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Industry roundup: 22 March

Transition from Libor ‘making progress’

Financial services firms are on track for a successful transition from the previously used London Interbank Offered Rate (LIBOR) benchmark, following the cessation or non-representation designation of Sterling, Swiss and Japanese Yen LIBORs at the end of 2021, reports Bloomberg.

A survey conducted by the financial news organisation last month polled 130 executives from financial services firms and corporations worldwide. The results showed that more than 50% of firms no longer trade USD LIBOR-indexed products including floating-rate notes, cross-currency swaps and Eurodollar futures – suggesting that the transition away from USD LIBOR is well underway ahead of the end-June 2023 cut-off date.

“The US dollar markets are the biggest financial markets in the world, and everyone will be impacted by the June 2023 deadline; whether you are a multi-national firm with exposure in many currencies or a smaller company that only focuses on dollar investments, you will be significantly impacted,” said Steffan Tsilimos, Bloomberg’s global head of interest rate derivatives products

Transition decisions around instruments such as non-centrally cleared USD LIBOR derivatives and tough legacy contracts have been possible as firms were given additional time due to the delayed cessation for key USD LIBOR tenors until June 2023.

Asked how non-centrally cleared derivatives are handled, firms are split on strategy; 28% of firms said they were “not sure” how to address these derivatives before the cessation date, while an addition 13% said they were still formulating a transition strategy.

One in five firms is planning a mixture of re-papering to risk-free rate (RFR) equivalents and International Swaps and Derivatives Association (ISDA) fallbacks, while 11% said they plan to let these derivatives run to maturity via the ISDA fallbacks.

The survey also found revealed several challenges relating to operations, selection of alternative rates and re-papering of existing contracts – with half of the respondents reporting they face challenges related to systems and operational readiness.

However, the survey results suggest progress in transition efforts when compared with an earlier survey by Bloomberg and the Professional Risk Managers’ International Association (PRIMIA) last year, which found that 82% of firms viewed systems and operational readiness as a hurdle at that time.

More than one in three (36%) respondents identify the re-papering of existing transaction and agreements as a challenge, while 45% of respondents highlighted difficulty around choosing new alternative rates and conventions. In addition, 15% noted that customer outreach and negotiation remain a challenge. 

According to Bloomberg, the loan markets also continue to see the effects of the transition. In respect to LIBOR-indexed terms loans, 63% of firms said they would continue the LIBOR transition process during 2022 and possibly also into early 2023, while 15% said their timeline for term loan transitions is “undecided” and 9% said their transition process was already complete.  

“The data clearly shows that while the LIBOR transition is proceeding well overall, there is more work to be done,” said Jose Ribas, global head of risk and pricing solutions at Bloomberg.

“While larger banks, institutions, and many non-US entities already have a blueprint as a result of the first major wave of LIBOR discontinuations at the end of last year, not all global financial participants were impacted. Some US regional banks and smaller institutions with only US dollar investments may still have a way to go.

“As they prepare for the US dollar transition, firms should focus on making sure they are operationally ready to exit their LIBOR exposure (directly or through fallbacks), migrate their systems and benchmarking to non-LIBOR- based rates, and also fully understand the impact of the LIBOR transition on US markets such as mortgages and municipal bonds (munis).”


Four Wall Street banks plan syndicated loan platform

Versana, which promotes itself as “a leading-edge, industry-backed syndicated loan platform”, will launch later this year with the aim of “joining together banks, institutional lenders and their service providers to bring transparency, efficiency and velocity to this US$5 trillion market”.

Four of Wall Street’s major banks – JP Morgan, Bank of America, Citi and Credit Suisse – are founding members of Versana, which named industry veteran Cynthia Sachs as CEO and member of the Board of Directors.

Sachs has more than 25 years of Wall Street experience, primarily focused on loan-related businesses in the banking and technology sectors. She has spent much of her career as a leveraged finance banker, portfolio manager and trader at Morgan Stanley, Natixis and Bank of America, and later served as Global Head of Fixed Income Valuations at Bloomberg where she led the creation of BVAL, the firm’s evaluated pricing service. Most recently, Sachs was the CEO and Chief Investment Officer of Athena Art Finance, a specialty finance start-up founded by Carlyle.

While the syndicated loan market is expected to see significant growth, thanks to rising inflation, Versana says that the fragmented and inefficient nature of the current market ecosystem – with settlement times averaging more than 20 days – often results in frustration among participants, significant additional costs and operational challenges.

The new venture aims to address this by digitally capturing agent banks’ reference data directly from its source on a real-time basis. In addition to providing greater transparency into loan level details and lender portfolio positions, Versana will streamline workflows and lower costs, its press release pledges.

“Versana is backed by some of the biggest players and is being built by industry veterans with decades of experience working in the loan ecosystem,” adds Sachs. “We know first-hand the challenges that exist today and are passionate about fixing the market's inefficiencies and inherent risks, setting it up for accelerated growth for years to come.”

Further commentary on the initiative comes from Lee Shaiman, Executive Director of the Loan Syndications & Trading Association (LSTA), who says: “Our industry sits at the crossroads of global banking, private equity, asset management, insurance and private wealth, and yet we haven’t seen the digital transformation that has come to other parts of the capital markets.

“Initiatives like Versana provide our members with operational innovations that significantly reduce reliance on highly manual processes while streamlining workflows. Versana’s position as an industry-wide collaboration is in the spirit of the LSTA's mission, and we whole-heartedly applaud what Versana is setting out to do. It has been needed for a long time”.


UK’s ClearBank raises £175m for expansion

UK fintech ClearBank, founded in 2015 and launched two years later, has raised £175 million (US$230 million) equity investment for expansion beyond its home market. 

The funding round was led by funds advised by Apax Digital, the growth equity arm of the global private equity advisory firm Apax. Existing investors, CFFI UK Ventures (Barbados) Ltd and PPF Financial Holdings BV, also participated.

ClearBank reports “tremendous growth” since its launch and was recognised as the fastest-growing tech company in Deloitte’s 2021 UK Technology Fast 50 awards. It said that the new investment will accelerate the global expansion of its clearing and embedded banking offering, initially in Europe before moving into North America and Asia Pacific. The bank also plans to move into newer areas such as cryptocurrency exchanges.

“ClearBank is the first proven and fully regulated cloud-native clearing bank in the UK for over 250 years,” said its CEO Charles McManus, CEO. 

“Over the last five years we have demonstrated the success of our business model and through our work with leading financial service providers, helped to both unlock their potential and bring about positive and meaningful change for UK businesses and consumers.

“Our revenue growth is the proof of the momentum we have been gathering since 2017. It is this proof point and our transformative effect on access to banking services, traditionally a space characterised by high barriers to entry, which has given us the credibility to partner with and deliver seamless and secure embedded banking for award winning financial institutions, powerful fintech disrupters and government bodies alike.

“The next challenge is delivering this innovation globally. To achieve this, we needed a strategic partner with the right cultural fit, sector expertise and geographic experience, something we found in Apax Digital.”

Euroclear takes stake in Fnality blockchain payment system

The securities settlement house Euroclear has joined a consortium of banks developing a payment system for tokenised assets in the latest sign of established institutions teaming up with newcomers in crypto technology.

Brussels-based Euroclear is owned by a group of banks and exchanges, including Euronext and the London Stock Exchange Group. It settles stock and bond trades in the final leg of a transaction where cash is swapped for legal ownership of an asset and in 2021 handled the equivalent of €992 trillion ($1,095 trillion) in securities.

Euroclear has bought a small stake in the three-year old consortium Fnality as it moves deeper into distributed ledger technology (DLT) or blockchain, the technology underpinning Bitcoin and other cryptoassets. It said the aim was to settle tokenised assets, or digital securities, against digital cash on DLT in a faster and more efficient way.

The 15 founding shareholders of Fnality – formerly known as the Utility Settlement Coin (USC) – include Banco Santander, BNY Mellon, Barclays, CIBC, Commerzbank, Credit Suisse, ING, KBC Group, Lloyds Banking Group, Mizuho Bank, MUFG Bank, Nasdaq, State Street Corporation, Sumitomo Mitsui Banking Corporation and UBS. The consortium said Euroclear’s involvement would expand its footprint in market infrastructure, the financial system’s basic plumbing, as it moves later this year from testing to implementing its plan.

“This has obvious positive implications for the execution of our business,” said Fnality chief executive Rhomaios Ram. Fnality aims to replace some of the lengthy processes and paperwork required when transferring value between financial organisations by using digital versions of currencies.

In April 2021 the Bank of England (BoE) unveiled a new type of central bank account at the central bank to cater for a wider range of anticipated payments systems, including those based on blockchain. Fnality applied to the BoE to become an operator of such an account and is due to go live in October with its pound sterling payment system.

VoloFin forms partnership with Highmore for SME working capital

A strategic partnership has been announced between VoloFin, a Singapore-based blockchain-based invoice financing provider and Highmore, a US-based alternative asset management group, as the fintech looks to deepen its working capital support for SMEs. 

VoloFin, which has offices in the US and India in addition to its Singapore headquarters, helps SMEs unlock liquidity in unpaid invoices via its financing platform. In its release, the company said that the strategic partnership would support VoloFin’s clients for their working capital requirements and empowering millions of SMEs in the US and Asian trade corridor.

Commenting on the partnership, Mohit Agarwal, co-founder and CEO of VoloFin, said: “We are extremely elated about this partnership. Highmore’s deep expertise in the working capital solutions business and VoloFin’s ability to use technology to create an attractive investment asset will help bridge the gap in SME financing.”

Dipak Jogia, co-founder and managing Partner of Highmore added: “The partnership with VoloFin is an organic extension of our mission which is to provide best in class trade finance solutions to SMEs worldwide. We are excited about our partnership with VoloFin which we believe will be mutually beneficial and provide tailored solutions to SMEs to release working capital and fuel their growth.”


Bahrain’s Islamic banking sector set for growth

Rising public demand for Islamic products and an anticipated improvement in the operating environment is set to drive growth in Bahrain’s Islamic banking sector, says Fitch Ratings.

The ratings agency said its forecast for 2022-23 is based on rising oil prices, higher real GDP growth, a progressive easing of Covid-19-related restrictions and the expected rises in interest or profit rates.

Islamic banking continues to have significant importance in Bahrain, with its market share rising at the end of 2021 to 38.8% of domestic banking system assets and 17.8% of total banking system assets (including foreign assets). Islamic banks’ total assets grew by 8.1% in 2021, almost double the rate of conventional banks’ total asset growth of 4.2%.

Total assets of the Islamic banking sector reached US$38.6 billion or about 100% of Bahrain’s GDP, supported by the mainstem relevance of Islamic products, growth in residential mortgage financing, a wide branch and digital banking network, a supportive Islamic finance ecosystem and the presence of Islamic liquidity-management tools.

The profitability and asset-quality metrics of Islamic retail banks improved in 2021, although conventional retail banks performed even better. Islamic banks were also adequately liquid, but at lower levels than conventional banks. While the capitalisation profiles of Islamic and conventional banks were satisfactory and stood at similar levels, Islamic banks’ capital ratios benefit from a 30% alpha factor, says Fitch.

To mitigate the impact of the pandemic, the Central Bank of Bahrain (CBB) continued to support the banking sector in 2021 with policy measures. Asset-quality metrics are expected to deteriorate as regulatory forbearance measures introduced by the CBB are removed. These have been extended several times and have masked the true reality of asset quality picture. Commercial real estate financing is likely to remain under pressure due to oversupply, while Fitch expects residential real growth to remain stable.

Mergers and acquisitions continue to be prominent in Islamic banks. Most recently, in January Al Salam Bank-Bahrain (ASSB) and Ithmaar Holding agreed on the acquisition by ASSB of Ithmaar Bank’s consumer banking business, which will position ASSB as the largest Islamic bank in Bahrain.

In 2021, GFH Financial Group offered to increase its shareholding of Khaleeji Commercial Bank to 100%, while Esterad Investment Company proposed the acquisition of Venture Capital Bank. However, Kuwait Finance House’s long-standing proposed acquisition of Ahli United Bank was suspended due to the pandemic and is currently going through an updated due diligence.

Fitch says that the discontinuation of interbank offered rates (IBOR) will affect Bahraini Islamic and conventional banks, many of which are still working on updating their systems and processes to adjust to the new alternative reference rates. It adds that while some Bahraini Islamic banks did not have exposures to benchmark rates, others did have outstanding IBOR-linked exposures as of end-2021.

Islamic banks face the additional complexity of needing to ensure sharia-compliance throughout the transition process, unlike conventional banks. In 2021, the CBB mandated Islamic banks to follow the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) Sharia Standard No. 59 (sale of debt) effective from 1 January, 2022.

Fitch will assess the implications on Islamic banks’ credit profiles going forward. Bahrain-based international sukuk issuers have been increasingly incorporating new language in the documentation to comply with AAOIFI standards and these revisions could help increase standardisation over the medium term.

Bahrain’s share of global Islamic banking assets remains modest at 3.5% at the end of Q3 2020, according to the Islamic Financial Services Board, mainly due to the economy’s small size, but was higher than Indonesia’s (2.1%) and Turkey’s shares (3%), both of which have larger economies.

Paylink and Ecospend offer ‘pay-by-bank’ services

UK fintech Paylink Solutions has partnered with online banking provider, Ecospend, to allow customers who’ve fallen behind with repayment plans to make instant payments and get back on track with their arrangements.

Customers will be sent a link for them to make the previously failed payments, either over the phone with an agent or online at a time that suits them.

Paylink says that ‘pay by bank’ services provide an alternative option to card payments and move money from people’s bank accounts in real-time. Customers need only log into their online banking, authorise the transaction using secure biometrics and their payments will be taken instantly.

Susan Rann, CEO of Paylink Solutions, said: “This type of payment particularly benefits financially vulnerable people as their funds are instantly moved, which allows them to budget and manage their money more effectively.”

James Hickman, CCO at Ecospend, comments: “We’re delighted to be working with Paylink Solutions to help their customers make payments quickly and easily. It’s a great opportunity for us to deliver the latest advancements in payment innovation that will make payments more convenient for customers, while removing any additional stress and cutting the cost of payment fees.

“Open banking has helped to limit the impact of the current downturn by providing new experiences, helping customers manage debt, adjust budgets, and make full use of new government initiatives. We’re excited about enhancing our digital affordability software – and being able to support clients and their customers even more.”

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