From the Celent Innovation Forum, Tokyo

At Celent we have been focusing on financial services technology since our inception. Now of course all eyes are focused on fintech, which we might inversely call the use of technology to disrupt (traditional) financial services. Investment in fintech startups is significant, and the financial markets involved are huge – US$218 trillion annually in the capital markets alone. Celent recently held our latest fintech event in Tokyo to a full house, an indication of the intense interest in fintech in the Japanese market. The day consisted of two Celent presentations on fintech in the retail and institutional securities industries, followed by a discussion panel. Celent senior analyst John Dwyer presented on blockchain technology and its potential use across capital markets. Smart contracts powered by this technology could conceivably replace existing means of executing market transactions, and by enabling direct ownership might displace custodians and other intermediaries. As if this weren’t food for thought enough, governments including the US and UK are taking a serious look at putting the dollar and the pound on blockchains. Talk about fundamental disruption! Senior analyst Will Trout provided an analysis of how automated advice (robo advisory) is reshaping the wealth management industry. After the financial crisis many individuals quite naturally want to manage their assets themselves, but also require investment advice. Robo advisory, which perfectly suits the self-service, mobile lifestyle, is an answer to this dilemma. SoftBank, Nomura Asset Management and The Bank of Tokyo-Mitsubishi UFJ joined the panel discussion, bringing their respective views on cognitive computing; the potential of fintech to lure Japan’s famously reticent retail segment to participate in the markets; and how to mobilize a large organization for innovation. A fundamental question about fintech is who will ultimately derive value from these innovations: fintech startups; technology giants like Alibaba and Google; or the incumbent financial institutions? Due partly to the regulatory stance, in Japan more than in most markets financial institutions may be in the best position to end up in the winner’s box. Only time will tell, for Japan and for markets across the globe, but you can rely on Celent to continue to provide our clients with insights in the rapidly developing world of fintech.

CCP adoption in South Korea

In 2009, the G20 agreed to set up CCP (central counterparty) settlement by the end of 2012. However, as of early December 2012, adoption of CCP settlement for OTC derivatives has not been passed by South Korea’s National Assembly. In other words, South Korea yet to keep its commitment to the G20 agreement which says that G20 countries should set up a CCP by the end of 2012. The adoption of CCP settlement is crucial to improving the transparency and stability of the OTC derivatives market. In order to prevent another KIKO incident in the future, the role of CCP is essential in South Korea. This would also help support Korea’s global credit standing.

Introducing CDS in India

The Reserve Bank of India (RBI) recently put out a draft report on introducing credit default swaps as OTC derivatives product for corporate bonds in India. Two attempts to introduce the product were already made earlier in 2003 and 2007. The timing of the latest proposal indicates that perhaps the central bank was waiting for the financial crisis to subside and also buy that extra time to learn lessons from the crisis. However, RBI has not incorporated some key lessons from the crisis. The following are a few glaring shortcomings in the proposal – 1) At a time when the world is moving towards centralized clearing systems, issues such as opacity and counterparty risk associated with OTC markets seem to have been overlooked, at least for now. What is more worrisome is that the proposal is not even keen on establishing a trade reporting platform. While it envisages the establishment of a trade reporting platform in the future, the proposal gives a green signal to begin CDS trading without setting up a trade repository. 2) The proposal says that the market is essentially a dealers market. Users are only allowed to buy CDS from dealers alone. However, what is very surprising is that it does not allow CDS buyers to unwind the protection by entering into another offsetting contract. If buyers desire to unwind, they have to terminate the position with the original counterparty, thereby allowing excessive and unfair control to the sellers. 3) The trade reporting format provided in the proposal does not include price data, which makes it even more unfriendly to the buyers. Opacity in prices even on post-trade basis, along with transparency issues arising out of the OTC nature of the market loads the dice heavily against CDS buyers. One would just hope now that the CDS market does not suffer in the same manner in which interest rate futures market did, especially given that India certainly needs a mature CDS market to manage systemic risks prudentially.