, Dong said.

So far, China has released two batches of e-CNY trial regions and made the digital yuan accessible in 10 Chinese cities, including Shenzhen, Guangdong province, Shanghai and Chengdu, Sichuan province, as well as the venues of the Beijing 2022 Winter Olympics. Market talk about the e-CNY has grown this year as a growing number of regions declared their ambition to pilot digital currency services as part of their efforts to boost digital finance.

Earlier this month the PBoC and the other authorities concerned released guidelines confirming that they will support qualified areas in Zhejiang province to launch e-CNY pilots. The provincial financial regulator said in January it will pilot e-CNY services in scenarios related to the 19th Asian Games and support local areas to apply for piloting the digital renminbi.

Local governments in Guangdong, Heilongjiang, Henan and Fujian provinces, as well as Chongqing municipality, are reported to be seeking to introduce new e-CNY trials.

Experts said introducing more trials will help in testing the functioning and security of the e-CNY more thoroughly and in exploring more ways to incentivise consumers and financial institutions to use the digital currency.

According to Zheng Lei, deputy head of the International New Economic Research Institute, while previous pilot projects helped establish the digital yuan payment and settlement system between consumers and commercial banks, there is now a need to expand the scope of e-CNY trials and payment amounts involved in transactions to further test the robustness and security of the ecosystem.

Expanding the scope of trials can also help fortify the links between commercial banks and the central bank in the context of e-CNY issuance and management of bank reserves, Zheng added. All these measures will help build a solid ecosystem of the e-CNY that will function as a critical infrastructure of digital finance.

At the end of last year, up to 261 million individual digital renminbi wallets had been set up, with the transaction value totalling CNY87.57 billion and usage scenarios exceeding 8.09 million, official data showed.

NFTs could go mainstream, says Deutsche Bank

Non-fungible tokens (NFTs) could go mainstream, helped by Instagram’s planned support, by lowering the barriers for entry into the market suggests a Deutsche Bank Research report.

The research report notes that the market opportunity for NFTs is very large, with the total addressable market (TAM) estimated to be over US$1 trillion, led by such categories as art, collectibles and gambling.

Earlier this month Mark Zuckerberg, CEO of Instagram’s owner Meta Platforms, said that his company was “working on bringing NFTs to Instagram in the near term” and Deutsche Bank’s report suggests that bringing NFTs to Instagram’s large audience has the potential to supercharge the overall market.

NFTs are digital assets on a blockchain that represent ownership of virtual or physical items and that can be sold or traded. The bank says that Instagram will simplify the process of buying and selling them, thereby lowering the barriers to entry and the platform’s strong global brand recognition will “lend itself to legitimatise NFTs, which could serve to erode buying hesitancy across the company’s broader audience.”

The launch of an NFT marketplace on Instagram is highly likely to gain traction, the report says. Based on typical NFT marketplace fees and conservative assumptions about user penetration and average transaction values, Deutsche Bank estimates that a broader rollout of an NFT marketplace on Instagram could drive up to US$8 billion in net annual revenue.

Even this figure could be conservative as the report notes that other internet companies, such as eBay, Twitter and Snap are also taking steps to adopt digital assets and could all incorporate NFTs to some degree. The NFT market is in “hypergrowth mode” the report concludes, generating around US$25 billion in transaction volume last year, an increase of about 250 times the total volume in 2020 of around US$95 million.

According to a Yahoo Finance report, Visa has begun recruiting creators keen to sell their work and services via NFTs for a one-year NFT programme

The report says that the global payments giant has begun accepting applications for the immersive programme aiming to help gig workers, entrepreneurs, and artists dive deeper into the commercial side of NFTs.

“We want to build a small cohort of amazing talented creators from different geographies across the world that are focused on leveraging NFTs for different use cases,” Cuy Sheffield, head of digital assets at Visa, told Yahoo Finance.

However, a separate commentary by US news website Axios is less convinced. “Sales of NFTs, one of 2021's biggest investment crazes, are but a fraction of what they were at last year's peak,” it reports, adding that “despite the present doldrums, the market for NFTs… is very likely here to stay. But it will probably go through several more rounds of hype and disillusionment.”

Citi sells India retail unit for US$1.6bn to Axis Bank

Citi has agreed the sale of its consumer businesses in India to Axis Bank – formerly UTI Bank and India’s third-largest private sector bank – following “an extensive and competitive auction process” in a cash deal worth around US$1.6 billion.

The transaction comprises the sale of the consumer banking businesses of Citibank India, which includes credit cards, retail banking, wealth management and consumer loans. It is expected to close in the first half of calendar year 2023 subject to requisite regulatory approvals.

The deal also includes the sale of the consumer business of Citi’s non-banking financial company, Citicorp Finance (India) Limited, comprising the asset-backed financing business, including commercial vehicle and construction equipment loans, as well as the personal loans portfolio.

The transaction, once completed, will see 3,600 Citi employees supporting the consumer businesses in India, transfer to Axis but excludes Citi’s institutional client businesses in India.

“This announcement is only the start of a process, and while there will be a transition, Citi will ensure that it is done in as seamless a manner as possible, with due notice,” Citi said. “There will be no immediate impact on the services to the customers of Citi’s consumer businesses in India.” The group expects the sale to release about US$800 million of allocated tangible common equity.

Citi’s has previously said that a global exit from its consumer banking franchises in 13 markets across Asia and EMEA is expected to release around US$7 billion of allocated tangible common equity over time.

“Our announced transaction with Axis, a leader in Indian financial services, represents an important milestone for our franchise and offers an excellent opportunity to our consumer banking colleagues in India,” said Peter Babej, Citi Asia Pacific CEO.

“As we move forward with this transaction, India remains a key institutional market for Citi. In line with our broader strategic repositioning, we will continue to support our institutional clients in this core market and across APAC, delivering the full power of our global network to enable their growth.”

MillTechFX expands into Europe

MillTechFX, the fintech affiliate of Millennium Global Investments, is rolling out its multi-bank foreign exchange (FX) marketplace in the UK and North America to include Europe

The firm, which offers a cost-effective FX execution and hedging solution for corporate treasurers and asset managers, currently executes US$760 billion in annual FX volume and manages over US$19.5 billion in institutional currency mandates.

MillTechFX provides clients with direct access to comparative wholesale FX rates from 10+ liquidity provider banks and transparent best execution. It recently launched the margin-free FX hedging solution in partnership with Investec Bank.

The firm said that it has selected Paris for its European hub and is “now ready to hit the ground running across the EU” after receiving regulatory approval from both French financial authorities – the Financial Markets Authority (AMF) and the Prudential and Resolution Control Authority (ACPR).

In its release, MillTechFX stated: “Asset managers and corporates have had little choice but to suffer from significantly overpaying for their currency execution and hedging requirements as well as the operational burden of implementing and managing multiple relationships to seek best execution

“MillTechFX is looking to change this by revolutionising the FX market with its multi-bank FX marketplace which allows asset managers and corporates to significantly reduce both FX costs and the operational burden associated with FX execution and rolling hedging requirements.”

Commenting on the plans to establish a new hub in the French capital, Stephanie Aufan, Directeur Général of MillTechFX Europe, said: “Paris is one of the top tech cities in Europe, boasting a deep pool of talent as well as excellent transport links to London and the rest of Europe. From our Paris hub, we will open the door to more transparent, efficient and cost-effective access to multi-bank FX execution, levelling the playing field for asset managers and corporates across Europe.”

ESMA reports on liquidity stress tests

The European Securities and Markets Authority (ESMA) says its review of liquidity risk in corporate debt and real estate funds suggests that compliance is satisfactory although not perfect.

ESMA, as the EU’s securities markets regulator, conducted a supervisory engagement with investment funds together with National Competent Authorities (NCAs). The results of the exercise show that the funds included in the scope of the analysis do not pose any substantial risk for financial stability.

“While the overall degree of compliance is satisfactory, it also highlights some room for improvement and continued monitoring, especially on the liquidity stress testing and valuation of less liquid assets,” comments ESMA.  “Many NCAs reported that management companies were able to manage episodes of valuation uncertainty in March 2020 and that they have not identified any strong valuation issue for the funds in the scope of the exercise.”

In May 2020, during the first wave of the Covid-19 epidemic, the European Systemic Risk Board (ESRB) recommended that ESMA coordinate with NCAs on a focused supervisory engagement with investment funds that have significant exposures to corporate debt (different from money market funds (MMFs)) and real estate, in order to assess their preparedness to potential future redemptions and valuation shocks.

ESMA said that it has followed up on steps undertaken by NCAs regarding the priority areas defined in its Final Report, published November 2020. It now plans to facilitate discussions on these topics among NCAs on the application of the Liquidity Stress Testing (LST) guidelines in Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) and is conducting a 2022 Common Supervisory Action (CSA) on the valuation of less liquid assets in UCITS and open-ended AIFs.

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