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Updates to Term SOFR scope of use recommendations - Industry news: 24 April

Term SOFR scope of use recommendations receive an update

The Alternative Reference Rates Committee (ARRC) has released a summary and update of its Term SOFR Scope of Use recommendations. The ARRC is releasing this summary to support understanding among market participants of the possibilities that the existing recommendations recognise in hedging Term SOFR risk. It is also updating its guidance to include a limited refinement that will help to ensure that Term SOFR remains a sustainable and useful tool for the business loan market.

Over the past year, the market has successfully adopted the ARRC’s recommendations: SOFR has become the dominant US dollar interest rate benchmark, with CME Group Term SOFR rates providing a useful additional tool for the business loan market while their use has remained limited in derivatives and other cash products. The popularity of the Term SOFR rates in business lending has led dealers to take on Term SOFR risk as they have helped clients hedge these loans, and the ARRC believes that it is appropriate to recognise a further option for laying off some of this Term SOFR risk, in addition to clarifying already existing options under its recommendations, while continuing to emphasise that use of Term SOFR should remain limited overall.

The ARRC’s existing recommendations recognise the ability of end users to use Term SOFR derivatives to hedge Term SOFR business loans or legacy LIBOR products that have converted to Term SOFR. The ARRC’s update of its recommendations additionally recognises the ability of end users to enter into Term SOFR-SOFR basis swaps (but not other Term SOFR derivatives) in a wider set of circumstances, even when they do not hold Term SOFR cash assets that they are seeking to hedge. This offers an additional channel through which dealers can lay off some Term SOFR risk to other market participants but is expected to continue to ensure that the use of Term SOFR remains limited overall. 

The ARRC emphasises that it has not altered its position regarding interdealer trading of Term SOFR, including of Term SOFR basis swaps, as such activity could compromise the robustness of Term SOFR. CME Group has recognised the ARRC’s recommendation regarding interdealer trading of Term SOFR derivatives.

The Financial Stability Oversight Council has endorsed the ARRC’s recommendations and its emphasis that Term SOFR should remain limited. The ARRC believes that the Term SOFR-SOFR basis swaps refinement, together with a broader understanding of the applications of the ARRC’s previous best practice recommendations, will help to ensure that Term SOFR remains a valuable tool in the transition away from LIBOR over the long-term, in a way that remains consistent with financial stability.

“The ARRC’s Best Practice Recommendations on the scope of use of Term SOFR have facilitated transition in the loan market while also supporting a resilient transition broadly grounded in use of forms of overnight SOFR,” commented Tom Wipf, ARRC Chairman and Vice Chair at Morgan Stanley. “The refinement incorporated today should contribute to this continued balance by providing an additional outlet to help ensure the long-run sustainability of Term SOFR, while at the same time ensuring that use of Term SOFR derivatives is sufficiently contained, in line with the recommendations of the official sector.”

 

Mastercard and M1xchange roll out digital invoice discounting solution for Indian farmers

Mastercard has announced its collaboration with M1xchange to offer a digital invoice discounting solution to farmers, farmer producer organisations (FPOs), and agri-MSMEs through Farm Pass, its agritech platform. Along with enabling access to credit and working capital, the solution will allow farmers and FPOs to directly connect with buyers, negotiate the best price for their produce, and get paid faster. Farm Pass is part of Mastercard’s broader Community Pass platform.

As part of the collaboration, M1xchange, a Reserve Bank of India (RBI)-approved facilitator for discounting and selling receivables to banks and non-banking financial companies (NBFCs), will bring on board its network of agri-businesses and lenders. The solution jointly developed by the two organisations is the first of its kind for the agriculture sector and will help lenders in underwriting credit offerings through the Trade Receivables Discounting System (TReDS).

Due to the delays and follow-ups involved in directly engaging with buyers, farmers and agri-MSMEs often sell their products to intermediaries to access instant payments. The FPOs also struggle with access to working capital, which prevents them from procuring effectively from farmers. By enabling credit via invoice discounting, the Mastercard-M1xchange solution will equip these FPOs with working capital to purchase goods from farmers and sell them to buyers at the best price with instant payment. This will help start a self-sustaining cycle for the FPOs, resulting in self-sufficiency over the medium to long term.

“To support the Government of India’s efforts at doubling farmers’ income, access to formal credit will act as a catalyst,” said Vikas Varma, COO, South Asia, Mastercard. “In collaboration with M1xchange, Mastercard aims to bring together MSMEs, FPOs, traders, and farmers on a single platform to address their working capital and credit needs through an invoice discounting solution, leveraging the secure and consented data on the Farm Pass platform. Through an auction-based mechanism for selecting the best interest rates against the trade, the solution aims to benefit 10 million farmers.”

Through Farm Pass, Mastercard has helped over 1 million smallholder farmers. Adding the credit and invoice discounting feature to the platform will support the company’s commitment to digitising the agriculture sector and promote financial inclusion among farmers and rural communities. Accion International helped facilitate the collaboration.

 

CGI-MP Working Group 4 releases eBAM best practice guide 

Common Global Implementation Market Practice (CGI-MP) Working Group 4 has released its best practice guide to electronic bank account management (eBAM). The document provides guidance to organisations looking to adopt eBAM and leverage its benefits for efficient bank account management.

eBAM streamlines bank accounts' opening, closing, and maintenance by automating the data exchange between companies and banks. However, adopting eBAM can be challenging without a clear understanding of best practices and a roadmap for implementation.

The CGI MP Working Group 4’s Best Practice Guide aims to fill this gap by offering practical guidelines for implementing eBAM. It provides a step-by-step guide to help organisations understand the critical considerations for selecting an eBAM solution, developing an implementation plan, and executing a successful eBAM project.

The whitepaper culminates the CGI MP Working Group 4’s research and experience in implementing eBAM solutions across various industries. The working group comprises industry experts and practitioners with expertise in deep banking, treasury management, and financial technology.

“We are excited to share our eBAM best practices whitepaper with the industry,” said Hubert Rappold, Chair of the CGI MP Working Group 4. “Our goal is to help organisations of all sizes and industries adopt eBAM successfully and realise its benefits, including increased efficiency, enhanced security, and better compliance.”

 

Santander Bank and DailyPay launch on-demand salary payments

Santander Bank, N.A. is teaming up with global financial technology company DailyPay, Inc. to offer an on-demand pay benefit for its commercial banking clients in the US.

Through DailyPay, Santander’s Commercial Banking clients can provide employees immediate access to their pay as they earn it. A user’s earned pay can be transferred to the account of their choice and is available to use in real-time at any point in the payroll process.

The bank says this collaboration is another step forward in expanding digital capabilities and delivering flexible solutions based on clients’ needs and emerging technologies.

“Clients are increasingly interested in digital products and services that will simplify their banking experience, help them manage their workforces and build their businesses,” said Joe Abruzzo, Head of Commercial Banking for Santander. “Providing transparency and access to earned pay through this offering with DailyPay will serve as an impactful tool for our business clients who can now offer employees a simple and convenient way to manage their finances.”

 

Swift’s RMB Tracker shows the currency holding steady in March

In March 2023, the RMB retained its position as the fifth most active currency for global payments by value, with a share of 2.26%. Overall, RMB payments value increased by 25.04% compared to February 2023, while in general all payments currencies increased by 21.46%. Regarding international payments, excluding payments within the Eurozone, the RMB ranked 7th with a share of 1.67% in March 2023. 

Using data from live and delivered MT 103 and MT 202  - customer initiated and institutional payments - and ISO equivalent messages exchanged on Swift, RMB’s share as a global payments currency based on value placed it fifth out of all international currencies in March, capturing 2.26% of all global payments value. This is behind the US dollar (41.74%), the euro (32.64%), the British pound (6.19%) and the Japanese yen (4.78%). 

As a global currency in the trade finance market, based on live and delivered MT 400 and MT 700 messages exchanged on Swift, RMB ranked third based on value, accounting for 4.5% of March trade finance transactions. This field was dominated by the dollar (83.71%), while the euro also placed higher (6.41%).

Looking at FX spot transactions, the RMB was the fifth most used currency for FX confirmations. The dollar was the most used, followed by the euro, pound, and yen. In terms of the top economies carrying out FX spot transactions in RMB, the UK came out on top in March (36.63%), followed by the US (13.93%), Hong Kong (10.3%), China (9.06%) and France (7.75%). 

 

New online portal for UK banks and PSPs to perform Confirmation of Payee checks

SurePay, a provider of payment verification solutions, has announced the launch of an online portal that enables UK banks and payment service providers (PSPs) to perform Confirmation of Payee checks. This solution can be offered alongside the firm’s existing Confirmation of Payee solution, which helps protect customers against fraud and provides compliance with Pay.UK guidelines.

Confirmation of Payee is a vital fraud prevention measure introduced in the UK to combat the increasing instances of authorised push payment (APP) fraud. This type of fraud involves criminals tricking individuals into making payments to them by posing as legitimate individuals or businesses. Confirmation of Payee checks help to prevent this type of fraud by verifying the recipient's name against the account details held by the bank or PSP.

SurePay's online portal makes it easy to perform these checks. One integrated portal is offered to execute EU and UK checks. The CoP portal helps to validate personal and business accounts and to prevent fraud and misdirection. In addition, access to CoP through this portal can be offered to corporate customers preventing fraud and errors and facilitating the onboarding of customers, suppliers and employees. Customer or supplier files and bulk payments can be checked by uploading them to the portal. The solution is already being used by some UK banks and building societies.

 

FSB explores climate-related financial risk factors in compensation frameworks

Climate-related metrics are often part of the environmental, social and governance (ESG) factors that financial institutions increasingly use as part of performance measurement to determine variable compensation.

The impact of climate change on the financial system is becoming a strategic priority for financial institutions and regulators. In turn, financial institutions are increasingly adopting climate-related metrics in compensation frameworks. Many jurisdictions have incorporated or plan to integrate rules or guidance in regulatory and supervisory frameworks across banking, insurance and asset management.

A Financial Stability Board (FSB) report reviews compensation practices around climate-related objectives and how financial institutions’ stated goals are incorporated into their compensation frameworks. Climate-related financial risk factors in compensation frameworks are still an emerging theme. Therefore, this report does not aim to present and compare practices across jurisdictions but rather to identify challenges and provide early insight into a fast-moving field to assist ongoing initiatives of regulators and financial institutions. Common challenges include:

  • Gaps in data availability and reliability make it challenging to apply consistent metrics and monitor them in performance evaluation and compensation determination.
  • Development of objectively measurable metrics that are aligned with financial institutions’ strategies.
  • Misalignment of timeframes between compensation assessment periods and the materialisation of climate-related results.

The incorporation of climate-related metrics into compensation frameworks is expected to evolve further. In response to a fast-changing environment, continuous revision and adaptation of metrics by financial institutions are needed to ensure the effective alignment of compensation with prudent risk-taking. Financial regulators can facilitate this process by helping share regulatory and industry practices with each other and the industry.

 

Phishing, smishing and vishing top fraud list

Data published by TransUnion shows that over four in 10 (43%) UK consumers who said they had been attacked by fraud were targeted by phishing between September and December 2022.  

This is followed by smishing – fraudulent text messages meant to trick you into revealing data (40%) – and vishing – fraudulent phone calls with the same aim (28%), indicating that digital channels remain the most common focus for fraudsters, according to TransUnion’s 2023 State of Omnichannel Fraud Report.

However, the top types of digital fraud which UK consumers were most worried about differed from the attempts reported, as the most significant consumer concerns were identity theft (52%), stolen credit cards (45%) and account takeover (41%). 

Several industries have seen a rise in digital fraud attempts from the UK compared to 2021, including insurance, gambling and logistics. At the same time, some industries, such as financial services, saw a significant drop in attempts year-on-year, indicating that cybercriminals have turned their attention elsewhere. This may be a testament to the increasing levels of control finance providers are putting in place to help stop fraud and raise awareness of scams. 

“We’re seeing a persistently high number of suspected digital fraud attempts, with the total volume still 11% higher than pre-pandemic,” said Josh Gunnell, director of fraud and ID for TransUnion in the UK. “This reflects the overall accelerated adoption of digital technologies and rise in online transactions. UK businesses need to take proactive steps to protect themselves and their customers by ensuring that identity proofing and authentication is up-to-date and as robust as possible.”   

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