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Nasdaq First North Attracts More Non-Nordic Interest

By
Shanny Basar
-

Equity segments in Sweden, Denmark and Finland have been granted EU “SME Growth Market” status.

There is increasing interest from overseas issuers in listing on Nasdaq First North and the Nordic platform has been granted ‘SME Growth Market’ status by the European Union, which could further boost its international profile.

Adam Kostyál, Nasdaq

Adam Kostyál, senior vice president and head of EMEA listings at Nasdaq, told Markets Media: “There is increasing interest from international issuers as between 10 and 15% of our pipeline is non-Nordic. Brexit is creating uncertainty that London will remain a centre for small and medium sized enterprises but it takes time to change behaviour.”

The exchange announced last week that the equity segments of Nasdaq First North in Sweden, Denmark and Finland have been granted the European Union’s ‘SME Growth Market’ status from the beginning of next month. These three segments will then be referred to as Nasdaq First North Growth Market.

SME Growth Markets are a new subcategory of multilateral trading facilities introduced in the MiFID II regulations at the start of this year, and aim to make it easier for SMEs in the region to access equity capital markets.

“EU SME Growth Market Status allows us maintain high quality standards and keep the support of institutional investors,” said Kostyál. “The combination of Growth Market Status and the new prospectus directive means SMEs can issue a lighter prospectus to move to the main market which is very attractive.”

Nasdaq said the  new status is also expected to increase the visibility and international profile of Nasdaq First North and attract more international investors to the market.

Bjørn Sibbern, Nadsaq

Bjørn Sibbern, executive vice president and president of European Markets at Nasdaq, said in a statement that SMEs represent the vast majority of all companies across the European economy and are critical to job creation and growth.

Sibbern added: “Maintaining a strong and dynamic market place for companies and investors while safeguarding market integrity is one of Nasdaq’s top priorities, and we are confident that the SME Growth Market status will make Nasdaq First North an even better platform for European SMEs looking to raise capital.”

Activity

Kostyál continued that Nasdaq First North had 80 listed companies in 2012, which has grown to 360 during the first half of 2019. There were 348 listed companies at the end of last year

“Around 80 companies have transferred to the main market since Nasdaq First North was launched, so it has been a successful stepping stone” added Kostyál.

There were 50 new listings last year, of which 37 were initial public offerings. This year there have been 25 new listings, including 16 IPOs.

First North : number of listed cos 2013 – July 2019.
Source: Nasdaq

Kostyál said: “We are likely to reach more than 400 listed companies either this or next year, but a number of companies are likely to move to the main market – success is our worst enemy.”

He noted there is strong activity in both listings and secondary capital raising.

Last year €2.6bn was raised in IPOs and €6.5bn in secondary capital raising across both the main market and Nasdaq First North. On only Nasdaq First North, €0.7bn was raised in IPOs and €1.7bn in secondary offerings in 2018. Secondary offerings have raised €1bn on Nasdaq First North in the first half of this year.

Activity may fall if research coverage of SMEs drops off. MiFID II mandated the separation of trading commissions and research payments, leading to anxiety that bank analysts would stop covering less liquid SME stocks.

“We are concerned about the impact of MiFID II unbundling on research for SMEs and this is something we are watching closely,” Kostyál added.

However he said that Nasdaq First North has been the most active market for SMEs, especially in Sweden. He explained this was because Sweden has encouraged the active participation of retail investors in IPOs and there is an ecosystem of micro funds and smaller advisory firms which is not present in the rest of Europe.

“Nasdaq in the US has been looking to First North as an example of how to make capital markets more relevant to SMEs,” added Kostyál. “Apple raised $50m in its IPO but those days are gone and it is roughly the same picture in Europe.”

In 2017 Nasdaq unveiled a Blueprint to Revitalize Capital Markets in the US.  The exchange targeted three areas – overly complex regulations that discourage market participation; one-size-fits-all market structure and a culture that creates an imbalance between the value of long-term return and short-term potential.

CCP

In addition to gaining the new status, Nasdaq introduced a central counterparty in June to clear equity trades on Nasdaq First North in the Nordics and Nasdaq Stockholm Small Cap – which decreases counterparty risk while improving market efficiency and potentially increasing liquidity.

“We have launched a CCP for equities for Nasdaq First North and we are revamping our liquidity provider scheme to make sure our market is more attractive to international issuers and investors,” added Kostyál.

Nasdaq First North and Nasdaq Stockholm Small Cap now have the same post-trade process as the other market segments and allow access to institutional investors who need CCPs in order to trade.

Patrik Tigerschiöld, chairman of Bure Equity AB, said in a statement:  “We fully support Nasdaq’s efforts to reduce the risk and potentially increase the liquidity pool in small- and medium sized companies. We are also happy to see that trading conditions between Nasdaq’s European markets have been further aligned, increasing overall market efficiency.”

The introduction of a CCP on Nasdaq First North and Stockholm Small Cap was the final step of a transformation to central counterparty clearing for all shares listed on Nasdaq’s equity markets in Sweden, Denmark and Finland.

WFE’s H1 2019 Market Highlights

By
Shanny Basar
-

The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has published its H1 2019 Market Highlights report.

According to the WFE’s statistics, the key trends of H1 2019 were as follows:

Global market capitalisation was up 1.6% at the end of H1 2019 compared to H1 2018.

  • The increase in global market capitalisation in H1 2019 took place after a sharp year-on-year decline in global market capitalisation at the end of 2018, for the first time since 2014. Thanks to the H1 2019 increase, domestic market capitalisation is now at a comparable level vs the end of H1 2018 (+1.6%).
  • Compared to H2 2018, global market capitalisation was up 17.8% at the end of H1 2019.
  • This was due to an increase across the three regions, with the Americas up 17.6%, the Asia-Pacific region up 21.3% and the EMEA region up 13.6%.
  • This increase has been steady overall, with constant month-on-month increases over the first six months of 2019. This excludes the month of May, which saw a global 4.3% decrease.
  • All three regions experienced a similar trend, with steady month-on-month increases, a halt in May and a final increase in June.

As compared to H1 2018, the value of trades in equity shares decreased by 11% globally, while the number of trades increased by 11.4% globally. These global figures are driven by diverging regional trends.

Asia-Pacific shows an opposite trend, with the value of equity trading up 5.5% and the number of equity trades up 23.8% compared to H1 2018.

Compared to H1 2018 half-year figures, both the Americas and the EMEA regions have seen a sharp decrease in both the value and the number of trades in equity shares, with value traded lower by 17.4% and a 25.8% respectively and the number of trades lower by 5.5% and 15.6% respectively.

  • The number of listed companies was slightly lower as compared to H1 2018 (-0.5%).
    The number of listed companies at end H1 2019 was slightly down on H1 2018. The change was largely driven by the EMEA region, which has seen a 2.3% decrease in the number of listed companies. In both the Asia-Pacific and the Americas region, the number of listed companies was instead up +0.5% and +1.4% on H1 2018 respectively.
  • Compared to H2 2018, the total number of listed companies was essentially the same, with slight increases in the three regions.

Overall, new listings and investment flows fell over the first six months of 2019 compared to H1 2018.

New listings through IPOs were down 35.2% compared to H1 2018, due to a decline in the number of IPOs in all regions: Asia-Pacific (-32.7%), Americas (-22.3%) and EMEA (-55.4%).

  • Investment flows through IPOs also fell by 19.3% compared to H1 2018. This was due to a decline in investment flows in Asia-Pacific (-32%) and a greater decline in the EMEA region (-51.8%). The Americas region recorded an 18.7% increase in investment flows
  • IPO investment flows in the Americas region were up despite the decline in the number of listings thanks to several large IPOs, such as technology and transportation network company Lyft (Nasdaq), that raised over 2.3 Billion USD; pet food company Chewy (NYSE), that raised over 1 Billion USD; and utility/energy company Neoenergia (B3), that raised nearly 1 Billion USD. In the first six months of 2019, the New York Stock Exchange was the market that recorded the highest amount of fund raised through IPOs in the Americas region, accounted for 16.8 Billion USD.
  • The Asia-Pacific region held the lion’s share of global IPOs, drawing almost 60% of IPOs worldwide. These allowed companies listing in the region to raise over 27 Billion USD in H1 2019. Hong Kong Exchanges and Clearing (HKEX) recorded the highest number of IPOs in the region (63), raising 8.8 Billion USD alone. Some major IPOs in the region were Hansoh Pharmaceutical Group (HKEX), that raised over 1 Billion USD; vocational training company China East Education Holdings (HKEX), that raised over 600 Billion USD; and Cnooc Energy Technology & Services (Shanghai Stock Exchange), that raised more than 500 million USD.
  • In the EMEA region, the political uncertainty arising from the unresolved Brexit negotiations and subsequently the change of the UK prime minister is likely to have had a negative influence on the number of listings and investment flows in the EMEA region. Despite that, the London Stock Exchange Group (LSEG) listed 32 IPOs, which raised nearly 5.9 Billion USD. These included some of the largest IPOs globally, such as Italian payment company Nexi Spa (Borsa Italiana), which raised more than 2.2 Billion USD. Deutsche Börse was the second biggest market in the EMEA region after LSEG in terms of investment funds, thanks to a large IPO (Traton, Volkswagen’s manufacturer of commercial vehicles) which alone raised more than 1.5 Billion USD. Oslo Børs was third, raising more than 1.2 Billion USD for seven newly listed companies.

Non-IPO listings were up 20.9% on H1 2018, thanks to an increase in both the Americas region (+18.4%) and the Asia-Pacific region (+7%). The EMEA region saw a 15.5% decline.
Investment flows through companies that are listed already declined by 31.4% on H1 2018. This figure was driven by a downturn in all regions.
The value and the number of trades in ETFs fell compared to H1 2018. 

  • During the first half of 2019, the value of trades in ETFs was 13.6% lower than in H1 2018, driven by decreases in all the regions, particularly in EMEA (-60%).
  • Globally, the number of trades in ETFs increased slightly (+0.18%) compared to H1 2018. This result was driven by differentiated regional trends. In the Americas region, the number of trades in ETFs was 2.9% lower than in H1 2018. On the other hand, both EMEA and Asia-Pacific showed a 4.5% and 13.9% increase respectively.

Exchange traded derivatives volumes rose. The volume of options traded was 12% higher than in H1 2018, and 5.3% higher than in H2 2018. The volume of futures traded was 9.8% higher than in H1 2018,
and 5.2% higher than in H2 2018. These gains were driven by increases in volumes traded in a wide range of products, and especially in stock index options and futures and commodity futures.

  • Stock index options volumes were up 40.4% on H1 2018, driven by an increase in Asia Pacific, where volumes were 67.1% higher than in H1 2018. Americas and EMEA volumes fell 18.4% and 6.5% on H1 2018. The National Stock Exchange of India was by far the largest exchange in terms of stock index options trading, with over 1.85 billion contracts traded in H1 2019.
  • Stock index futures volumes were up 20.6% on H1 2018. This increase was largely driven by the Americas, which recorded a 55.6% growth. Asia-Pacific increased (+5.6%) while EMEA saw a 15.3% decrease on H1 2018. The three biggest markets in terms of trading activity in H1 2019 were CME (over 335 million contracts), followed by Deutsche Boerse AG (over 250 million contracts) and B3 (over 93 million contracts).
  • Volumes of commodity options and futures were up 6% and 14.1% respectively, thanks to a positive performance in all regions. In the Asia-Pacific region, commodity options grew by 58.8% on H1 2018 and commodity futures grew by 17.7% on H1 2018. In EMEA commodity options grew by 2.3% on H1 2018 and commodity futures grew by 16.7% on H1 2018. In the Americas, volumes in both products grew by 1.3% on H1 2018. The largest exchange in terms of volume of commodity options traded was CME, with over 75 million contracts in H1 2019. In terms of commodity futures, we note that the three largest markets were all located in mainland China, with the Shanghai Futures Exchange ranking first (over 596 million contracts traded in H1 2019), followed by the Zhengzhou Commodity Exchange (over 520 million contracts traded in H1 2019) and the Dalian Commodity Exchange (over 492 million contracts traded in H1 2019).
  • Single stock options volumes were down 2.4% on H1 2018. In the Asia-Pacific region volumes were almost the same as in H1 (+0.1%), while in the Americas and the EMEA regions volumes fell by 2.1% and 7.2% respectively. The lion’s share of single stock options trading was held by American exchanges, with the three biggest markets being B3 (over 480 million contracts traded in H1 2019), Nasdaq (over 352 million contracts traded in H1 2019) and Cboe Global Markets (nearly 262 million contracts traded in H1 2019).
  • Single stock futures volumes recorded a 21.2% increase on H1 2018. All regions saw an increase in single stock futures trading, with the largest uptick in the Americas, where the number of contracts traded was several times larger (+319.4%) than at the end of H1 2018. This was driven by activity on the Bourse de Montréal. Asia-Pacific and EMEA also recorded a sizable growth on H1 2018, equal to 28% and 12.9% respectively.
    Volumes of ETF options, which are traded mostly in the Americas regions, were down 19.4% with respect to H1 2018. Volumes of ETF futures were 14.4% lower compared to H1 2018.
    Interest rate options volumes were up 8.5% compared to H1 2018. This result was driven by increases in the Americas region (16%), where 88% of the volume is traded. EMEA, where the remaining 12% of the volume is traded saw a 17.8% decline.
  • Volumes of interest rate futures were down 3.6% globally compared to H1 2018. This result was driven by a 14% decline in the EMEA region, accounting for roughly 27% of the market. This was paired with a steady American market, which accounts for 65% of the volumes, up 0.1% compared to H1 2018.
  • Currency options were up 22.2% on H1 2018, driven by a positive performance in the Asia-Pacific market (and in particular the Indian exchanges) which grew by 26% on H1 2018.
  • Currency futures volumes were slightly down (-0.9%). While the performance in the Americas and Asia-Pacific was positive (+26.1% and +3% on H1 2018 respectively), a downturn in the EMEA region (-25%) more than offset the growth in the other two regions, resulting in a slight global decline.

Read the full H1 2019 Market Highlights report here.

Source: WFE

MarketAxess Boosts Streaming Liquidity

By
Shanny Basar
-

The firm has acquired LiquidityEdge, an electronic venue for trading US Treasuries.

Chris Concannon, president and chief operating officer of MarketAxess, said streaming liquidity has a place in the corporate bond market as the electronic fixed income venue provider acquired LiquidityEdge, an electronic venue for trading US Treasuries.

MarketAxess last week announced an agreement to buy LiquidityEdge for $150m.

Concannon told Markets Media: “While we were developing our net hedging solution with LiquidityEdge as a client, we learned about their ability to customise liquidity pools which led to discussions on trading rates and eventually the acquisition.”

When investors trade corporate bonds, the spread is not always spotted against the corresponding Treasury rate at the same time. There can be a time delay between executing the corporate bond and Treasury trade, leading to risk that the price may move and increase the cost of execution.

“The hedging solution will launch in the fourth quarter allowing clients to seamlessly transact their corporate bond trade and Treasury hedge at the same time” added Concannon. “This is the first step in the integration of LiquidityEdge.”

Streaming liquidity

LiquidityEdge was established in 2015 to offer a bespoke electronic trading ecosystem for US treasuries.

Nichola Hunter, chief executive officer of LiquidityEdge, told Markets Media that liquidity providers create different streams after analysing consumer flow so they can facilitate trading.

“As a result, every consumer has their own custom order book,” she added. “They get connected to the appropriate liquidity provider and have the best experience in a relationship-based bespoke electronic model.”

Hunter continued that LiquidityEdge records daily volumes of more than $25bn (€22.5bn).

“That tremendous growth is made possible by our cutting-edge approach to liquidity management and superior technology solutions, something also shared by MarketAxess,” she said.

Greenwich Associates said in a report in June that more than 60% of trading in the US Treasury market is transacted via electronic trading venues.

Kevin McPartland
Kevin McPartland, Greenwich Associates

Kevin McPartland, head of market structure and technology research at Greenwich, said in the report that the central limit order book market continues to serve as the benchmark price for the entire market while request for quote trading has evolved to allow further automation of the entire process. However direct, continuous bilateral pricing streams is gaining share.

“Accounting for 7.6% of volume in May 2019 up from virtually zero only 5 years ago, direct streaming allows everyone – dealers, electronic market makers and the buy side – to get much (if not all) of what they get from CLOB and RFQ markets in one place,” said McPartland. “Among the early movers are Dealerweb, part of Tradeweb, as well as startups LiquidityEdge and Fenics, part of BGC Partners.”

McPartland continued that if clients could aggregate liquidity from the CLOB markets with their direct streams they would receive a more complete picture of market liquidity.

The study said platforms are particularly suited to facilitate the distribution and aggregation of direct streams due to their network.

“If the virtual top of book price/size created by aggregating streams is shown alongside responses to an RFQ, the requestor could then chose to trade with the pricing stream rather than the RFQ counterparties if the price is better, “added McPartland.

He predicted that if experience, or transaction cost analysis, demonstrates the streams are consistently better, then behavior will change.

Chris Concannon, MarketAxess

Concannon said: “The world is evolving and streaming liquidity is aggressively taking share in the rates space. Streaming also has an application in the corporate bond world – our upcoming live order book, Live Markets, shares some of these protocol features.”

Greenwich predicts that trading using direct streams will grow in the coming years, but it does not expect it (or any other protocols) to completely take over.

“The US Treasury market has a particularly diverse group of participants with varying needs, trading styles and expected outcomes,” added the report. “While most of those do not want liquidity to fragment across many platforms adding complexity, they do want access to multiple trading protocols so they can use the one best suited for the specific situation.”

TRADERS Q&A: Arturs Ivanovs, FIC Network

By
Rob Daly
-

FIC Network is positioning itself as an “operating system” for the bond market.

Of the various well-established asset classes that could integrate blockchain technology the easiest, fixed income has received the greatest attention in the past couple of years. Traders Magazine’s sister publication IntelAlley caught up with Arturs Ivanovs, founder & CEO of FIC Network, to discuss the bond market’s reaction to the new technology.

How would you describe the credit market’s uptake of blockchain-issued bonds?

It is in the tryout period by many financial institutions right now. Some are building their own internal optimization tools and applications using blockchain technology specifically for primary digital blockchain bond issuances. That is soon going to change as these applications will be interconnected via “operating systems.”

The real cost and efficiency benefits will emerge when independent platforms and marketplaces become available for these institutions. Benefits will include real-time order books, allocation management, ease of transfers, near real-time settlement and coupon payment flow, and the vast data that can be extracted throughout the lifecycle of the instrument.

We are positioning FIC Network as one such “operating system” for the bond market.

What is the greatest hindrance to adoption?

Education and lack of infrastructure are the two main factors.

Many decision-makers still confuse digital securities with cryptocurrencies and thus are reluctant to try blockchain-based platforms. We are always focusing on showing our platform in action to alleviate these unknowns and manifest the efficiencies it will bring to their organizations through automated workflows that traditionally have been manual in nature.

In terms of the infrastructure, there is over $40 trillion of debt securities outstanding on traditional market infrastructure with slow processing times, bilateral intermediaries, and low data availability. We have plans to create a module where these securities can be transformed into digital blockchain securities to fully benefit from FIC Platform’s efficiencies and transparency for bond coupon flows and secondary market transactions.

Is the hindrance permanent? What can be done to reduce its effects?

The hindrance is not permanent. Many innovative investment banks that we have engaged believe that digital securities are the future and are exploring the utilization of this technology.

My team’s own way of increasing adoption is to collaborate with innovative broker-dealers and issuers to issue billions of dollars worth of bonds through our platform. I am aiming for $100 billion in principal issued through our platform which should be a good enough signal that the digital fixed income market is the future. Long way to go though.

One of blockchain’s promises is fractionalizing assets. Has the market seen such an exercise yet? When do you think it will?

I have not seen a sensible fractionalized asset project so far. I believe that tokenizing individual future cash flows think coupon payments as zero-coupon bonds, is going to benefit insurance companies and corporations doing asset liability management. Our platform has the ability to do that today for newly issued digital bonds, but the market participants do not know that they need it yet. Hard to predict the exact time when such things will get adoption.

What do you see as the next major sea change in this space?

Change in the bond market structure and regulations.

I think that the processes ranging from origination to distribution to trading will be completely disrupted. Humans will be less important in structuring, sales, trading processes. The broker-dealers that will change before they have to will gain the most.

Hopefully, the regulators will provide more guidance to the digital securities space.

CANNABIS CORNER: Cannabis By Any Other Name: Differentiating The Industrial Hemp/CBD Market

By
Creating Digital
-

The industrial hemp industry has been making headlines for its impact on several mature markets – from food and textiles, to building construction and nutraceuticals.

In the summer of 2019, the hottest topics in the legalized cannabis industry are hemp and cannabidiol (CBD), which are related but sometimes confusingly different elements of the Cannabis sativa (marijuana) plant.

The market for industrial hemp is being powered by the passage of the 2018 Farm Bill allowing American farmers to cultivate hemp in a fully federally legal setting starting with their 2019 harvests, activating the long-dormant U.S. market for the first time since World War II. With the U.S. being the world’s largest importer of hemp products, its hemp cultivation industry is poised to serve a massive and still-growing domestic market.

cbd_sales_online

In the early 1990s there were fewer than 10 countries growing hemp as part of organized commercial markets. Today, approximately 30 countries commercially grow hemp, with 15 countries conducting research. In all, there are nearly 50 countries now growing hemp, and many more considering whether to permit its cultivation.

Hemp is a fast-growing, environmentally friendly plant with a low cost to produce. It is one of the world’s most diversely applied and sustainable crops. Indeed, recent discoveries suggest that hemp may have been among the first plants humans domesticated, over 10,000 years ago. Historical data shows how past cultures of Asia, India, and Europe utilized hemp for industrial and medical benefits. Ancient documents from Egyptian and Greek physicians illustrate its use for both medical and industrial purposes.

Hemp has many uses and byproducts that have driven farmers to embrace the crop as a hedge against lower-value crops like soy, cotton, canola, and alfalfa. As an agricultural commodity, hemp is grown for its seed, fiber, and flower, or as a multicrop (i.e., hemp grown for both seed and fiber). The seed, stalk, and flower are all used commercially. A hemp seed (or grain) is smooth, hard, and about ¼ of an inch long. The stalk is comprised of a short woody interior (called hurds), while the plant’s outer part consists of long fibers (called bast fiber). Flowers (and to a small degree other parts of the plant such as the leaves) are used to create hemp extracts, oils and cannabinoid isolates. Biologically, hemp belongs to a family and genus of plants with wide chemotypic diversity. The genus Cannabis (hemp and marijuana) is part of the Cannabaceae family of plants, which includes a total of 170 species. Interestingly, a primary ingredient of beer, Humulus (hops), is also from the Cannabaceae family, making hops and cannabis genetic cousins.

As reported in New Frontier Data’s Global State of Hemp: 2019 Industry Outlook, the total global hemp market reached $3.7 billion in retail sales in 2018, with an annual growth rate of 15% driven by continued strength in Chinese textiles, European industrials, Canadian foods, and the U.S. hemp-derived CBD market. The hemp-derived CBD market is expected to quickly expand and be the primary driver of global industry growth.

The industrial hemp industry has been making headlines for its impact on several mature markets – from food and textiles, to building construction and nutraceuticals. Hemp is emerging as a potential commodity ripe to not only influence but possibly revolutionize major economic sectors around the world. While China and Canada represent two of the world’s leading markets, their leadership will be challenged as countries around the world begin to embrace the plant and its applications.

In the U.S., while the 2018 Farm Bill legalized hemp, the legal status of hemp-derived CBD remains in limbo: CBD can be derived from hemp or cannabis, but if a hemp plant contains more than 0.3% delta-9-tetrahydrocannabinol (or THC, which provides the psychoactive “high” ingredient in cannabis) it is technically and legally a “marijuana” plant. Under the Controlled Substances Act (CSA), CBD is currently a Schedule I substance since it is a chemical component of marijuana.

Thus, adding to the buzz about the potential market for CBD is the open question of how the U.S. Food and Drug Administration (FDA) will decide to regulate it. CBD has been formally codified as a drug by the FDA since Epidiolex was approved in June 2018 for patented use in treating epileptic seizures for patients suffering from Lennox-Gastaut syndrome or Dravet syndrome. Epidiolex is the first (and to date, only) FDA-approved drug containing a purified drug substance derived from marijuana.

According to a 2017 report from the World Health Organization, “In humans, CBD exhibits no effects indicative of any abuse or dependence potential…. To date, there is no evidence of public health-related problems associated with the use of pure CBD.”

That noted, however, the FDA treats all other CBD products remain subject to the same laws and requirements as FDA-regulated products that contain any other substance. The FDA’s stance is that the agency has not approved any other CBD products beyond Epidiolex, and that there is very limited available information about CBD, including about its effects on the body. The Food Drug and Cosmetic Act prohibits adding any non-approved drug to food, beverages, or dietary supplements.

Some experts have said that drafting and implementing regulations could take years, though in July the FDA closed its period for public comment, and Dr. Amy Abernethy, FDA’s principal deputy commissioner and acting chief intelligence officer pledged to provide guidance by the early fall after pressure from the industry and lawmakers wanting more transparent guidance.

Standing on the sidelines are large-scale national retailers, many of which understand the potential profits but prefer not to pique the ire of federal authorities. While some retailers are avoiding CBD craze completely, others are taking a calculated risk for profits by splitting the difference by offering topical CBD products, which are less likely to draw the legal wrath of the FDA.

Though CBD may have some pharmaceutical applications, the hemp industry at large has asserted that the intent of the Farm Bill is to regulate hemp and its derivates like any other agricultural crop. In the case of hemp-derived CBD, that would mean regulating it as a dietary supplement as defined by the Dietary Supplement Health and Education Act of 1994 (DSHEA). By so regulating CBD, licensed producers and mass-market retailers would have more assurance (and less risk) to sell ingestible, hemp-derived CBD products on their shelves.

In March, CVS and Walgreens became the first national retailers to announce that they were peddling CBD creams, patches, and sprays in their stores. CVS was selling them in eight states (Alabama, California, Colorado, Illinois, Indiana, Kentucky, Maryland, and Tennessee), while Walgreens marketed them in nine (Colorado, Kentucky, Illinois, Indiana, New Mexico, Oregon, South Carolina, Tennessee, and Vermont). Following suit, Kroger — the nation’s largest grocery chain — in June announced plans to sell CBD products in 945 stores in 17 U.S. states (Arizona, Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Nevada, Oregon, South Carolina, Tennessee, West Virginia, Washington, Wisconsin and Wyoming).

Both chains were deliberate in noting that their offerings would be limited to topicals, while stopping short of any foods, beverages, or dietary supplements as the FDA determines its policies for oversight and quality assurances.

Sachin Barot is co-founder of CERESLabs, a Cannabis Analytical Testing and Research Company in Greenfield CA,

New Frontier Data is an independent, technology-driven analytics company specializing in the cannabis industry.

QUICK TAKE: ‘Safe Haven’ Bitcoin To Hit $15,000

By
Creating Digital
-

The devaluation of China’s currency that is rattling global financial markets has revealed that Bitcoin is now becoming a safe haven asset, according to the head of deVere Group.

nigel_green-1

Nigel Green, chief executive and founder of the wealth manager based his comments on anecdotal and pricing activity as investors piled into the Bitcoin and other cryptocurrencies this week amid growing trade tensions between the U.S. and China.

The Chinese renminbi fell to under 7 to the U.S. dollar on Monday – the lowest in more than a decade – igniting drops in stocks and emerging market currencies and driving a rally in government bonds.

“The world’s largest cryptocurrency, Bitcoin, jumped 10% as global stocks were rocked by the devaluation of China’s yuan as the trade war with the U.S. intensifies,” Green said. “This is not a coincidence. It reveals that consensus is growing that Bitcoin is becoming a flight-to-safety asset during times of market uncertainty.”

He added that Bitcoin is currently realizing its reputation as a form of digital gold. Up to now, Green said gold has been known as the ultimate safe-haven asset, but Bitcoin – which shares its key characteristics of being a store of value and scarcity – could potentially dethrone gold in the future as the world becomes increasingly digitalized.

“With the Trump administration now officially labeling China a currency manipulator, escalating the tensions between the world’s two largest currencies economies, investors are set to continue to pile in to decentralized, non-sovereign, secure currencies, such as Bitcoin to protect them from the turmoil taking place in traditional markets,” Green said. “The legitimate risks posed by the continuing trade dispute, China’s currency devaluation and other geopolitical issues, such as Brexit and its far-reaching associated challenges, will lead an increasing number of institutional and retail investors to diversify their portfolios and hedge against those risks by investing in crypto assets.”

Looking ahead, he continued and said the aforementioned will drive the price of Bitcoin and other cryptocurrencies higher. Under the current circumstances, he believed the Bitcoin price could hit $15,000 within weeks.

“Cryptocurrencies are now almost universally regarded as the future of money – but what has become clear…is that they are increasingly regarded a safe haven in the present,” Green said.

CEO CHAT: Vince Molinari, Templum

By
Creating Digital
-

Digital assets are the next finance frontier.

vince_molinari_online-3While much ballyhooing and bellybucking surround cryptocurrency and stablecoins, the future might just belong to digital assets and the trading of them, according to Templum Co-Founder Vince Molinari. His New York-domiciled firm is committed to the digital asset space – operating both a flagship broker-dealer subsidiary, Templum Markets, and a blockchain-enabled, regulated alternative trading system (ATS) for the primary sale and secondary trading of digital assets. Templum has also entered into a strategic partnership with the Miami Exchange Group (MIAX) to launch an SEC-regulated digital securities exchange.Molinari and Templum have jumped all-in into this new realm and spoke with Traders Magazine’s editor John D’Antona Jr. about new broker regulations such as Reg BI, digital asset creation and trading, and future digital asset regulation.

TRADERS MAGAZINE: How do you feel about the recently passed Reg BI? Did it go far enough? Too far?

VINCE MOLINARI: Firstly, Templum would like to offer congratulations to Chairman Clayton for bringing Regulation BI to this point. We fully endorses all meaningful initiatives and mandates that advance investor and consumer protection as well as create further market awareness. As the vote in favor of Regulation BI by the Commission is so recent, we are still assessing the broader implications, but Templum believes that Reg BI is a step in the right direction. It is worth stating, however, that Regulation BI has less direct implications for Templum as we do not give investment advice, but the changes contained related to giving better clarity regarding investment advice and reducing conflicts (i.e. reductions or eliminations of sales competitions or awards for selling specific products over same period of time) can go a long way in aligning fiduciaries with their client interests. Templum is also looking forward to what the Department of Labor may introduce on this topic later this year.

TM: What are your thoughts on the state of digital asset creation? Is the pace slow or just right?

Molinari: I believe that the current pace of digital asset adoption is slowed by uncertainty regarding the implications of blockchain technology. At present, many traditional capital markets participants are still unclear on where cryptocurrency ends and where blockchain-based share registry begins. Templum’s business does not touch cryptocurrency in any way, instead it leverages a permissioned blockchain to store the share registry of private securities in an innovative way which increases the inherent tradability of the instrument. Templum’s ultimate goal is to create new paths to liquidity in traditionally illiquid assets. Templum believes that as education and adoption regarding digital securities continues to grow, we will see more and more traditional participants entering the space and applying the technology’s value proposition to their own business.

TM: What about the trading of digital asset-backed securities? Will it be OTC, ATS or via exchange? What is the best way to promote liquidity here?

Molinari: Templum believes that trading, in the near term, will largely take place on ATSs given some of the guidance from the Commission not only for asset-backed digital securities, but digital assets broadly. Templum believes, reminiscent of the release of Regulation ATS in 1998 and the dislocation of trading of listed securities off exchange, ATSs will be utilized in the current day as the venue for unregistered securities to transact, create new market infrastructure, and ultimately to set best practice. Over the long term, Templum believes that the adoption of blockchain based share registry will only continue to expand, eventually being used for public registered instruments. To that end, Templum has entered into a joint venture with MIAX to create an SRO dedicated to the trading of public digital securities.

TM: What are some of the issues that need to be addressed to better facilitate trading?

Molinari: We believes that bridging the gap between traditional capital markets and the private and unregistered digital security space will further incentivize institutional engagement. Templum believes that this bridge will be created via the incorporation of more formal intermediaries to mitigate counterparty risk. Templum was approved to operate a Transfer Agent to act as a redundant record of all ownership recorded on our permissioned blockchain. Regulated entities like this will assist in reducing some of the unjustified concerns often related to blockchain. In addition, many institutional participants are still exploring the concept of custody and good control as it relates to digital securities. As more clear regulatory guidance is authored, Templum feels that we will continue to see more widespread adoption. Lastly, trading of private securities (whether traditional or digital) is often met with substantial asymmetry of information across buyers and sellers. Templum has entered into a collaboration with S&P CUSIP to assign a unique CUSIP identifier to all instruments offered and traded on our platform, making them discoverable on Bloomberg and Reuters terminals globally. Templum also institutes reporting requirements of all issuers that intend to list their private security on its ATS. Partnerships and innovations like these are intended to further reduce the risks and fears of traditional capital market participants as they venture into the digital security space for this first time.

TM: Are all digital securities considered to be private securities? If so, why is that the case? Does it make it easier to trade digital securities if they remain on the private, rather than public, markets?

Molinari: The use of a blockchain-based share registry has no bearing on whether the instrument is publicly registered or a private security. To date, most digital securities have been issued as private securities due comparatively to lighter regulation in the private security space as it relates to transfer, settlement, and custody when compared to public securities. However, as regulation of public securities continues to warm to the utilization of distributed ledger or blockchain technology to record ownership, and the incumbents within the public market infrastructure begin to use blockchain, there will certainly be public digital securities.

TM: Can you discuss digital assets and their regulatory future?

Molinari: As the space has developed, the term digital assets has been utilized as a catch-all for all instruments that record their ownership on a distributed ledger. Digital assets can take many forms from: cryptocurrency, reward token, utility token, etc. Digital securities, a subset of digital assets, fit into traditional security structures: equity, debt, Limited Partnership interest, etc. At their core, digital securities and traditional securities are identical instruments, the only difference with the former is the manner in which digital securities record their ownership. The use of distributed ledger technology to record this ownership yields benefits to the instrument in making it more tradable, however has no bearing on the rights of the investors or the cash flows owed to an investor when compared to its traditional counterpart. This is true for both private and public digital securities.

From a regulatory perspective, there is currently no legal definition of digital securities. It is not really an issue of modernizing an existing definition, but rather authoring a definition with regulators as to what is a digital security. What still is required is further education and awareness related to how digital securities record their ownership and the benefits that data architecture provides.

FCA Reviews Fixed Income ETFs

By
Shanny Basar
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Full size photo of Andrew Bailey

The UK Financial Conduct Authority said exchange-traded fund primary markets are highly concentrated, particularly for fixed income ETFs.

However, there is evidence that alternative liquidity providers ’step in’ during times of market disruption.

Andrew Bailey, FCA
Andrew Bailey, FCA

The UK regulator, led by chief executive Andrew Bailey, released a research note this month, Fixed income ETFs: primary market participation and resilience of liquidity during periods of stress.

The FCA decided to research fixed income ETFs due to the rise in passively-managed funds from 8% of global assets under management in 2007 to 20% in the following decade. As a result of this growth concerns have been raised about potential risks to financial stability from fixed income ETFs. They may have a greater risk of liquidity mismatch as they are traded daily while investing in relatively illiquid underlying bond markets.

“Everyone recognises that low fees and easy access to liquidity are positive features that underpin the success of ETFs,” said the report. “However, questions have been raised as to whether ETFs would still be able to offer the expected level of liquidity in times of market stress, and the potential financial stability consequences if not.”

The FCA analysed a database of ETFs domiciled in the European Union from a sample of ETFs managed by four of the largest global issuers. The dataset covers daily creations and redemptions for 257 ETFs with $381bn (€342bn) in assets under management between 2016 and 2018. Fixed income ETFs were the second largest category after equities and contribute approximately 18%.

The FCA’s analysis of Bloomberg data showed that more that half of these funds were  invested in investment grade instruments. The regulator also found that fixed income ETFs accounted for a similar level of aggregated trading volumes to equity ETFs, despite their lower assets.

“A possible explanation for this is that investors use fixed income ETFs to manage their exposure to the asset class as a whole,” continued the FCA. “In other words, while it is easy to manage the exposure to stocks by trading them directly, it is relatively easier to manage exposure to fixed income products by trading ETFs.”

The UK regulator found there is a high level of concentration amongst authorised participants (APs), who create or redeem ETFs in primary markets.

“The five most active APs are responsible for about 75% of overall reported primary market volumes (across all asset classes),” said the FCA in the report. “Concentration is particularly pronounced in the fixed income market, with the top five APs there accounting for around 91% of overall volumes and the top AP itself accounting for 51%.”

However the FCA also observed that after various stress events with a marked rise in fixed income redemptions, there was an expansion in the overall number of APs active in fixed income ETFs and a decrease in concentration amongst the most active APs in fixed income ETFs.

“We also observe a similar pattern in equity ETFs in 2018 stress events,” added the FCA. “Our analysis therefore provides tentative evidence that alternative liquidity providers step into the market to some extent during times of stress.”

The regulator has not analysed why this happens, but said it is possibly due to arbitrage opportunities that emerge from the selling pressure in the secondary market during times of market stress. ETFs may trade at a discount to the value of the underlying, making it profitable for less active APs to enter the market and provide the necessary liquidity.

The report concluded that this analysis is just the first step in investigating the resilience of ETF markets.

The FCA concluded: “Resilience is a particular concern for ETFs with less liquid underlying assets, so we will also be extending our analysis to this aspect of fixed income ETFs.”

European ETFs

Assets in ETFs and ETPs listed in Europe reached a record at the end of last month according to ETFGI, an independent research and consultancy firm covering trends in the global ETF/ETP ecosystem.

ETFGI reported yesterday that July marked the 58th consecutive month of flows into European listed products with net inflows of $18.55bn, bringing year-to-date net inflows to $62.74bn.

Fixed income ETFs/ETPs listed in Europe attracted net inflows of $38.33bn, far more than the $8.48bn in net inflows in the same period in 2018. In contrast, equity ETFs/ETPs had inflows of $16.67bn, substantially less than the $24.51bn in the first seven months of last year.

Deborah Fuhr, managing partner and founder of ETFGI, said in a statement: “Despite the weak performance for European equity markets and the intensified trade dispute between US/China, the prospects for further loosening in monetary policy by Federal Reserve and European Central Bank led the European equity ETF/ETPs to see significant inflows of $9.97bn in July, and fixed income funds see net inflows of $6.57bn.”

SOFR Swap Volumes Increase

By
Shanny Basar
-

Progress has been made on fallbacks to adjust for structural differences during the Libor transition.

SOFR swap trade volumes have picked up significantly this month as trades in just one week were half of the combined May and June totals according to Clarus Financial Technology, the derivatives analytics provider.

The secured overnight financing rate, SOFR, has been adopted by the US as its risk-free rate to replace US dollar Libor.

After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, such as Libor, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates based on transactions, so they are harder to manipulate and more representative of the market. The UK Financial Conduct Authority said two years ago that it will not compel panel banks to submit to Libor beyond 2021.

Amir Khwaja, chief executive of Clarus Financial Technology, said on the firm’s blog that 37 trades in outright SOFR overnight indexed swaps were reported in the week beginning August 5, which is 50% of the trade volumes in May and June combined. In addition, there were 17 trades in SOFR basis, which is also 50% of the volume in the whole of May and June.

Khwaja continued: “Based on outrights as off a swap execution facility and basis as on SEF, we can assume that currently customer activity is in outrights and hedging in the dealer market is in basis. Sounds logical in the evolution of a new market.”

Regulators have been urging the financial industry  to begin transitioning to  the new risk-free rates without waiting for term rates to be fully developed. For example, this month John Williams from the NY Fed said market participants should begin using SOFR as soon as possible.

In addition Sifma, the securities industry trade body, and the Bank of England sent letters to chief executives on the Libor transition:

Transition progress

ISDA, the derivatives trade association, said in its quarterly magazine this month that the latest consultation on transition from Libor has closed, so work can be done on finalising and implementing changes into derivatives contracts and reducing the systemic risk of a market disruption.

“Market feedback has now been sought on nine key IBORs in total, including US dollar Libor,” added ISDA. “As with the first consultation last year, the latest asked market participants to opine on possible methodologies to adjust for structural differences between the IBORs and the risk-free rates (RFRs) that will replace them if a fallback is triggered.”

ISDA continued that definitions are expected to be amended before the end of the year and a protocol will be developed to enable firms to adapt legacy derivatives contracts.

“The progress made on fallbacks is critical – and the end is in sight,” said ISDA. “This is a big step towards ensuring derivatives markets are safer and more efficient by ensuring a robust backup is in place if an IBOR permanently ceases to exist.

This month ISDA said it had selected Bloomberg Index Services Limited to calculate and publish adjustments related to fallbacks that ISDA intends to implement for certain interest rate benchmarks.

However the association also warned that an enormous amount of work is needed to shift the market away from its use of Libor and other IBORs and to develop trading activity and liquidity in the alternative RFRs before the end of 2021.

“A consultation on adjustments to the fallback for euro Libor and Euribor will be held after the alternative RFR for euro, €STR, is published in October,” said ISDA. “Given the adjusted fallback will not match the relevant IBOR exactly – meaning there will be winners and losers if the fallback is triggered – voluntary adoption of RFRs before any permanent cessation of an IBOR will be the preferable route for many.”

Blockchain Q&A: Arturs Ivanovs, FIC Network

By
Rob Daly
-

The bond market steadily warms to the new technology.

Of the various well-established asset classes that could integrate blockchain technology the easiest, fixed income has received the greatest attention in the past couple of years. IntelAlley caught up with Arturs Ivanovs, founder & CEO of FIC Network, to discuss the bond market’s reaction to the new technology.

How would you describe the credit market’s uptake of blockchain-issued bonds?

It is in the tryout period by many financial institutions right now. Some are building their own internal optimization tools and applications using blockchain technology specifically for primary digital blockchain bond issuances. That is soon going to change as these applications will be interconnected via “operating systems.”

The real cost and efficiency benefits will emerge when independent platforms and marketplaces become available for these institutions. Benefits will include real-time order books, allocation management, ease of transfers, near real-time settlement and coupon payment flow, and the vast data that can be extracted throughout the lifecycle of the instrument.

We are positioning FIC Network as one such “operating system” for the bond market.

What is the greatest hindrance to adoption?

Education and lack of infrastructure are the two main factors.

Many decision-makers still confuse digital securities with cryptocurrencies and thus are reluctant to try blockchain-based platforms. We are always focusing on showing our platform in action to alleviate these unknowns and manifest the efficiencies it will bring to their organizations through automated workflows that traditionally have been manual in nature.

In terms of the infrastructure, there is over $40 trillion of debt securities outstanding on traditional market infrastructure with slow processing times, bilateral intermediaries, and low data availability. We have plans to create a module where these securities can be transformed into digital blockchain securities to fully benefit from FIC Platform’s efficiencies and transparency for bond coupon flows and secondary market transactions.

Is the hindrance permanent? What can be done to reduce its effects?

The hindrance is not permanent. Many innovative investment banks that we have engaged believe that digital securities are the future and are exploring the utilization of this technology.

My team’s own way of increasing adoption is to collaborate with innovative broker-dealers and issuers to issue billions of dollars worth of bonds through our platform. I am aiming for $100 billion in principal issued through our platform which should be a good enough signal that the digital fixed income market is the future. Long way to go though.

One of blockchain’s promises is fractionalizing assets. Has the market seen such an exercise yet? When do you think it will?

I have not seen a sensible fractionalized asset project so far. I believe that tokenizing individual future cash flows think coupon payments as zero-coupon bonds, is going to benefit insurance companies and corporations doing asset liability management. Our platform has the ability to do that today for newly issued digital bonds, but the market participants do not know that they need it yet. Hard to predict the exact time when such things will get adoption.

What do you see as the next major sea change in this space?

Change in the bond market structure and regulations.

I think that the processes ranging from origination to distribution to trading will be completely disrupted. Humans will be less important in structuring, sales, trading processes. The broker-dealers that will change before they have to will gain the most.

Hopefully, the regulators will provide more guidance to the digital securities space.

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