Sunday, May 26, 2024

TECH TUESDAY: Assessing the Present and Future of AI in Markets

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

Artificial intelligence (AI), specifically generative AI, has perhaps been the hottest emerging technology topic in markets of late. Traders Magazine caught up with Mike O’Rourke, Head of AI and Emerging Technology at Nasdaq, to learn more about the current AI landscape and how it will evolve.

Tell us about your background and your current role at Nasdaq.

I’ve been with Nasdaq for 25 years, the last 10 of which have been primarily focused on emerging technologies—AI, data science and our move to the cloud. 

Mike O’Rourke, Nasdaq

Back in 2016, I ran our data business technology; we were doing a lot of data science, but there was no formal data science program at Nasdaq. So, we built out a whole career track as well as a center of excellence for AI because, at the time, Brad Peterson, Chief Technology, and Information Officer at Nasdaq, and I anticipated that this was going to be very important. We wanted to start building up talent, a skill set and prowess in AI. 

When did Nasdaq start using AI, and what were the early use cases?

The early projects at that time focused on using machine learning and AI language models to understand data and make new alternative data sets. How can we use AI to process unstructured data and convert it into structured data and knowledge so people can make better investments and trading decisions? We also used machine learning models to better understand trading activity and behavior. Why am I not getting the fill rate that I want? Why did this order not execute? How are my trading patterns compared to other firms? Things like that. 

How has Nasdaq’s cloud journey and partnership with Amazon Web Services (AWS) facilitated AI adoption?

AWS has been a wonderful partner. The cloud is really where innovations happen first, and Nasdaq took the stance that we needed to be early adopters by moving our data and systems there. It was about being agile and able to scale more easily. 

Our investment in the cloud is paying off—the new emerging AI technologies are there, and because our data is there, too, we can readily implement these new models on top of our data. We’ve invested a lot in having really good data systems, and to have good AI, you need sound data, which we have in the cloud.

AI is one of our strategic pillars across the company—we want to incorporate it into all our products and services, and the cloud is a significant enabler of this.

What current AI use cases are you most excited about?

I’d be remiss if I didn’t talk about Dynamic Midpoint Extended Life Order (M-ELO), which is part of our dynamic markets program. We believe we can provide better service to our clients by having order types that can dynamically adapt to market conditions. It’s still early days for Dynamic M-ELO, but it’s been quite successful—we’re seeing increased order flow and higher hit rates, and we’re seeing no degradation in markouts. So, clients are clearly benefiting from the service.

Another part of dynamic markets is our strike optimization program, where we use machine learning models to figure out which strikes we should have listed in the options market. About 1.3 million strikes can be listed in the options market, so manually determining what strikes should be listed is difficult. We think this is a perfect use case where machines can do it better than humans. 

We have several other items in the research phase, such as order types and other solutions within the dynamic markets program. We believe these two first launches are just the beginning of how AI will transform markets. 

Generative AI has been a very hot topic. Do any AI use cases at Nasdaq utilize generative AI?

Broadly speaking, if there’s an investigative component anywhere within a solution set, generative AI can be very valuable. 

As for specific applications, our Verafin and market surveillance solutions are rolling out automated investigators that use generative AI to make investigating illicit activities more effortless. We recently launched a feature in BoardVantage that allows us to summarize documents, which can make reviewing length board documents easier. 

Beyond those examples, there are a host of new product enhancements that use generative AI. Really, anywhere there’s a user interface where people are trying to answer questions, you’re probably going to see some sort of generative chatbot interface in the near future.

What will the AI adoption we’ve been talking about mean for Nasdaq and the markets in the future? 

Information can be acted upon much more quickly because generative systems can summarize data more quickly. 

I’m dating myself here, but when I was a kid, if I wanted to research something, I had to go to the library—it would take me quite a long time to find the answer. With the advent of the internet, I didn’t have to drive to the library anymore. And then when mobile came out, I didn’t even have to go home to my computer. Timeframes for information access have gotten shorter and shorter—and generative AI will further compress that time.

The upshot for markets is that information will be acted upon much more quickly. This is why we think dynamic market solutions are so important. 

What about generative AI raises caution flags?

Generative AI is an incredibly exciting area, but there are risks, and people need to take those risks seriously. 

How are AI models built, how are they trained and where are they hosted? At Nasdaq, we focus on having excellent AI governance, where anything that goes out is looked at from a compliance, regulatory and technology perspective to ensure it’s safe, secure and scalable for clients. No AI solution goes out without a rigorous governance process to ensure that the models are effective and can be trusted. 

Explainability is also critical. When we came to market with some of our dynamic market solutions, like Dynamic M-ELO, we were very transparent; in fact, we published a whole whitepaper about it. We covered questions like what features are going into the model, how the model behaves and what type of information it will use to make decisions. 

Having that transparency and explainability is essential, and it’s something we value at Nasdaq.

Transparency is a core value for Nasdaq and a key part of what makes modern financial markets work so well. When it comes to generative AI at Nasdaq, transparency is equally important. Being able to explain both where information comes from and why it’s relevant is critical to ensuring generative AI is trustworthy and effective. We’re excited about what transformation opportunities generative AI can provide, and we look forward to continuing this journey of discovery.

Creating tomorrow’s markets today. Find out more about Nasdaq’s offerings to drive your business forward here.

DriveWealth Announces New Executive Hires Across Product and Operations Teams

Kyla Murphy, DriveWealth

Former Morgan Stanley leaders Kyla Murphy and Lauren Veisz bring specialized expertise, deep industry experience to the DriveWealth team

New York – May 21, 2024 – DriveWealth, a leading financial technology platform providing Brokerage-as-a-Service, announced today the hiring of two new executives: Kyla Murphy, as Chief Product Officer and Lauren Veisz as Head of Operations. In their respective roles, Murphy and Veisz will help to further expand DriveWealth’s footprint in global markets, develop deeper relationships with current and potential partners, and build out the company’s product roadmap.

“DriveWealth powers our global partners’ investing and trading applications through a combination of world-class technology and deep industry and regulatory knowledge,” said Michael Blaugrund, CEO of DriveWealth. “Kyla and Lauren each bring specialized expertise in their respective fields, strengthening DriveWealth’s ability to serve our partners globally and expand our platform at scale to meet their needs.” 

Murphy brings two decades of experience as a financial services executive across finance, wealth management, banking, and technology-leading risk management infrastructure, global regulatory implementations and business integrations. She worked at Morgan Stanley for 17 years, holding multiple management roles and most recently served as a Managing Director and Head of Basel Implementation. She holds a Bachelor of Arts degree in History from Yale University and is Series 7, 63 and 99 registered.

Veisz held various leadership roles across the operations, technology, and finance divisions throughout her more than 20 years at Morgan Stanley, playing a pivotal role in executive regulatory change across the organization. She most recently served as Head of Business Architecture and Change for the Global Finance Division of Morgan Stanley. She holds a Bachelor of Science in Accounting and Finance and a minor in Economics from Molloy University.

Founded in 2012, DriveWealth’s technology platform allows both established companies and emerging digital-native firms to provide securities trading to their clients simply, efficiently, and in a compliant fashion. In addition to its patented fractional trading and Brokerage-as-a-Service API technologies, DriveWealth has a fully featured institutional trading capability that includes order routing, clearing, custody, stock loan, enhanced liquidity, and NYSE Floor execution.  

To learn more about DriveWealth’s technology and services, contact salesops@drivewealth.com.

About DriveWealth:

DriveWealth is a global B2B financial technology platform. Our core business is providing Brokerage-as-a-Service, powering the investing and trading experiences for digital wallets, broker dealers, asset managers, and consumer brands. DriveWealth’s APIs provide our partners with a modern, extensible and flexible toolkit to develop everything from traditional investment workflows to more innovative techniques like rounding up purchases into fractional share ownership. www.drivewealth.com.

Canadian Market Increases Automation Ahead of T+1

Steve Everett, TMX

The new Canadian Collateral Management Service (CCMS), which enables domestic tri-party repo capabilities for the first time, has been launched ahead of the country shortening its settlement cycle this month.

TMX Group, which operates Toronto Stock Exchange and post-trade infrastructure including the Canadian Depository for Securities developed CCMS with Clearstream, the international central securities depository of Germany’s Deutsche Börse. The new platform enables market participants to transact domestic tri-party repos for the first time, with the aim of increasing liquidity.

Steve Everett, head of post trade innovation at TMX Group, told Markets Media that CCMS interoperates with the group’s settlement engine, which is critical in avoiding further fragmentation.

 Steve Everett, TMX

“The way we have designed CCMS brings those two worlds together,” he added. “Through unlimited substitution we have the ability to bring assets back in time for settlement without manual intervention.”

The end-to-end lifecycle of a repo trade is fully automated, which is important as Canada is cutting its settlement cycle from two days after a trade, T+2, to T+1 on 27 May this year, one day before US markets make that transition.

Repos allow one firm to sell a security to another firm with a simultaneous promise to buy the security back at a later date at a specified price, which has the economic effect of a collateralized loan, as they are mainly used to borrow cash using securities as collateral. In a bilateral repo, each counterparty’s custodian bank is responsible for the clearing and settlement of the trade. In contrast, a triparty repo involves a clearing bank who supports both parties in the trade and settles the repo on its books.

Everett said: “The ability to interoperate between custodians means we are able to substitute and settle straight out of the trade accounts and bring automation.”

Technology

The ability to settle collateral from trade accounts means counterparties can keep their existing custody relationships, while being able to benefit from the benefits of CCMS. Everett continued that average collateral reuse processes can take up to nine hops, so recalling assets in time to meet T+1 settlement deadlines can be problematic, as it can take hours, if not days. CCMS automation reduces this top minutes.

“CCMS necessitates behavioural change, because it is so fast, efficient and secure,” added Everett. “It is like a speedboat in a sea of tugboats.”

Marton Szigeti, head of collateral, lending & liquidity solutions at Clearstream, told Markets Media that CCMS is a development of the firm’s triparty collateral management platform that has been running for more than 20 years.

“Our platform is unique because we can do third party collateral management,” said  Szigeti. “We use a data interface where we receive the mirrored account information.”

Szigeti continued that the Clearstream platform had to be fine tuned for the Canadian market, which took about 12 months before it went live this month. Clearstream also worked with some Canadian clients on testing and connectivity for CCMS during the market readiness period.

Marton Szigeti, Clearstream

CCMS has generated interest in other countries. Szigeti said there are some conversations in different parts of the world around how the model works, especially in an environment of accelerating settlement periods.

“Higher collateral velocity is needed to survive in a T+1 environment,” he added.

In addition, banks are increasingly facing balance sheet pressure and market participants want to use their collateral as efficiently as possible to lower their funding costs.

Szigeti said: “Collateral efficiency is a general  theme in the industry on a global basis.”

Increasing participation

The big five Canadian banks – BMO, CIBC, RBC, Scotiabank and TD – have conducted inaugural trades on CCMS. In addition, more than 20 market participants are in the process of being onboard according to Everett.

In addition to T+1, the Canadian market also faces the disappearance of Banker’s Acceptances following the cessation of the Canadian Dollar Offer Rate on 28 June this year, so participants need another funding mechanism.

“We look forward to welcoming corporates in the triparty repo for the first time in Canada, as an alternative to money markets “ said Everett.”We are expanding and democratising type of counterparties in the repo market, as well as the type of assets that can be used.”

Other users could include asset managers, insurance companies and pensions to diversify both cash and collateral providers.

“The vision for CCMS is to facilitate a liquidity hub here in Canada by bringing together cash and collateral providers in one place and giving them a very simple way to transact very complex products,” Everett added.

Everett expects CCMS to have really positive volumes by the fall of this year as more counterparties are added.

 Nicholas Chan, BMO

Nicholas Chan, head, financial resource management, BMO Capital Markets and co-chair, Canadian Infrastructure and Market Practices Advisory Group (CIMPA), said in a statement: “The development of a tri-party repo service represents an advancement in the evolution of liquidity management in Canada, leveraging technology to optimise efficiency, risk management and collateral eligibility in the Canadian market.”

Only fixed income securities can currently be used as collateral in CCMS, but equities will be added shortly in the next update.

“It is really interesting to add additional exposures,” he added. “We will eventually expand the service into securities lending.”

CCMS first aims to mobilise domestic assets before addressing foreign exposures and assets. Clearstream is an international securities depository and some Canadian institutions also operate in Europe.

Szigeti said it will take a number of years before clients can link collateral in Canada and international securities in Clearstream and automatically move collateral between the two in their collateral management programmes. For example, it will take time to align collateral rules and schedules across markets so that market participants can have a single view of their collateral across different markets, and then optimise appropriately.

CCMS also allows real-time repo simulations and introduces real time repo simulations and introduces Clearstream’s artificial intelligence-based collateral solution, OSCAR (Own Selection Criteria with Automated Reasoning), for the creation of collateral baskets.

“Weeks ago we didn’t even have triparty repo  but all these other features have landed at the  same time,” said Everett. “I call it a quantum leap.”

T+1 Triggers an FX Tech Evolution, not Revolution for Asset Managers

Scott Gold, SGX FX

By Scott Gold, Head of Sales, Americas at SGX FX

With less than ten days to go until the shortening of the settlement cycle for U.S equities and bonds (T+1), there is an undeniable urgency to dot the I’s and cross the T’s on final preparations. Asset managers outside the U.S find themselves at the forefront of significant upheaval, grappling with a myriad of time zone driven challenges. What’s particularly interesting is that the mood of market participants across continents reveals a common thread of apprehension, underscored by the absence of a perfect solution. However, amid the frantic final days, an opportunity for nuanced, as opposed to wholesale change, could not only increase efficiency across the cash equity and bond desks, but FX as well. 

How FX trades are conducted to source the required currency when purchasing, for example, S&P 500 or Nasdaq stocks is a key consideration. Asset managers, particularly those based in either APAC or Europe, will be up against it to match their equity trades and execute the FX trade required to source dollars to settle the U.S stocks. A lot of non-U.S. based asset managers, particularly those with smaller assets under management (AUM) and limited resources, are considering a sticking plaster short term fix of either opening a US based office or having their FX traders work US hours. This is due to the small window, from 4-6pm NY, to get FX trades finalised and completed. This is certainly an option, but it is not exactly ideal.

A more common approach, which is prevalent among Asian based funds, is pre-funding. Pre-funding trades in FX means having enough money in the account to ensure the necessary funds are available to execute equity and bond trades without delay or risk of being unable to fulfil them. On the surface, this seems like the most logical option, but pre-funding comes with its own costs. Investment managers who pre-fund will only be able to account for around 75-80% of the FX they’ll need. The remaining 20-25%, known as the ‘true-up’ will need to be done between the all-important 4pm (EST) equity market close, and the Continuous Linked Settlement (CLS) 6pm (EST) window. As there are no global markets open during this time, roughly, less than 1% of trades in the $7 trillion OTC FX market are carried out in this window which makes execution quite costly. This cost is exacerbated at 5pm (EST), when most of the large investment banks shutdown their market making pricing engines for anywhere up to 30 minutes.

All this means that between 5pm and 5:30pm, there is even less liquidity because banks are sifting through their trading system restarts. As a consequence, bid/ask spreads widen and liquidity shrinks – leaving traders worried about their performance being reviewed during a small window where it is neigh on impossible to deliver strong returns.  Then there is the third alternative option to pre-funding – which involves an asset manager outsourcing all their FX trading to a custodian bank. But much like going down the 100% pre-funding route, or flying out an FX trader to the U.S., giving everything over to the custodian approach is not ideal because fund managers could end up getting filled at much worse prices.

This begs the question – what is the ideal approach? So much of what constitutes a successful migration to T+1 will be down to technology. While a complete tech stack overhaul may not be possible, there is a real opportunity for asset managers to make incremental changes to their FX workflows in order to reduce their operational risk and limit additional FX related costs that T+1 will bring.

For instance, one specific area that could make a noticeable difference from day one is around rules-based execution. An investment manager that is pre-funding, should know time horizons by the currency pairs that are most liquid and when spreads are tightest, specific to their own bespoke liquidity. Then, they can create automation around executing their FX during peak windows of time which would reduce the overnight wake up calls traders may have otherwise. Further, this would reduce the time it would take for a trader to seek out the best execution method. Detailed insights such as what times of day an asset manager should be trading a particular currency pair, and where the liquidity provider is pricing an asset manager throughout the trading day, are also important and would reduce execution costs. Another piece of technology that has not been adopted by the real money community is the mobile app. For traders working odd hours or forced to login in the middle of their night, being able to have a view only look at the orders on your mobile device, to have piece of mind your automation is working as expected, will be a big value add.

While the move to T+1 settlement undoubtedly presents a complex web of challenges for asset managers, particularly those operating outside the U.S., it also heralds an era of potential technological refinement rather than wholesale transformation. As these managers navigate time zone constraints and liquidity bottlenecks, the adoption of incremental, tech-driven solutions— such as rules-based execution and pre-funding — can mitigate the risks and costs associated with the new settlement cycle. The final few days in the lead up to T+1 may not be seamless, but it offers a pivotal moment for asset managers to enhance efficiency in FX trading. Ultimately, those who focus on nuanced advancements will be better positioned to thrive in a post T+1 world.

Genesis and Inovotek Solutions Partner to Accelerate Technology Innovation in Financial Markets

View this press release at genesis.global

LONDON & NEW YORK – May 20, 2024 — Genesis Global and Inovotek Solutions, an IT consultant and Murex integration specialist, announced they are partnering to accelerate software innovation in the financial markets industry. 

The firms will apply the power of the Genesis Application Platform and the expertise in Inovotek’s team of more than 60 consultants and developers to rapidly deliver new software and integration work for clients working to enhance their trading, treasury, risk, compliance and other financial industry technologies.

“Partnering with consultants like Inovotek is a key part of our strategy to make the Genesis platform the innovation engine in financial markets,” said Devry Ross, Head of Partnerships at Genesis Global. “Extending the capabilities of core systems, like Murex, is a major opportunity for buy- and sell-side firms taking their digitalization strategies to the next level. Combining our technology with Inovotek expertise helps us reduce time to market for our clients’ most innovative ideas.”

“The Genesis platform possesses a distinctive capability to meet not only the rigorous standards for data processing and resilience in trading and other financial applications, but also the compliance and control requirements,” said Karim Yahia, CEO and Founder of Inovotek Solutions. “In working together, we will help clients realize the technology edge they need to compete and succeed.”

Partnering with Genesis drives competitive advantage by improving profitability, reducing time to delivery for technology projects and lowering costs for end clients. Genesis partners have access to the Genesis Academy and other dedicated developer support programs designed to ensure their success in using the Genesis platform.

The Genesis Application Platform combines a specialized low-code framework, a library of prebuilt components and AI-driven developer tools to make it easier and faster for financial firms to build new applications or upgrade legacy systems at speed.  It provides a unified developer environment for creating full-stack applications requiring high-performance transaction processing, event-driven workflows, real-time data integrations and rich, interactive user experiences. 

# # #

About Genesis Global

Genesis Global enables financial markets organizations to innovate at speed through its software application development platform, prepackaged solutions and deep expertise in capital markets and financial services. 

The Genesis Application Platform is designed with flexibility and performance at its core, providing developers with the frameworks, integrations and components required to automate manual workflows, enhance legacy systems and build entirely new applications. Featuring a resilient, real-time service-oriented architecture, Genesis excels across the performance envelope of low-latency, high-throughput and high-scalability, powering mission-critical applications at the world’s leading financial institutions.​

Strategically backed by Bank of America, BNY Mellon and Citi, Genesis Global has offices in London, New York, Miami, Charlotte, São Paulo, Dublin and Bengaluru.

About Inovotek Solutions

Inovotek Solutions strives to redefine traditional delivery models through advanced innovative engineering. Its multifaceted approach focuses on minimizing costs, maximizing efficiency, and mitigating risks, all while fostering trusted partnerships. With over two decades of proven track record in program delivery and a strong presence in the financial sector, particularly around Murex and Transformation programs, the firm offers bespoke solutions tailored to clients’ needs. Deep industry knowledge, complemented by a commitment to continuous innovation and excellence, positions Inovotek Solutions as a trusted advisor and partner in driving sustainable growth and success amidst a rapidly evolving business landscape.

ON THE MOVE: Citi Names Mitali Sohoni; Vanguard Hires Salim Ramji

Mitali Sohoni

Citi has appointed Mitali Sohoni as Head of North America Markets in addition to her existing responsibilities as Head of Asset Backed Financing, according to a source familiar with the matter. In this role, Sohoni will coordinate our strategy for NAM Markets. She will continue to report to Mickey Bhatia with a matrix reporting line to Sunil Garg, CEO CBNA, Head of NAM. She joined Citi 19 years ago and has overseen several businesses including: CLO/Credit Financing, Asset-Backed Securities, Clean Energy Finance, Global Infrastructure Finance, Residential Finance, Citi Community Capital, Municipal Finance, and Asset Finance Group. In addition, Dina Faenson has been appointed CEO of CGMI reporting to Andy Morton, Head of Markets, in addition to her existing responsibilities as Head of Markets Counterparty Trading & Risk.

Salim Ramji

Vanguard has appointed Salim Ramji as the Company’s new Chief Executive Officer and a member of the Board, effective July 8. Ramji succeeds Tim Buckley, who will retire and step down as Chairman and CEO. Ramji is a senior financial services executive with more than 25 years of experience in investments, capital markets and wealth management, including a decade as a senior leader at BlackRock Inc., leaving in January 2024. Most recently, he was Global Head of iShares & Index Investing, where he was responsible for managing a majority of the firm’s client assets and evolving the iShares platform to provide an even broader set of innovative low-cost products for investors globally. Prior to leading iShares, Ramji was the Head of U.S. Wealth Advisory and began his BlackRock career as the Global Head of Corporate Strategy. 

Peter Crawford

The Charles Schwab Corporation has announced several executive transitions as part of the firm’s long-term succession planning strategy. Peter Crawford, after a distinguished 22-year career with the firm, including serving as Chief Financial Officer since 2017, has decided to retire from Schwab following a planned transition period. Crawford will be succeeded by Mike Verdeschi who will join the firm on May 20 as a Managing Director and Deputy Chief Financial Officer. Effective June 28, 2024, Joe Martinetto will transition from his role as Chief Operating Officer to assume the role of Executive Chairperson of the Schwab Banks. Martinetto has served the firm, employees, and clients in multiple roles over the past 25-plus years, including roles as CFO and Treasurer. In addition, Bernie Clark will transition from Head of Advisor Services to an advisory role to the firm. 

CalSTRS has named Scott Chan as chief investment officer, effective July 1, 2024. He will report to the board’s Investment Committee and the CEO. Before joining CalSTRS, Chan was senior managing director of the University of California, Office of the CIO of the Regents, where he oversaw the $55 billion global equities portfolio. Chan will draw on his decades of financial expertise and institutional investment experience in directing a growing Investments Branch of more than 225 staff and continue contributing to the CalSTRS executive leadership team. Chan is a board member of the Toigo Foundation, co-chair and board member of the Institutional Investors Roundtable and serves on the Milken Institute’s Executive Counsel for Diversity, Equity and Inclusion in Asset Management.

Clear Street has appointed Sean Hendelman as Chief Executive Officer of its Active trading division. Hendelman’s experience building a global trading platform with equities, options, futures and algorithmic offerings will support Clear Street’s further expansion in the roughly $10 billion active trading market. Hendelman has 25 years of capital markets experience and founded T3, which provides trading, training and technology to professional traders and is a premier, robust destination for traders to maximize their performance in today’s active trading markets. Additionally, Hendelman co-founded and serves on the board of the social investing platform public.com.

Delta Capita, a global Capital Markets consulting, managed services, and technology provider has welcomed Liliana Girao-Tavares as its new US Head of Client Lifecycle Management. Based in New York, Girao-Tavares will be responsible for leading the CLM business in the region, working closely with clients and local and global teams to support Delta Capita’s North American clients. Most recently, she was the CLM Global Head of Regulatory Due Diligence at Credit Suisse, now part of the UBS Group. Her prior career experience spans Goldman Sachs and Citigroup. 

Paxos, a regulated blockchain and tokenization infrastructure platform, has added J. Christopher Giancarlo, former Chairman of the United States Commodity Futures Trading Commission (CFTC), to its board of directors. A well-respected figure in the financial services industry, and a passionate blockchain technology advocate, Giancarlo brings invaluable expertise and knowledge to Paxos as it continues to lead in digital asset innovation.

If you have a new job or promotion to report, let me know at alyudvig@marketsmedia.com

US Basel III Endgame Will Impact Trading & Capital Markets

In July 2023, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation proposed capital rules known as the US Basel III ‘endgame’ based on the global minimum regulatory capital standards developed by the Basel Committee on Banking Supervision (BCBS). If finalized as currently drafted, the US Basel III proposal will have a significant negative impact on trading activity and the liquidity and vibrancy of the US capital markets, with adverse effects on derivatives end users, investors, businesses and consumers.

In response to the proposal, ISDA and the Securities Industry and Financial Markets Association (SIFMA) conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models. This matters because trading and capital markets activities play a crucial role in the ability of US businesses to raise funds and perform risk management functions, with debt capital markets in the US representing 75% of total financing. By requiring banks to hold additional capital that is misaligned with levels of risk, the proposal would significantly reduce capital market access for US end users and businesses, restrict the ability of businesses to hedge exposures to changes in commodity prices, and increase the cost of everyday consumer goods, including food and gasoline.

Based in Basel, Switzerland, the BCBS develops global minimum regulatory capital and liquidity standards through a multi-year process involving regulators from participating countries around the world. Given the BCBS has no enforcing powers, each jurisdiction transposes those standards into local law or regulation, as applicable. Although jurisdictions participating in the Basel process generally follow these standards, they may deviate to reflect philosophical differences and national priorities on local markets and economies. However, the US Basel III proposal would impose more stringent requirements than those embodied in the global framework in several areas.

This note summarizes key findings based on the results of the ISDA/SIFMA QIS.

Click on the PDF below to read the full paper.

Source: ISDA

Goldman Sachs AM Wins UPS’s $43.4bn OCIO Mandate

Marc Nachmann, Goldman Sachs
  • Global investment capabilities of Goldman Sachs will benefit UPS pensioners
  • One of the largest corporate pension outsourced chief investment officer (OCIO) mandates to date

Goldman Sachs Asset Management (“Goldman Sachs”) announced its appointment by the UPS pension plan fiduciaries to provide investment management services for UPS’s US and Canadian defined benefit pension plan assets. UPS’s North American pension plans have a combined $43.4 billion in assets as of March 31, 2024.

The partnership is one of the largest corporate pension OCIO mandates to date and continues the trend of increasingly large and complex plan sponsors seeking robust outsourced solutions for the management of their pension portfolios. The mandate affirms Goldman Sachs’ position as the largest OCIO manager in the US, with over $325 billion in OCIO assets under supervision globally.

As part of this appointment, the UPS in-house investment management team is expected to join Goldman Sachs’ Atlanta office and to continue to provide investment management services to the pension plans. The team transition helps further Goldman Sachs’ commitment to expanding its Atlanta presence, adding deep pension expertise to its growing local office of approximately 200 employees. It is expected that the asset management and team transition to Goldman Sachs will take place in the third quarter of 2024.

The UPS pension plans will benefit from both continuity and enhanced services through the global investment and risk management capabilities of Goldman Sachs and the integration of the in-house team.

The decision by the plan fiduciaries to appoint Goldman Sachs follows a competitive search process and reflects the firm’s deep experience in partnering with pension plans of all sizes and integrating investment teams. Goldman Sachs has proven strength in liability-driven investing (“LDI”) to help protect pensioners’ benefits, offers one of the world’s leading open architecture platforms, and has extensive investment capabilities and experience across public and private markets.

Marc Nachmann, Global Head of Asset & Wealth Management at Goldman Sachs, said:

“We are grateful to UPS’s pension plan fiduciaries for entrusting us with this significant mandate and we look forward to welcoming a number of talented new colleagues. Outsourced CIO solutions can deliver investment excellence, economies of scale and enhanced risk management while allowing corporate and pension plans of all sizes to focus on their core business.”

PJ Guido, SVP Capital Markets and Investor Relations Officer at UPS, said:

“After extensive evaluation of market trends and asset managers, we are happy to announce that UPS has chosen Goldman Sachs Asset Management to take on this important role. I’m confident this team will ensure strong continuity and best-in-class pension asset management with no change to benefits for plan participants. This decision also allows UPS to place our focus more squarely on serving our customers while adding more oversight and expertise that will benefit retirees.”

Source: Goldman Sachs Asset Management

FLASH FRIDAY: AI is Nothing New, but the Frenzy is Well-Warranted

Artificial intelligence AI research of robot and cyborg development for future of people living. Digital data mining and machine learning technology design for computer brain communication.

By Shai Popat, global head product and commercial strategy, Financial Information, SIX

Shai Popat, SIX

Exciting technological developments often – quite understandably – create a frenzy. But this doesn’t quite explain the AI mania of recent months. After all, AI is by no means a new technology. Its roots trace back to the 1950s, when pioneers began exploring algorithms and machine learning. As for chatbots, the first, ELIZA, was created as early as 1966. Business applications for AI then emerged in the 1980s, notably in expert systems and risk assessment. And in more recent memory, many of us will recall IBM’s Deep Blue beating chess master Garry Kasparov in 1997, when a computer finally bested the human race’s most formidable champion.

Despite its longstanding history, however, the current narrative surrounding AI is dominated by sensationalism and, frankly, misunderstanding. We are bombarded with headlines touting AI as the perfect solution to all our problems, from skyrocketing stock prices to the looming spectre of job loss. But the first dose of reality around AI may have been felt in markets last month, when chipmaker Nvidia’s 10% stock price slump made for its steepest plunge since the start of the pandemic. Indeed, the true impact of AI may take longer to materialize than many anticipated – but that doesn’t mean its influence won’t be profound, especially in financial markets.

Co-bots, not robots

One of the greatest fears surrounding AI is that it could render human expertise obsolete, but nothing could be further from the truth. In the financial sector, AI isn’t about replacing skilled professionals; it’s about enhancing their capabilities. Consider Bing AI, a recent development whereby a search engine is powered by a large language model. This tool doesn’t usurp control from the user. Rather, it streamlines repetitive tasks, providing valuable insights in seconds that might have taken minutes for an expert to gather manually.

This brings us to a crucial point: practical applications of AI are already making a tangible difference. From data mining to language learning models, AI tools are empowering financial institutions to make faster, more informed decisions – and they are doing so now. It is high time we moved beyond theoretical discussions and embraced these real-world use cases.

One example is how AI is revolutionizing client support services. Initially met with apprehension, AI-powered tools are enabling several prominent financial institutions to support their teams to focus on higher-value tasks, ultimately enhancing the quality of service they can offer clients. Far from displacing jobs, AI is enriching employee satisfaction, enabling professionals to concentrate on tasks that require creativity, critical thinking, and empathy – qualities machines may never replicate.

Its potential advantages far surpass mere operational efficiency gains and employee satisfaction, though. It could inform and radically transform many financial institutions’ entire business strategy. By adopting AI capabilities like natural language processing, for example, financial institutions can identify patterns and uncover opportunities that were previously hidden in vast oceans of data. Using a large language model, one can compare and contrast a share price in relation to five other prices. What might have taken an expert on a terminal one minute can now be done in ten seconds. Essentially, the use of a terminal wasn’t necessary, they simply typed in the request and received the share price information they sought instantaneously.

Open to all

Beyond enhancing productivity, profitably and client service, perhaps the most significant impact of AI lies in its ability to propel us further along the path towards fully democratized markets.

Buying shares in the early 1980s was mostly the preserve of the wealthy, with private investors having to telephone their broker to attain the latest price information and place trades, before mailing a cheque. The dot-com boom of the 2000s then helped popularize the early online trading platforms and fund supermarkets. The sector continues to boom and was boosted by the pandemic, which brought with it surging interest in online trading, as people had more free time and – in many households – fewer financial outgoings.

Now, large language models have the power to level the playing field, making complex financial concepts accessible to a broader audience. No longer confined to the realm of experts, critical information – such as portfolio attribution – can now be readily understood and utilized by practically anyone, regardless of their background. While some may view this as relinquishing control to machines at the risk of detrimental market outcomes, AI is not about abdicating decision-making; it’s simply augmenting human intelligence.

If the 1700s to 1800s was about the transition from creating goods by hand to using machines to drive economic progress, what is the difference with AI in the 21st century?

FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.

Nasdaq Enhances Global Market Surveillance with GenAI

Ed Probst, Nasdaq

Nasdaq announced the new AI powered feature within its Market Surveillance technology solution that will significantly enhance the quality, speed, and efficiency of market abuse investigations performed by our clients. The solution leverages generative AI to streamline the triage and examination process involved in investigating suspected market manipulation and insider dealing, empowering regulator and marketplace clients to more effectively monitor and detect potential market abuse.

During proof-of-concept testing, surveillance analysts estimated a 33% reduction in investigation time, with improved overall outcomes. This represents a substantial gain in investigation efficiency. Nasdaq is planning to leverage the generative AI enabled functionality for its U.S. equity market surveillance.

“Maintaining trust in capital markets is critical to preserving long-term growth and prosperity,” said Ed Probst, Senior Vice President and Head of Regulatory Technology at Nasdaq. “Market abuse is a substantial global challenge and one that demands increasingly sophisticated solutions to address it. As a major regulatory technology provider to the world’s financial system, with a deep culture of innovation, Nasdaq is uniquely placed to leverage the power of technology to further enhance the tools and capabilities necessary to uphold the integrity of marketplaces globally.”

New AI Surveillance Capabilities

In an effort to ensure market integrity and trustworthiness, international regulators require financial institutions to demonstrate the ongoing effectiveness of their surveillance systems and controls. Firms are expected to have comprehensive coverage across their entire portfolio and operations, spanning a broad range of asset classes and jurisdictions, with scalable systems capable of managing increased levels of risk during periods of high volume and volatility.

Today, when analysts receive automated alerts of suspicious activity, they must conduct an initial review and form an assessment of whether the activity warrants further investigation. That typically involves manually collating all necessary evidence, including relevant trading activity and corporate filings alongside a vast array of data from external sources, before deciding whether to continue the review. The process is highly resource intensive, and even more so if the alert warrants further investigation.

Leveraging Amazon Bedrock, an AWS service for building secure generative AI applications, Nasdaq’s enhanced functionality will empower analysts with generative AI capabilities to distill, analyze, and interpret relevant information more quickly, enhancing their ability to form detailed initial assessments of alerts. For example, the technology can produce a consolidated table of the company’s regulatory filings, summaries and links to company, sector, and peer company news, news sentiment analysis, and other mitigating or aggravating factors that may impact any given security.

Tony Sio, Head of Regulatory Strategy and Innovation at Nasdaq, said: “By drawing on the latest innovation in cloud technology and artificial intelligence, we can better respond to new threats and offer the global financial system advanced tools to more effectively tackle market abuse. This is a continuous cycle of investment and improvement in our capability, leveraging our unique position as both a world class market operator and best in class surveillance technology provider around the world.”

Scott Mullins, General Manager of Worldwide Financial Services at AWS, said: “Nasdaq is continuously innovating on behalf of the global capital markets by combining its industry-leading expertise with cloud and AI technology. We are honored to work with Nasdaq as it harnesses the power of generative AI to advance the stability and security of the global financial system.”

Nasdaq’s Expansion of AI Across Multiple Business Units

As a global technology provider, Nasdaq has continuously advanced AI capabilities to support capital markets, enhancing the integrity, fairness, liquidity, and efficiency of the financial ecosystem. This new generative AI functionality has been introduced as part of Nasdaq’s broader research and development effort, focused on transparent, reliable, and accountable AI implementation across the financial services industry.

A major aspect of Nasdaq’s AI strategy has been to accelerate its market modernization effort by improving the quality of its data and surrounding systems while embracing cloud-enabled infrastructure. Nasdaq’s long-term approach to technology and investments has enabled the company to unlock the power of AI by scaling its capabilities, tools, and systems with proper governance, security, and oversight. To date, Nasdaq’s AI initiatives span many of its business units, including North American Markets Services, Financial Crime Management Technology, and Corporate Solutions.

Within North American Market Services, Nasdaq has launched Dynamic MELO, the first SEC approved AI order type, and Strike Price Optimization, a purpose-built program designed to align Nasdaq’s six options exchanges strike lists to market demand. For several years, the Nasdaq Investor Relations Intelligence team has also been employing different types of AI to better serve clients, with a key focus on empowering analysts to uncover new proprietary data and insights more efficiently. In addition, IR Intelligence recently launched Nasdaq Sustainable Lens™, an AI-powered ESG intelligence solution that helps clients make better decisions faster, boost productivity and enhance credibility on key topics such as regulatory reporting readiness and competitive intelligence. In addition, Verafin, which provides Nasdaq’s Financial Crime Management solutions, announced the availability of its Entity Research Copilot, the first of its integrated Copilot capabilities that uses generative AI to automate compliance tasks and daily workflows enabling financial institutions to reduce operational costs and increase the efficiency of anti-financial crime programs.

Source: Nasdaq

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