US investment banks are set to delist Hong Kong-listed structured products linked to companies sanctioned under a recent executive order from President Donald Trump.
Goldman Sachs, Morgan Stanley and JPMorgan will delist a total of 500 Hong Kong-listed structured products, according to filings from the Hong Kong stock exchange on Sunday. These structured products are linked to telecom companies China Mobile, China Telecom and China Unicorn.
The executive order that prompted the delisting bans US citizens from investing in firms that the government has deemed to be linked with the Chinese military. 35 firms were targeted in the order as enabling “the development and modernisation” of China’s armed force and which “directly threaten” US security.
From 11 January at 09:30 EST, US investors will be prohibited from owning or trading securities in the banned companies. This extends to pension funds and share ownership.
Transactions made for the purpose of divesting ownership in the firms will be permitted until 11 November.
Bourse operator Hong Kong Exchanges and Clearing released a statement saying it was “working closely with the relevant issuers to ensure orderly delisting, and facilitate buyback arrangements being arranged by the issuers.”
The operator added: “We do not believe this will have a material adverse impact on Hong Kong’s structured products market, the largest in the world with over 12,000 listed products.”
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In a separate statement, US custodian bank State Street confirmed that an ETF it manages which tracks the Hang Seng Index would no longer make investments in sanctioned stocks, though it would maintain its existing shareholdings.
The statement also noted that, according to information published by the US Office of Foreign Assets Control last week, the fund was no longer appropriate for US firms or individuals to invest in.
Fintech company Ripple said on Monday that it expects to be sued by the Securities and Exchange Commission (SEC) for allegedly violating laws against the sale of unlicensed securities when it sold XRP to investors.
The SEC is planning to name Ripple CEO Brad Garlinghouse and co-founder Chris Larsen as defendants in the lawsuit, Garlinghouse told Fortune. In his remarks, he described the suit as “fundamentally wrong as a matter of law and fact”.
“XRP is a currency, and does not have to be registered as an investment contract,” the CEO said. “In fact, the Justice Department and the Treasury’s FinCEN already determined that XRP is a virtual currency in 2015 and other G20 regulators have done the same. No other country has classified XRP as a security.”
The SEC has been plain in recent years that it considers Bitcoin and Ethereum to be cryptocurrencies and not securities due to their decentralised nature, though the more centralised XRP – the world’s third-largest cryptocurrency – has not received a clear designation.
If XRP is found to be a security it will be brought under new restrictions that would likely have a significant impact on Ripple, which owns 55 billion of the total 100 billion XRP tokens that exist. Part of the company’s quarterly revenue stems from the sale of its XRP holdings.
Ripple is backed by a range of financial services giants such as Japanese financial firm SBI Holdings, Spanish bank Santander and a range of venture capital firms including Lightspeed, Andressen Horowitz and Peter Thiel’s Founders Fund. The company was last privately valued at $10 billion, and XRP holds a market cap of over $20 billion.
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SBI Holdings CEO Yoshitaka Kitao said that the firm would continue its partnership with Ripple as it looks to expand further in Asia. “Japan’s FSA has already made it clear that XRP is not a security,” he said. “I’m optimistic that Ripple will prevail in the final ruling in the US.”
XRP responded negatively to news of the impending lawsuit, falling more than 17% to hover around $0.46 on Tuesday morning.
Currently, $350 trillion worth of financial contracts reference the LIBOR rate worldwide. Banks and other financial institutions are now required to phase out any agreements that utilise LIBOR as a benchmark and transition to an alternative reference rate by the end of 2021. While this may seem like a long time from now, the process will likely be lengthy and complex. To ensure a smooth transition, banks and other impacted organizations will need to begin preparing well in advance. Right now, only 19% of firms say they’re ready. Neil Murphy, VP of global business development at ABBYY, discusses how these companies can best prepare for the changes to come.
The transition process will be no mean feat. It will involve creating task forces, sorting through immense volumes of documents, adopting new technologies, re-negotiating current agreements and developing entirely new financial products. Preparing early and thoroughly is critical for minimising risk from every angle – financial risk, legal and compliance exposure, and operational disruption. Planning ahead will also facilitate a smooth process for customers, helping maintain – or even increase – client satisfaction and retention.
While the transition may seem daunting for some organisations, it doesn’t have to be. To begin preparing, businesses need to understand what LIBOR is and how it will affect your business, including which products will be impacted, what the replacement options are, and what exactly the complex transition process will involve. Let’s start from the beginning.
What’s behind the transition?
According to the Consumer Financial Protection Bureau, the LIBOR rate is based on specific types of transactions between banks which now do not occur as frequently as they used to, making the rate less reliable. The governing bodies that oversee this index have stated that they cannot guarantee the rate will be available after 2021.
Certain private-sector banks which are currently required to submit information that is then utilised to set the LIBOR rate will stop being required to do so after next year, which means the rate will subsequently not be an accurate reflection of its underlying market. At this point, the quality of the rate will likely degrade to a degree at which it is no longer credible, which could cause LIBOR to stop publication immediately.
The end of LIBOR is imminent, which makes preparing for the transition and implementing alternative reference rates in advance an imperative for financial institutions. All types of banks and financial institutions will be impacted, from small regional banks serving local consumers to large global financial institutions providing commercial services to multinational enterprises. In addition, related industries, such as insurance, will also be impacted by the discontinuation of LIBOR. Even industries that are completely outside of the financial sector will feel a ripple effect.
The end of LIBOR is imminent, which makes preparing for the transition and implementing alternative reference rates in advance an imperative for financial institutions.
What’s the impact?
From 30-page mortgage agreements to 340-page commercial loan contracts, every type of financial product that utilises LIBOR will be impacted. First up is derivatives, including interest rate swaps, cross-currency swaps, commodity swaps, credit default swaps, interest rate futures, and interest rate options. Bonds will also be impacted, including corporates, floating rate notes, covered bonds, agency notes, leases, and trade finance. As for loans, the impact will be far reaching, from syndicated to securitised, business loans, real estate mortgages, private loans and even certain types of student loans. In short, any type of loan that utilises a variable interest rate based, in whole or in part, on LIBOR will be impacted.
There will also be an impact on short-term instruments such as repos, reverse repos, and commercial paper, and on securitised products like mortgage-backed securities (MBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS). Finally, in the retail sphere, it will affect loans, mortgages, pensions, credit cards, overdrafts and late payments.
To replace LIBOR, there will be various Alternative Reference Rates (ARRs), which will vary by geography.
How should we prepare?
Many companies have thousands, even hundreds of thousands, of LIBOR-based financial agreements circulating within their organisations. There are some global investment banks whose volume of related contracts reaches into the millions.
There will be many necessary steps in a successful transition. One of the most important is assessing where LIBOR is used across all business operations and identifying each individual contract, agreement and related document. Without a doubt, finding, collecting, and compiling every contract that utilises the LIBOR rate will be an extensive and complex process.
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Whether it’s a small- to mid-size bank or a large financial institution with hundreds of thousands of contracts, sifting through, reading, and pinpointing every document that references LIBOR will be cumbersome, costly and time-consuming if conducted entirely manually. The right technology, particularly those that are powered by AI and content intelligence technologies, could transform this process. They can sort through volumes of documents, accurately identifying relevant contracts thanks to advanced OCR and NLP technology, and automatically extracting relevant data. The right tools go a long way in simplifying the complex document-related processes involved in the LIBOR transition.
Identifying all related contracts is only the first step, however critical it is. After all relevant agreements have been compiled, the next step is to transition each individual contract to the new alternate reference rate. For many financial institutions, there will likely be a significant degree of re-negotiation involved in this process, particularly for contracts governing high-value financial products or agreements serving commercial clients.
The transition process is one that will likely involve many business units – from legal and compliance for managing risk, to product management for creating new offerings, to marketing and PR for developing effective communication strategies for customers, investors and stakeholders. Successfully navigating the transition will require a clearly defined roadmap, long-term vision, and the right technology. This combination will be crucial for firms to be prepared for the transition, and to ensure their business isn’t adversely affected by it.
While the deadline for transitioning from LIBOR may be over a year and a half away, time is still definitely of the essence. For businesses that want to minimise financial and legal risk, ensure a seamless transition, maintain their market share, and ensure customer loyalty, the time to begin preparing is now.
However, every owner of stocks, bonds and ETFs has the right to lend these - meaning that in this unrealised market there are around $40tn of assets collecting dust. Below, Boaz Yaari, CEO and Founder of Sharegain, explains everything you need to know about securities lending.
In short, securities lending is due a revamp so that it can be fit for purpose in a post economic crash, 21st-century financial world. This would result in a more efficient and regulation compliant process for large banks and assets managers; huge cash potential for private investors and wealth managers; and greater liquidity and long-term trust in capital markets.
Securities lending is a long-established practice in capital markets that has until now been largely confined to big financial institutions, even though every owner of stocks, bonds and ETFs has the right to lend them. As a consequence, most asset owners know little about this lucrative practice, which has become a global industry with a massive $2tn of assets on loan on a daily basis. Here are some of the intricacies that make this such an exciting space:
Securities lending is a long-established practice in capital markets that has until now been largely confined to big financial institutions, even though every owner of stocks, bonds and ETFs has the right to lend them.
- Securities lending has been going on for over 40 years. The first formal equity lending transactions took place in the City of London in the early 1960s but it really took off as an industry in the early 1980s. The practice has evolved from a back office operation to a common investment practice that enhances returns for big financial institutions.
- Securities lending plays an important economic function in capital markets. It brings greater liquidity and efficiency to the market, ensures the settlement of certain trades, promotes price discovery and facilitates market making. It also plays a critical role in derivatives trading, certain hedging activities and other trading strategies that involve short selling.
- Securities lending is a great source of alpha, and a way to earn from the hidden value of your portfolio. Earnings from lending are dependent on the level of availability of your stocks. The more widely available stocks, known as ‘general collateral’, generally produce lower returns, of up to 0.5% (50 bps). Hot stocks, known as ‘specials’, can command much higher returns varying from 1.0% (100 bps) to over 100% (10,000 bps) annually in more extreme cases.
- Sometimes short-sellers are right! For example, they spotted that there was trouble with construction company Carillion long before anyone else. A year prior to its collapse, Carillion was the FTSE 250 most shorted stock, which should have sounded alarm bells. However, at other times they are wrong. They can misunderstand the present or future business of a company, as we saw with online supermarket Ocado and a share surge in early 2018 which wiped out $382m for short sellers. At the end of the day it’s not the short sellers who dictate the long-term direction of the stock but the performance of the business itself.
- Did you know that fund managers, active or passive, engage in securities lending to help boost a fund's performance or offset its costs? This has helped keep index fund charges down, which is hugely important in an age where the hunt for alpha has taken more importance - and where fees are under the microscope.
- In general, securities lending has negative beta to market conditions, with all things being equal. When stocks rise in a bull market, demand to borrow securities wains and lending rates are lower, but you do enjoy the appreciation of your assets. On the other hand, in a bear market (when stocks depreciate), demand to borrow stocks increases and so do lending rates. This way you benefit from a new stream of income to mitigate the volatile times.
- Demand for borrowing ETFs is growing exponentially, with the huge swing towards passive investing over the past decade or so, and currently there are over a 100 ETFs returning more than 2.0% (200 bps) to lenders.
Lisa Davis LL.B, is the CEO of PearTree Securities. Drawing on her extensive advisory and business experience in the investment industry, Lisa oversees the strategic direction of the firm and is responsible for the legal aspects of the firm’s business. Lisa gained her in-depth knowledge of securities regulation at the Ontario Securities Commission and as General Counsel for a specialized investment fund business. Through private practice, Lisa specialized in corporate and securities law.
Dedicated to the Canadian resource sector, Lisa is a Director of the Prospectors & Developers Association of Canada (PDAC) and co-chairs the Finance & Taxation Committee. Here she tells us all about PearTree Securities.
PearTree Securities Inc. is a subsidiary of PearTree Financial Services Ltd., an exempt market dealer and a specialized fund manager. PearTree created an investment platform for High-Net-Worth Canadian clients to access the tax benefits available in resource exploration and development activities funded through the issuance of flow through shares, for the ultimate purpose of lowering their after tax cost of philanthropy.
A flow through share is a unique Canadian hybrid instrument made up of a common share and a tax benefit available only to the first subscriber. Our platform captures the tax benefits for our clients enabling the sale of the shares stripped of tax value to global equity investors at a discount. Since January 2016, PearTree has deployed more than $500M (CDN) of capital with equity acquired from PearTree by global institutional and strategic investors, at material discounts to market.
Junior resource companies rely heavily on Canada’s flow through share system to raise high risk capital for exploration and development. Flow through shares enable these companies to “renounce” eligible expenses funded with subscribers’ money. These investors then claim these expenses as deductions for tax purposes. However, flow through share tax benefits are available only to Canadian resident investors, a retail market.
PearTree’s platform increases access to capital for junior resource companies by expanding the capital pools available. We secure the highest price possible for the share issuer, with less dilution to existing shareholders.
Our clients are a triumvirate - the resource sector (mining and oil & gas), the banking/brokerage community and the “end buyer” investors, often international. We offer the flexibility of being able to facilitate financings by public or private issuers and can participate in all or part of a flow through financing. PearTree provides additional demand from a larger, more diverse investor base and the potential for higher remuneration on larger financings.
Our format adds no incremental cost to the flow through financing process. We are paid by our clients with no fees charged to the share issuer, bank or broker or the end buyer. Therefore our program doesn’t interfere with any existing fee arrangements.
The PearTree format is well-known in Canada and our goal is to grow market share, retain and grow trusted relationships and expand the market through adoption of this financing platform by international investors. By providing optimized investment access to high-quality Canadian resource stocks, we create new opportunities for investment in the Canadian resource exploration sector. Our format is well poised to expand the universe of capital sources, bringing a unique value proposition directly to a worldwide investment community.
Website: http://peartreesecurities.com
Sinayo Securities is an independently owned and managed, broad- based BEE. Specialising in South African listed company’s equity sales and trading, the firm provides top quality services to institutional investors.
Driven by the desire to see black women rising up, proving themselves and making a significant footprint in the sector, Sinayo was born out of the notion of addressing the lack of black women leadership in the stockbroking industry. Sinayo Securities began this process by being the only member of the JSE with a 100% black female shareholding and a Level 1 BEE rating.
Founded in 2015, the company is a relative newcomer to the JSE, yet it understands that in order to be significant and have a sustainable long-term business, outstanding service, integrity and significant partnerships are paramount to achieving success. Part of this success was the announcement in late 2016 that Patrice Motsepe’s investment group, African Rainbow Capital (ARC), had bought a 49% stake in Sinayo Securities. The synergy of this deal fits ideally with the company’s vision, namely to challenge the conventional mind sets of investors by providing leading insights on high-growth pan-African markets.
Services
Currently, Sinayo Securities specialises in listed South African companies’ equity sales and trading.
The firm provides institutional investors with quality research and exceptional client service through being insightful, responsive, and connected, while having a deep appreciation of transformation responsibilities.
We have an experienced dealing team that is supported by an accomplished independent back office to ensure compliance and timely settlement. Various products and services have been introduced, including quality third party research, unique corporate access, corporate finance and mentoring and coaching of young black investment professionals.
Education
Sinayo Securities believes it has a core responsibility to be a role player in the South African transformation process. The firm has created a graduate training programme, called Project Funda. The aims of the programme are to further black talent, particularly in terms of research and leadership in the financial services industry; to create positive experiences that will lead to improved
engagement and retention; and to produce graduates that are team players for its company and clients.
The course consists of four modules, each with a duration of five days providing students with the theoretical foundation and practical insight into the various aspects of the securities analysis and brokerage industry. The project has seen beneficial spin-offs, whereby a number of graduates have been sponsored or ‘adopted’ by independent companies to further their careers in the financial industry.
Future plans
The firm’s clients are its top priority – for this reason, it is continually expanding its scope and capacity of existing activities. The Sinayo Securities/ARC deal has further bolstered its capital base allowing it to be more competitive and to trade larger transitions and equity baskets. The firm also plans to expand its product offering – it has a number of exciting ideas in the pipeline, including a private client and derivatives offering.
Sinayo Securities has also identified opportunities offshore that will allow it to participate in international equities trading platforms, with access to global equities research. This will facilitate international equity trade execution for both domestic and offshore clients. ‘We, as Sinayo Securities, not only believe we have a role to play in the empowerment of black women in the financial industry, but also to be open-minded and flexible when it comes to the needs of our clients,’ says Sinayo Securities’ CEO - Babalwa Ngonyama.
Building a sustainable long-term business takes time, hard work and innovation. To this end, the firm acknowledges the importance of taking a journey with its existing and future clients on the path to success.
Website: http://sinayo.co.za
Sinayo Securities is an independently owned and managed, broad- based BEE. Specialising in South African listed company’s equity sales and trading, the firm provides top quality services to institutional investors.
Driven by the desire to see black women rising up, proving themselves and making a significant footprint in the sector, Sinayo was born out of the notion of addressing the lack of black women leadership in the stockbroking industry. Sinayo Securities began this process by being the only member of the JSE with a 100% black female shareholding and a Level 1 BEE rating.
Founded in 2015, the company is a relative newcomer to the JSE, yet it understands that in order to be significant and have a sustainable long-term business, outstanding service, integrity and significant partnerships are paramount to achieving success. Part of this success was the announcement in late 2016 that Patrice Motsepe’s investment group, African Rainbow Capital (ARC), had bought a 49% stake in Sinayo Securities. The synergy of this deal fits ideally with the company’s vision, namely to challenge the conventional mind sets of investors by providing leading insights on high-growth pan-African markets.
Services
Currently, Sinayo Securities specialises in listed South African companies’ equity sales and trading.
The firm provides institutional investors with quality research and exceptional client service through being insightful, responsive, and connected, while having a deep appreciation of transformation responsibilities.
We have an experienced dealing team that is supported by an accomplished independent back office to ensure compliance and timely settlement. Various products and services have been introduced, including quality third party research, unique corporate access, corporate finance and mentoring and coaching of young black investment professionals.
Education
Sinayo Securities believes it has a core responsibility to be a role player in the South African transformation process. The firm has created a graduate training programme, called Project Funda. The aims of the programme are to further black talent, particularly in terms of research and leadership in the financial services industry; to create positive experiences that will lead to improved
engagement and retention; and to produce graduates that are team players for its company and clients.
The course consists of four modules, each with a duration of five days providing students with the theoretical foundation and practical insight into the various aspects of the securities analysis and brokerage industry. The project has seen beneficial spin-offs, whereby a number of graduates have been sponsored or ‘adopted’ by independent companies to further their careers in the financial industry.
Future plans
The firm’s clients are its top priority – for this reason, it is continually expanding its scope and capacity of existing activities. The Sinayo Securities/ARC deal has further bolstered its capital base allowing it to be more competitive and to trade larger transitions and equity baskets. The firm also plans to expand its product offering – it has a number of exciting ideas in the pipeline, including a private client and derivatives offering.
Sinayo Securities has also identified opportunities offshore that will allow it to participate in international equities trading platforms, with access to global equities research. This will facilitate international equity trade execution for both domestic and offshore clients. ‘We, as Sinayo Securities, not only believe we have a role to play in the empowerment of black women in the financial industry, but also to be open-minded and flexible when it comes to the needs of our clients,’ says Sinayo Securities’ CEO - Babalwa Ngonyama.
Building a sustainable long-term business takes time, hard work and innovation. To this end, the firm acknowledges the importance of taking a journey with its existing and future clients on the path to success.
Website: http://sinayo.co.za
