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Trade volumes returning to trend amid high uncertainty - Industry roundup: 4 December

Trade volumes returning to trend amid high uncertainty

The latest quarterly World Trade Organization (WTO) Goods Trade Barometer indicates that the global merchandise trade volume is recovering after its recent slump, with automobile sales and production and electronic components trade driving the recovery. However, mixed economic results and increasing geopolitical tensions make the near-term outlook highly uncertain.

The current reading of 100.7 for the barometer index is above the previous reading of 99.1 from last August and close to the baseline value of 100. This suggests that merchandise trade volume will gradually revert towards its medium-term trend in the second half of 2023. However, uncertainty remains high due to mixed economic data and rising geopolitical tensions.

World merchandise trade volume was flat in the second quarter of 2023, up 0.2% compared to the previous quarter but still down 0.5% year-on-year. Trade statistics for the third quarter should be slightly stronger thanks to accelerating GDP growth in the United States and China, even as a stagnant European Union economy continued to weigh on global demand. 

Year-on-year trade growth is likely to be strong in Q4 due to the reduced trade in the same period last year as high energy prices, rising interest rates and pandemic-related disruptions weighed on economic growth in leading economies. These developments are consistent with the WTO's forecast of 5 October 2023, which foresaw an 0.8% increase in global trade volume in 2023. While the forecast remains unchanged, risks to the trade outlook have shifted towards the downside in light of recent developments in the Middle East.

The barometer's component indices are mixed, with some rising firmly above trend and others remaining on or below trend. The most significant gains were seen in the indices for automobile sales and production (110.0) and electronic components trade (109.8). The indices for air freight (100.3), export orders (99.4)  and container shipping (98.0) finished on or slightly below trend, while the raw materials index (95.6) sank below trend.

The strength of the automotive products and electronic components indices may be explained by surging global demand for electric vehicles, while the weak result for raw materials may be partly due to weakening property markets as interest rates remain elevated.


Swift connects instant payment systems to bring cross-border 24/7 processing

Cross-border payments destined for Europe can now reach beneficiaries in seconds through seamless connection to instant domestic payment systems, with full transparency and end-to-end tracking provided by Swift.

The European Payment Council’s One-Leg-Out Instant Credit Transfer scheme (OCT Inst), which went live this week, enables payments to and from Europe to be processed 24 hours a day, seven days a week. The go-live follows on from a successful proof of concept earlier this year in which Swift collaborated with Iberpay, the European payment system; Spanish banks BBVA, CaixaBank and Santander; and commercial banks from Australasia (ANZ and the National Australia Bank), Brazil (Itaú Unibanco) and the UK (Lloyds Banking Group), with dozens of international payments successfully reaching Spanish accounts within seconds.

Interlinking market infrastructures this way is crucial to achieving the G20’s goals for cross-border payments around speed, transparency, cost and access. Swift announced earlier this year that 89% of payments on its network reached the end bank within an hour. The G20 targets 75% of cross-border payments to be credited to the beneficiary within an hour by 2027. 

Financial institutions see OCT Inst as an opportunity to leverage the benefits of domestic instant payment systems globally while enabling outgoing flows and using existing rails.

Swift is closely monitoring and engaging with other interlinking initiatives and considering how they could use Swift’s solutions. For instance, forthcoming European legislation for instant payments directs payment service providers to offer instant payments at the same price as traditional payments while mandating them to check beneficiary details before a payment is initiated. Connecting domestic Confirmation of Payee schemes - effective in tackling instant payment fraud - with Swift Payment Pre-validation can enable institutions to comply with this legislation by checking beneficiary details across the Eurozone without reinvesting in a new product.

“Interoperability is at the heart of everything we are doing at Swift to achieve our strategy of instant and frictionless payments for all, and it will be key to achieving the G20’s goals for cross-border payments,” said Marianne Demarchi, Chief Executive of Swift in Europe. “The EPC’s OCT Inst scheme is a positive step for Europe that will enhance the user experience for payers in Europe, but also all around the world.”


Finance directors renew focus on governance 

Benchmarking data from Birchstone Markets has revealed that finance directors (FDs) are now focused more on governance strategies and are less risk-averse in volatile FX markets. The report shows that they are spending more time on governance and risk mitigation strategies to hedge against future shocks. Business decisions require more justification, and confidence in FX decisions and strategy is waning.

The report features data and analysis from surveying over 100 Finance Leaders in the UK throughout 2022 and 2023. Birchstone’s proprietary technology was developed by experts in financial psychometrics and assesses risk profile, confidence, attitude, and economic outlook.

The outcome shows a reduced confidence in FX and an uncertain outlook on business and economic performance. With reduced confidence, governance is a priority, and FDs are concerned about the effects and costs of FX resulting from significant market shocks.

Inflationary pressures and margin squeezes have driven a renewed focus on FX as a main treasury challenge, with a 15% growth in the last 12 months. Noting FX accounts for 46% out of 5 categories. The proportion of FDs who would be very stressed by a costly FX decision has increased by 121%. FDs are more risk averse in these uncertain times with the data showing less willingness to take financial risks (516% YoY growth). Governance has risen up the agenda as a key objective for 35% of FDs, compared to 25% in 2022.

FDs continue to show concern on business outlook, with 28% of FDs lacking a positive view on their business performance.


Improved financing could save US$50 trillion as the world decarbonises

New cost-reducing finance instruments can help de-risk green projects in developing economies while making investing in these projects more attractive, helping to fuel a global just energy transition, according to Deloitte’s Financing the Green Energy Transition report. 

Achieving net-zero greenhouse gas emissions by 2050 will require an annual global investment in the energy sector ranging from US$5 trillion to US$7 trillion. However, the world currently invests less than US$2 trillion each year into the transition, far short of the financing needed to help put the world on course to meet our collective climate goals.

The report found that green projects currently suffer from underinvestment and high required return rates because private investors consider green technologies riskier than alternative investments. The report highlights the need for governments, financial institutions, and investors to jointly develop mechanisms to help mitigate risk from green projects by developing blended, low-cost finance solutions to mobilise private investment and help achieve economic growth and climate neutrality - especially in emerging economies. It also highlights the benefits of taking action - the projected savings of US$50 trillion through 2050 could reduce the annual investment needed by over 25%. The report goes beyond finance to provide a holistic overview, employing analysis and modelling to consider the technology landscape, policy environment, and a matrixed vision of financing challenges.

“Just as we are continually developing solutions and technology to rapidly decarbonise, we must take definitive steps to remove financial barriers in order to accelerate a just energy transition, especially in developing economies,” said Jennifer Steinmann, Deloitte Global Sustainability and Climate practice leader. “Decisive and coordinated policy support and hand-in-hand action across the global finance ecosystem are critical to guiding investments toward green projects and supporting the growth of sustainable economies.”


Central Bank of Ireland fines GlobalReach Multi-Strategy ICAV for EMIR reporting breach 

The Central Bank of Ireland has reprimanded and fined investment fund GlobalReach Multi-Strategy ICAV (the ICAV) €192,500 in line with the European Union (European Markets Infrastructure) Regulations 2014, as amended (the EMIR Regulations), for breach of its reporting obligation under Article 9(1) of the European Markets Infrastructure Regulation (EMIR). This requires details of any derivative contracts to be reported to a registered trade repository no later than the working day following the conclusion of the contract.

The ICAV has admitted that it failed to report 200,640 derivative trades entered into between January 2018 and May 2020 by one of its sub-funds (the Sub-Fund) to a trade repository.

The Central Bank has determined the appropriate fine to be €275,000, which was reduced by 30% to €192,500 as allowed for by the settlement discount scheme provided for in the EMIR Regulations Settlement Scheme. This is the first monetary penalty imposed on an investment fund by the Central Bank to date.

“This case highlights the importance of timely and accurate data reporting,” commented Seána Cunningham, the Central Bank’s Director of Enforcement and Anti-Money Laundering. “The reporting obligations under EMIR and other sectoral legislation increase transparency and enable the Central Bank to obtain a complete picture of each firm’s operations, to fully understand the risks facing firms operating in securities markets, and thereby to address systemic risk. Incomplete or inaccurate data actively hinders market monitoring processes and activities.”


Why the US dollar could stay strong through 2024

Even in the face of continued global growth, the US dollar maintained its value in 2023 — and the story could be similar in 2024, according to Isabella Rosenberg of Goldman Sachs Research.

A statement put out by Goldman Sachs notes that this is somewhat unusual. Typically, when there’s strong economic growth, the dollar is expected to underperform the currencies of countries viewed as more risky. But the US economy has outperformed in 2023, on track to grow at a 2.4% pace (as of 15 November) that well surpasses the 0.4% consensus growth estimates at the start of the year. Given this backdrop and the economic challenges in Europe and China, “it's no surprise the majority of cross-border fund flows have been directed into the US,” Rosenberg said.

Looking ahead to 2024, Goldman Sachs Research expects US growth of 2.1% (again, as of 15 November), a double consensus expectation forecast. This environment could foster continued interest in US assets among foreign investors.

“While it might be compelling to forecast dollar depreciation from the top down,” Rosenberg added, “US outperformance in 2024 means the dollar should remain in high demand.”


Over US$3.4 trillion in retail investor capital could be mobilised against climate change

Standard Chartered’s latest Sustainable Banking Report 2023 reveals US$3.4 trillion of retail investor capital could be mobilised towards climate investments in ten growth markets across Asia, Africa and the Middle East by 2030, highlighting the power of individuals to combat climate change.

The research – based on investor interest from a survey of 1,800 respondents – identifies a wider US$8.2 trillion of retail capital potential in sustainable investing and shows that climate investing is gaining traction. US$2.1 trillion could be directed to climate mitigation, with investors showing high interest in renewables, energy storage and energy efficiency; a further US$1.3 trillion could be channelled into climate adaptation across resilient infrastructure, food systems, biodiversity and the blue economy.

While Europe and North America dominate the current sustainable investing landscape, the report highlights opportunities for other regions to unlock more capital to combat climate change worldwide. Investor interest is strong, with over 90% of investors surveyed stating they are interested in climate investing. However only approximately 20% are willing to invest significantly towards it.

At 66%, investors reveal accessibility – the availability and ability to make climate investments – is the biggest challenge holding them back. Other barriers include comparability (64%), comprehensibility (63%), perceived low returns (59%), perceived higher risks (58%), and scepticism (56%).

The report notes that the industry needs to help investors overcome these barriers to unlock the potential of retail capital. Financial institutions, regulators, companies and individuals must make a concerted effort to establish a broader range of climate assets to drive greater retail participation.


Survey reveals excitement around the potential of generative AI

Finastra’s annual global survey has revealed that, despite economic constraints, financial institutions globally continue to invest in artificial intelligence (AI), Banking as a Service (BaaS) and embedded finance.

The ‘Financial Services: State of the Nation Survey 2023’ finds that decision-makers in financial institutions worldwide are excited about the opportunities presented by fast technological and cultural change within the industry today. Nearly nine in ten respondents (87%) are personally excited about the pace of change, while 83% are excited for the opportunities it will bring for their financial institution and 81% for the wider financial services industry.

The survey found that financial institutions are rapidly exploring the benefits of AI, with deployment of AI and improvements in AI capabilities increasing notably year-on-year. Globally, 37% of respondents stated that their financial institution had improved or deployed AI technology in the last 12 months, rising from 30% in 2022. The growing importance of generative AI also stands out. More than four fifths (83%) of decision-makers say their institution is interested in the technology, with 26% having already incorporated generative AI in some form. Only 6% of respondents globally say that their financial institution is not interested in adopting the technology.

Respondents perceive generative AI as a key means to meet increased customer expectations for tailored, personalised services, with 32% of those interested in the technology saying they will use it in this way. When asked about specific business areas, the most common use case for generative AI is collecting, processing, and analysing data for ESG criteria classifications and decision-making. Other widely cited use cases include: automating manual or repetitive tasks; collecting, processing, and analysing data for KYC or AML purposes; and improving risk management and decision-making processes.

The research also found an increased uptake of BaaS, with 48% of financial institutions having either deployed BaaS or improved their capabilities in this area in the last year. This is a sizeable increase from the 35% recorded in 2022. Key use cases globally include buy now pay later schemes, embedded lending and embedded cross-border payments.

There is also optimism about the outlook for tech investment despite current constraints. While 78% of financial institutions surveyed say the current economic climate has constrained their investment in technology, 69% expect their investments to resume in full before the end of H1, 2024.

The vast majority of financial institutions (85%) believe open finance is having a positive impact on the industry. In addition, 85% say that at least a quarter of their customers are using open banking-enabled services. 46% say that over half of their customers are using them.

The survey also found that financial institutions are not turning inwards during challenging economic conditions. Instead, decision-makers still believe it is as important as ever to maintain a strong commitment to their communities. 86% of decision-makers believe financial services and the banking sector are about more than just finance and that they have a duty to support the communities they serve.

The research, conducted from August to September 2023, canvassed the opinions of 956 professionals at financial institutions and banks across France, Germany, Hong Kong, Singapore, Saudi Arabia, the UAE, UK, US and Vietnam.


Trovata and Jiko open channel into short-term US Treasury bills

Trovata has partnered with bank and technology firm Jiko to enable customers to allocate operating cash into Treasury bill (T-bill) investment according to liquidity needs and to earn competitive yield.

Treasury bills are a popular destination for short-term cash, but access through traditional broker-dealers and fund managers can be expensive, tedious, and often pooled with additional instruments containing counterparty risks. With Jiko Corporate, trading in and out of US Treasury bills can be automated based on custom-term structuring, and customer funds are held in government-backed assets with no exposure to bank lending or balance sheet risk – with the same liquidity, flexibility, and access as a bank account.

“This partnership is a significant leap forward to provide automated insights, forecasting, and money movement in Trovata and a secure avenue for investing idle operating cash in Jiko Corporate,” said Stephane Lintner, founder and CEO of Jiko. “It’s a natural next step for our companies to work together in empowering corporate treasurers with the technology they deserve.”


Mercuria closes US$3bn revolving credit facility in North America

Mercuria Energy has announced the successful closing of its US$3bn one-year secured borrowing base facility in North America. Mercuria mandated Société Générale New York, MUFG Bank, Natixis New York, Cooperatieve Rabobank New York, Sumitomo Mitsui Banking Corporation and ING Capital as joint lead arrangers. Société Générale New York acted as the administrative agent.

The facility launched on 24 August, and general syndication started on 18 September. Following successful syndication and strong demand, the facility was oversubscribed by more than US$500m, with Mercuria choosing to scale back lender commitments to US$3bn in aggregate. The facility will be used for general corporate and working capital purposes.

“We are pleased with the strong support from an exceptional syndicate of our banks,” said Bin Wang, Mercuria’s North America CFO. “The facility provides us with increased liquidity to further scale our North America business footprint on the back of our sound financial discipline, compliance, credit and risk management. It also demonstrates the quality of our collateral and the strength of our team.”


ACI Worldwide and Mexipay to Empower Payment Innovation in Mexico

ACI Worldwide has partnered with financial technology company Mexipay to boost payment innovation in Mexico. Mexipay, a new fintech player in the Mexico ecosystem, will leverage ACI Enterprise Payments Platform to deploy ISO 20022 real-time payments and other payment services in Mexico.

Expected to go live in early 2024, Mexipay´s real-time payments technology should accelerate financial inclusion to a broader portion of the unbanked population in Mexico. By leveraging ISO 20022 real-time payments, the fintech will complement the current real-time capabilities in the country with payment services and a fast time to market.

“We are very excited to be ACI Worldwide's partner in Mexico for real-time payments as our partnership will allow us to boost ISO 20022 technology in the country by facilitating modernization, innovation and time to market to the participants in the ecosystem,” commented Fabian Uribe, co-founder and CEO of Mexipay.


ARRC releases final reflections following transition from LIBOR

The Alternative Reference Rates Committee (ARRC) has released the ‘ARRC Closing Report: Final Reflections on the Transition from LIBOR’ and announced the conclusion of the group itself, following a successful transition from US dollar (USD) LIBOR.

The report highlights critical areas that the ARRC believes firms should focus on going forward to preserve the robust system of reference rates achieved through the decade-long transition effort. Despite the group's completion, this report and other transition tools and recommendations will remain relevant and available on the ARRC’s website.

“The prospect of smoothly transitioning away from LIBOR was once widely seen as impossible,” said John C. Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York. “Now, the transition, and the ARRC’s efforts to support that transition, serve as a testament to what can be accomplished through dedicated public-private partnerships. We must uphold the lessons from the transition to avoid ever needing to repeat it again,” 

The report provides an overview of the ARRC’s history - describing the scale of the LIBOR issues, the ARRC’s formation, and key transition milestones. It highlights three areas for firms to prioritise continuously:

1.           Active review of any reference rates that firms may consider using.

2.           Appropriate fallback language for any contractual use of reference rates.

3.           Maintaining an appropriate balance between the use of SOFR and Term SOFR.

The ARRC emphasises that market participants should seek to avoid the mistakes made with LIBOR and consider their exposures to reference rate benchmarks as they consider other material sources of risk.

While the ARRC will wind down, the report also notes that the New York Fed plans to launch a new sponsored group in 2024 to focus on promoting the integrity, efficiency, and resiliency in the use of reference rates across financial markets. It is envisioned that this group will build on the legacy of the ARRC’s work by promoting its critical best practice recommendations.

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