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Industry roundup: 23 December

SEC proposes further money market fund reforms

The US Securities and Exchange Commission (SEC) has voted 3-2 in favour of proposing a new round of reforms that would significantly impact the regulatory framework governing money market funds (MMFs).

The SEC says that the proposed changes, which will be open for public comment period for 60 days after the date of publication, are designed to improve the resiliency of MMFs by reducing the risk of shareholder “runs” on MMFs, especially during times of liquidity stress. It indicated that the proposed reforms follow the experiences of MMFs in March 2020 when the onset of the first wave of Covid-19 sparked market volatility, including heavy outflows from institutional prime MMFs.

The proposed reforms consist of amendments to Rule 2a-7 under the Investment Company Act of 1940, the primary rule governing the operation of MMFs, and related reporting and disclosure form amendments.

Key aspects of the proposed reforms include removing the ability of a MMF to impose liquidity fees or redemption gates once the fund falls below certain liquidity thresholds. Currently, Rule 2a-7 gives the board of directors of a MMF discretion to impose liquidity fees (of up to 2%) and/or redemption gates (for up to 10 business days during any 90-day period) if the fund’s “weekly liquid assets” fall below 30% of its total assets.

Although government MMFs are not subject to the fees and gates provisions, a government MMF is permitted to impose fees and/or gates by reserving the authority to do so and disclosing that authority in its prospectus. Government MMFs have rarely, if ever, opted into the ability to impose fees and gates.

The fees and gates provisions were added to Rule 2a-7 in 2014 to help MMFs curb runs during extraordinary circumstances. The SEC intended that they serve as redemption restrictions that would provide a “cooling off” period to temper short-term investor panic and preserve liquidity in times of market stress.

However, the SEC believes that the fees and gates provisions failed to work effectively when markets were stressed in March 2020. Although no MMF imposed a fee or gate (and only one institutional prime MMF reported weekly liquid assets below the 30% threshold), the possibility that it might happen increased redemptions – investors may have been more inclined to redeem as a MMF approached the 30% threshold out of uncertainty about whether the MMF’s board would use its discretion to impose a fee or gate if the MMF reached this threshold.

At the same time, to avoid the uncertainty associated with dropping below the 30% threshold, MMF managers sought to maintain weekly liquid asset levels above the 30% threshold – for example by selling longer-term portfolio securities – rather than use weekly liquid assets to meet redemptions. Consequently, the 30% threshold effectively became a liquidity “floor” instead of a buffer.

Further details on the SEC’s proposed reform can be read in this recently-published commentary:

SWIFT eyes expansion into digital assets

SWIFT is reported to be considering how it might best support interoperability in further developing tokenised asset market, working in partnership with market participants that include Clearstream, Northern Trust and SETL. Although the market capitalisation of tokenised assets is still modest against that for cryptocurrencies and stablecoins, demand for digital assets is expected to accelerate over the next five years to reach as much as US$24 trillion by 2027.

Banks and securities firms have responded by developing digital asset servicing capabilities, such as private key safekeeping and support for the full lifecycle of digital securities. SWIFT hopes to improve interoperability between participants and systems during the transactional lifecycle of tokenised assets and the Brussels-based payment messaging services plans a series of experiments in Q1 2022 on issuance, delivery versus payment (DVP), and redemption processes for supporting a seamless tokenised asset market.

These experiments will use both established forms of payment and central bank digital currencies (CBDCs), Thomas Zschach, SWIFT’s chief innovation officer, told Finextra. “As a neutral cooperative with a reach across 11,000 institutions in more than 200 countries, and oversight by central banks globally, Swift is uniquely placed to engage closely in the future of securities,” he said. “We look forward to this set of new experiments and innovating collaboratively with market participants on the emerging trend of tokenised assets.”

The pilot programme will see Clearstream, Northern Trust and other industry players representing key parts of the tokenised − and traditional − asset ecosystem, including securities market infrastructures, local custodians and global custodians. The tests will explore the feasibility and benefits of Swift as an interconnector, linking up multiple tokenisation platforms and various cash-leg payment types.

“Our vision for instant and frictionless transactions not only applies to traditional securities instruments but also to new asset classes as well,” Vikesh Patel, SWIFT’s head of securities strategy commented. “The insights from this exercise with leading capital markets participants will help us define and prioritise the concrete steps required to enable seamless processes for tokenised assets.”

US multinationals kept waiting for cross-border payments

US multinationals must typically wait 53% longer to receive cross-border payments than they do for domestic payments reports PYMNTS, citing the Payment Orchestration for Global Commerce Playbook – its collaboration with US money online transfer specialist Payoneer – as its source.

PYMNTS comments that while global e-commerce activity has surged over the past year and presented prime growth opportunities, they also come with several challenges. Enterprises must meet cross-border shoppers’ payment preferences by accepting localised payment methods, accommodate local or regional regulatory requirements, and manage a wide variety of cross-border payment frictions for each market they enter.

Payoneer’s president Keren Levy adds: “At the end of the day, the merchant’s entire revenue depends on the fact that each customer’s payment goes through. However, given the diversity of the payments market, the differences in local payment preferences and the complicated nature of tech infrastructure in e-commerce, ensuring a smooth and frictionless payment process is challenging.”

US multinationals report that several pain points impact both the business-to-business (B2B) and the business-to-consumer (B2C) spaces in cross-border commerce. They must add payment methods native to these markets to their options they offer and also ensure they are operating in compliance with local know your customer (KYC) and anti-money laundering (AML) regulations. These include the payment card industry (PCI) standards and the strong customer authentication (SCA) requirements set out by the EU Revised Directive on Payments Services (PSD2).

This often means finding new payment service providers (PSPs), payment methods, acquirers and risk providers to deliver the geographic-specific services needed to establish a local presence. US businesses looking to expand into China might need to partner with Ali-Pay or WeChat Pay, for example, in addition to observing local regulatory compliance requirements that can vary drastically from region to region.

As well as adding new payments capabilities, businesses looking to optimise cross-border payments flows must overcome legacy cross-border payments practices such as correspondent banking and manual processing that can further complicate an already-complex process. They must also deal with uncontrollable variables like a payment provider’s sudden downtime or new regulatory compliance that add more friction.

Standard Chartered tips developed markets in 2022

Standard Chartered Wealth Management’s chief investment officer predicts that the developed markets (DMs) will generally outperform emerging markets in 2022, although he does expect the Indian market to produce good returns. Steve Brice expects both the UD and European markets to be the top performers next year.

“We still believe that developed markets (DMs) will outperform emerging markets (EMs), at least going into the start of the year,” Brice told CNBC TV. “So we have much greater growth transparency when it comes to the outlook at the start of the year in the US in particular. Obviously, Omicron is raising concerns in Europe, but we have got fiscal stimulus coming through and very significant monetary policy stimulus still in the works. So, overall we believe the US and Europe will continue to outperform.”

Brice adds in the CNBC TV report that he believes this is a seasonally strong period for equities, despite a current inflation figure that is higher than investors would like. Turning to the Indian market, he expects “decent returns” in 2022 as the country’s macro environment continues to be favourable and is not overly concerned by current valuations.

“We are neutral Asia and within that, we are neutral India,” he says. “So we have been overweight India, pretty much the whole of 2021, until a couple of weeks ago. We have been riding that wave quite well, but we have downgraded it to neutral, but we are still expecting decent returns for the India market and we think this is going to be a cyclical play as far as the market is concerned. So the three sectors we like in particular are financials, industrials and consumer discretionary.”

Brice continues: “We do believe that the macro environment is still pretty favourable and so growth is going to be above trend. Yes, the Reserve Bank of India (RBI) is likely to raise rates in the second half of next year by around 50 basis points. So, it's going to temper some expectations, but we think that's largely priced into the short end of the bond curve. So, overall, still positive returns, but not a favourite market now within Asia.”

Myanmar keen to join renminbi trade project

Myanmar will begin accepting the renminbi (RMB) as an official settlement currency next year for cross-border trade with China, as its military government looks to revive several joint development projects and forge closer economic ties with Beijing.

The ruling junta, which seized power last February in a coup, said that Myanmar enjoys a special “kinship” with China, which has supported it both financially and with COVID-19 vaccines, and that restarting the projects is “a major priority”.

A statement issued by the ministries of information and investment identified several joint projects with China that the government wants to push ahead with, including infrastructure plans for railways and ports.

It added that Myanmar’s economic downturn this year has been “much less severe than forecasts of some international economists.”

The Myanmar government is reported to have approached Chinese banks several times since May, seeking deeper financial cooperation. China is Myanmar's biggest trading partner as well as its biggest source of foreign investment, so will provide a stable source for Myanmar banks to access the RMB, helping alleviate the country's financial difficulties and restore economic growth, according to local reports.  

As the US dollar has dominated Myanmar's international settlements, the move also marks an important step in China's joint efforts with neighbouring countries to expand the use of its currency in bilateral trade and counter the USD’s dominance, which analysts say has been regularly used by the US to impose unilateral sanctions on other countries. It also paves the way for broader use of the RMB in the Southeast Asia region.

Reports suggest that the closer relationship will be marked by an official ceremony, likely to be held on New Year’s Day, at which officials from the Central Bank of Myanmar and the Chinese Embassy are scheduled to participate.

The estimated settlement scale in the pilot phase will be around two billion yuan (CNY), or US$ 314 million according to sources. 

“Due to the dual effect of the pandemic and the political situation, the economic development of Myanmar has hit hurdles,” a spokesperson for the Myanmar branch of Industrial and Commercial Bank of China (ICBC) told the Global Times. “Strengthening trade ties with China is the best option for Myanmar to restore economic growth. Against this backdrop, the RMB plays both an evident and a bridging role in cementing bilateral cooperation.”

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