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MANAGING MIFID II RECORDING AND SURVEILLANCE IN A POST-BREXIT UK

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By Colum Gorman, Business Development Director at Content Guru

 

Among the many uncertainties brought about by Brexit, it remains to be seen whether the UK will dispense with areas of the EU Financial Instruments Directive II (MiFID II). Irrespective of what goes, it seems more certain that the articles that relate to Recording and Surveillance will be retained.

Given the ongoing pace of EU regulatory change, this is important for UK organisations in the post-Brexit era, who may find themselves subject to even greater levels of scrutiny than before. In fact, trading as a ‘Third Country’ within the EU means that the UK will now have to prove regulatory equivalence, with the complexity of this process is yet to be fully determined.

This provides UK firms with a potentially tricky challenge – how to assure long-term success while maintaining tight control over ongoing cost management. However, there are a number of steps organisations can take to future-proof existing communications recording and storage solution investments, while managing the prospect of additional costs and disruption in the future:

 

  1. Adopt a holistic approach to compliance

There’s no doubt that organisations who adopt a 360o approach to communication recording and storage solutions will be better able to position themselves for competitive advantage.

Colum Gorman

This means going beyond simply considering how to meet today’s compliance obligations to implement open architectures that leverage powerful, emerging technologies and anticipate future regulatory developments, such as those powered by artificial intelligence (AI).

In addition, firms should also be looking to streamline compliance strategies by implementing a unified approach to common requirements, such as the overlapping compliance obligations across MiFID, Dodd-Frank, EMIR and REMIT.

Finally, implementing cloud technology that utilises industry standards and supports organisational change will help ensure firms are capable of adapting with ease to the fast-evolving regulatory environment.

 

  1. Invest in open architectures

The pace of change across communications recording and analysis technology is rapidly accelerating, yet regulators and customers will still expect firms to keep up with the latest innovations. This represents a particular challenge for any business that is preparing to meet new compliance obligations, and especially so for those organisations that have already invested heavily in proprietary solutions.

Part of the problem is that these ‘closed architecture’ solutions use technology interfaces that will only work with a specific vendor’s products or file formats and rely on communication protocols that are incompatible with third-party software. This ‘vendor lock-in’ may be a barrier for any organisation that wants to implement a cost-effective or competitive long-term compliance strategy.

Instead, organisations that deploy open systems have the option to use best-of-breed solutions, and can quickly integrate the latest innovations to address any extensions and adjustments that arrive in the future.

 

  1. Rethink audio compression

The emergence of new cutting-edge voice analysis technologies powered by advances in Automatic Speech Recognition (ASR) are setting a new benchmark in analysis capability. These developments may eventually establish themselves as the standard compliance requirement across the industry.

As a result, firms must act now to ensure they can integrate ASR technology into their compliance solutions, and for many, this will mean rethinking their approach to audio data compression.

Many of the recording and data storage solutions in use today employ high audio compression algorithms that make files smaller by removing audio data. While this type of compression is useful for reducing file sizes, it also limits overall fidelity and can significantly increase transcription word-error rates. Once this audio is compressed, this lost fidelity cannot be recovered.

To take full advantage of ASR and other next-generation analysis technologies, organisations should instead look to deploy recording and storage solutions that use lossless formats. To improve transcription accuracy still further, businesses can utilise stereo recording that allows both sides of the conversation to be separated – eliminating the transcription errors that can arise when individuals talk over one another.

Furthermore, as ASR performance continues to improve, new algorithms will emerge that enable organisations to re-analyse existing recordings with increased transcription accuracy and analysis. As a result, organisations will also need to ensure they’ve moved on from recorded audio compression techniques if they hope to take full advantage of these useful developments.

 

  1. Deploy high-capacity storage

To help meet their compliance obligations, firms are increasingly turning to compliance analytics and AI technologies to sift through large data sets and identify potential compliance violations, based on current and historical data.

In addition, regulatory controls governing everything from best execution and reporting procedures to conducting monitoring and risk management means that firms are becoming increasingly reliant on data-heavy compliance strategies. In order to meet this growing demand for comprehensive high-quality data, organisations will need to invest in robust, high capacity storage solutions.

Ideally, these solutions will also utilise compliant WORM (write once, read many) data storage with the capacity needed to retain large volumes of electronic communications data – including uncompressed stereo voice data – for the duration of any regulated time period.

 

  1. Unified recording and analysis

Currently, many organisations use multiple recording and analysis systems or overlapping solutions that require multiple management policies. In contrast, the deployment of a unified platform will enable organisations to take full advantage of resources such as search-and-replay, e-discovery and end-to-end reconstruction.

Delivered via a single system, this approach enables firms to initiate cost-effective enterprise-wide compliance and data management policies that can eliminate many of the problems often associated with a disjointed approach.

Ultimately, by managing their assets and resources much more effectively, firms will not only be able to improve value across the business, but also optimise the effectiveness of their compliance officers who will be better placed to prioritise their valuable time and resources.

 

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CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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Green growth: The unstoppable rise of climate technology investment

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With the investment community focusing more and more on renewable technologies, investor interest is at an all-time high. Ian Thomas, managing director, Turquoise, reviews the current investment landscape and highlights the opportunities for investors keen to capitalise on this growing trend.

Green, or climate, finance is a label for providers of finance who are supporting investments seeking positive environmental impact. The label covers investments in green infrastructure, venture capital investment in clean technologies and renewable energy. Green finance has grown by leaps and bounds in recent years, supporting public wellbeing and social equity while reducing environmental risks and improving ecological integrity.

Worldwide, energy investment is forecast to increase by 8% in 2022 to $2.4 trillion, according to a new report by the International Energy Agency, with the expected rise coming mostly from clean energy – $1.4 trillion in total. To put this rocketing figure into some perspective, clean energy investment only rose by 2% annually in the five years following the signing of the Paris Agreement in 2015. Energy transition investment has some way to go, however – between 2022 and 2025, to get on track for global net zero, it must rise by three times the current amount to average $2,063 billion. [1]

Turquoise has been active for almost 20 years as a venture capital investor and adviser to companies in the climate technology space that are raising capital and/or selling their business to a strategic acquirer. Reviewing current industry investment news, as well as drawing on examples from the portfolio of Low Carbon Innovation Fund 2 (LCIF2), managed by Turquoise, I have commented below the latest on the renewable energy trends most piquing investor interest.

 

Solar PV

Renewable power is leading the charge when it comes to investment, with wind energy and solar PV emerging as the cheapest option for new power generation across many countries, and now accounting for more than 80% of total power sector investment. Solar power is responsible for half of new investment in renewable power, with spending divided roughly equally between utility scale projects and distributed solar PV systems.

This huge increase in solar spending, which continues in spite of supply chain issues affecting raw material delivery, has been driven by Asia, largely China (BloombergNEF, 2022). Meanwhile, Europe is re-doubling its efforts to achieve an energy transition away from Russian gas and other fossil fuels, building on investment that was already rising steadily prior to the outbreak of war in Ukraine. Germany, the UK, France and Spain all exceeded $10 billion on low-carbon spending in 2021.[2]

 

Wind

Last year was a record year for offshore wind deployment with more than 20GW commissioned, accounting for approximately $40 billion in investment. The first half of 2022 saw $32 billion invested in offshore wind, 52% more than in the same period in 2021 (BloombergNEF, 2022). Taking into account also onshore wind, in 2021 investment was spearheaded by China, followed by the US and Brazil.[3]

In the UK, suggested targets include plans to host 50GW of offshore wind capacity, as well as 10GW of green and blue hydrogen production, by 2030. Investors will naturally be encouraged by proposals to simplify the planning process across the board for renewable projects.[4] France and Germany have also increased their offshore wind targets, signalling further support for investment.

 

Decarbonising housing: the business opportunity

The need to decarbonise residential housing, made all the more urgent by current energy prices, also offers substantial scope for investment. The gas price spike is naturally increasing interest in technology such as electric heat pumps, which had already enjoyed 15% growth in 2021 albeit from a very low base.

Recently, Turquoise announced an investment by Low Carbon Innovation Fund 2 (LCIF2) in Switchd, which operates MakeMyHouseGreen, a data-driven platform that allows homeowners to source and install domestic renewable energy generation, including solar panels and battery storage with other energy saving products in the pipeline. The investment will enable Switchd to roll out the MakeMyHouseGreen platform to a much larger number of customers. The latest episode of the Talks with Turquoise podcast series saw us interview Switchd co-founder Llewellyn Kinch about the UK energy market and national transition to decarbonisation, covering the rise of residential renewable energy and energy efficiency.

 

Adapting to the low-carbon economy

Meanwhile, investors should not forget opportunities on the other side of the energy market. Renewables are undoubtedly exciting investors, but there are also opportunities for fossil fuel companies to adapt their business models to the low-carbon economy. Turquoise advised GT Energy, a portfolio company from our first fund that develops deep geothermal heat projects, on its sale to IGas Energy, a leading UK onshore oil & gas producer. Under IGas ownership, GT Energy will progress its flagship 14MW project to supply zero-carbon heat to the city of Stoke-on-Trent through a council-owned district heating network.

 

A broad investment landscape

Forecasts show that renewables will increase to 60% of power generation in Europe by 2030, and 40% in the US and China by the same date.[5] As demand rises for climate technology, the investment opportunities in green finance are far broader than they ever have been. Undoubtedly, as the energy crisis continues, investor interest will continue to soar to even greater heights.

[1] https://www.iea.org/news/record-clean-energy-spending-is-set-to-help-global-energy-investment-grow-by-8-in-2022
[2] https://ihsmarkit.com/research-analysis/global-power-and-renewables-research-highlights-july-2022.html
[3] https://dialogochino.net/en/uncategorised/56938-global-wind-energy-council-vice-chair-brazil-offshore-wind-accelerating-2/
[4] https://www.edie.net/uks-clean-energy-investment-ranking-rises-after-government-sets-95-low-carbon-electricity-target-for-2030/
[5] https://www.spglobal.com/en/research-insights/featured/energy-transition-renewables-remain-the-cornerstone-of-future-power-generation

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