Image Credit: Global Commodities Forum (Flickr)

Private Funds May Soon be Mandated to Disclose Digital Asset Holdings and Performance

The Securities and Exchange Commission (SEC) and Commodity Futures Trade Commission (CFTC) have issued a joint proposal to better “assess systemic risk” of private fund advisors. The proposal includes language that would require reporting of cryptocurrency positions and performance measures of large hedge funds.

What is Form PF?

The form is a jointly adopted requirement used by both the SEC and CFTC. It’s a regulatory filing that mandates private fund advisers report regulatory assets under management to the Financial Stability Oversight Council (FSOC). The purpose is to monitor risks to the US financial system. Form PF affects SEC-registered managers of private equity funds, real estate funds, hedge funds, and liquidity funds with at least US$150 million in private fund assets.

 

The Proposal

Both Commissions settled on the proposed inclusion after consulting with the Treasury Department and Federal Reserve on potential financial-stability risks in the private-funds industry. SEC Chairman Gary Gensler noted that private funds’ total assets are nearing the size of the banking sector’s assets. “In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds. Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity, and investment strategies,” said SEC Chair Gary Gensler.

The SEC/CFTC Proposed Amendments to Form PF include a number of amendments designed to enhance the FSOC’s ability to monitor systemic risk and bolster regulatory oversight of private fund advisors. Beyond crypto, the proposal would require hedge funds with more than $500 million of net assets to report more information on Form PF about their investment exposures, portfolio concentrations, and borrowing arrangements.

Image: Selection from

The proposal on Wednesday (August 10) would add “digital assets” for the first time on Form PF. It also defines what a digital asset is in the eye of the regulators. It has opened a 60-day comment period on whether funds should report detailed information about the cryptocurrencies they hold. This includes identifying specifically or describing their characteristics.

The proposal notes that many hedge funds have been formed recently to invest in crypto, while some other existing funds have added the asset class to portfolios.

 

Expected Benefit

The recent drop in the prices of digital tokens like bitcoin and Ether has not spread to other asset classes. But the implosion of a crypto-focused hedge fund earlier this summer created a chain reaction that dragged a number of its creditors into bankruptcy.

Regulators want to get ahead of any chain reaction that could extend into traditional markets if mainstream financial institutions increase their adoption of cryptocurrencies before additional guardrails are put in place. “Gathering such information would help the commissions and [financial-stability regulators] better to observe how large hedge funds interconnect with the broader financial services industry,” Mr. Gensler said.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.sec.gov/rules/proposed/2022/ia-6083.pdf

https://www.sec.gov/files/formpf.pdf

https://www.wsj.com/articles/regulators-weigh-asking-hedge-funds-to-report-crypto-exposure-11660140000?mod=djemalertNEWS

https://www.wsj.com/articles/mainstream-hedge-funds-pour-billions-of-dollars-into-crypto-11646808223?mod=article_inline

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Image Credit: Alexandra Maria

Are Consumer Price Increases Negatively Correlated to Stock Market Price Levels?

Does inflation lift stock prices? It has been long thought that stocks are a better hedge against inflation than cash, which loses purchasing power with rising prices, or even bonds, which lose value when inflation leads to higher interest rates. Excessive consumer price increases (defined as over 2% CPI YoY) come from either hypergrowth where demand outstrips supply or reduced supply while demand has changed little. The current inflation spike appears to be a mix of both supply issues from disruptions during the pandemic and demand issues from a dramatic increase in the money supply.

What Does Inflation Do to the Stock Market?

The answer is not straightforward as it depends on all of the contributing factors. If those factors can be easily modified, the markets are likely to react, in advance, to what it will be that changes them. If monetary policy is expected to be tightened, this can slow economic growth and weigh on equity prices as capital will not be as free-flowing. If it is because there is a shortage of supply, the market is likely to react to how quickly the condition will resolve itself. A shortage of supply could come from short-duration events like weather that impacts agriculture, or shipping, which is usually short-lived – also resource shortages result from a supplier not being available. This could be related to embargos, logistics, etc. Price increases from an imposition of tariffs are one-time additions to prices and don’t lead to prolonged inflation. 

Stock market participants are forward-looking. On an ongoing basis, they monitor current and expected conditions and react to how they will impact company earnings. The sweet spot is when inflation has no risk of dropping below zero and is stable within a percentage point of 2%.

Sources: NYU.edu (Stocks), BLS.gov (Consumer Prices)

The markets clearly dislike deflation or negative price growth. The chart above demonstrates that each time inflation went negative that same year or the following year, stocks dropped. So deflation has a positive correlation to stock index levels (decreasing inflation = decreasing stocks). From the chart, we also see when inflation approached or breached 10%, the markets also gave up ground that year or the following year.

A healthy market comes from a healthy economy; a healthy economy is one where supply is meeting demand. This makes growth more predictable, and the markets enjoy predictability. A lack of being able to assess what the future is likely to bring issues in periods of volatility where bulls and bears are most at odds.  The 40-plus year high in CPI has ushered-in the kind of whipsaw volatility that can hurt active investors and traders.

Some investors may seek stock ownership as a hedge against inflation. Companies that own assets that are rising in value help offset the erosion of the native currency. Alternatively, some investors may also find that fixed return investments like those that pay a known interest rate compete much better than the uncertain returns in stocks. Dividend stocks like utilities are often held by income investors like retirees. These stocks are particularly vulnerable should lower-risk bonds offer the same or higher yield than the expected dividends.

Take Away

Markets react to future earnings expectations. If the demand for a company’s product is little changed as prices increase, its earnings should stay relatively stable (food, medicine, government contractors, other non-discretionary). If the product or service will see reduced demand as prices increase, the company is likely to see reduced earnings and lower stock valuations.

Markets also react to expectations of future conditions. If it is expected that whatever the cause of inflation is, is transitory, market participants may look past current conditions. If instead, the expectations are that an aggressive and prolonged tightening stance will shrink the entire economy, then the markets are likely to respond negatively.

The high inflation the U.S. has experienced over the past year has resulted from both supply and demand-related factors. The supply issues are out of the Fed’s control, but it is presumed that these are transitory and related to the pandemic and war in Europe. Current price increases are also the result of trillions of dollars pumped into the economy over a short period of time. The Fed does have more control over this. If they act with aggressive monetary policy, the markets may initially pull back, if it appears the Fed is winning the battle, markets may become more bullish.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

https://investorplace.com/2022/06/what-does-inflation-do-to-the-stock-market/?utm_source=Nasdaq&utm_medium=referral

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Image Credit: Senator Stabenow (Flickr)

Who will Regulate Cryptocurrencies? The Senate May Have a Favorite

One ongoing cloud over cryptocurrency exchanges, crypto creators, and even the NFT market is the uncertainty of future regulations. Regulation, while seen as restrictive, would also mean acceptance of the asset class. Acceptance coupled with a more certain playing field would benefit all stakeholders, from the crypto investor to the business that allows purchases in crypto, all the way through to the blockchain companies that are necessary for its digital existence.

SEC vs CFTC

Crypto interests have had a favorite among two potential oversight bodies, the Securities and Exchange Commission (SEC), versus the Commodities Futures Trading Commission (CFTC). And the stakeholders have been vocal to lawmakers in Washington as to the preference.

The SEC Chair Gary Gensler once taught cryptocurrency at MIT, a top school helping to design and study the future of crypto. However, this is not the regulator most crypto interests would prefer. Instead, they prefer oversight from the CFTC. The CFTC Chairman Rostin Behnam is advocating his agency provide the biggest role in cryptocurrency regulation. In a speech last month, he said federal and state regulators sharing responsibility in a “patchwork blanket” approach “is increasingly proving inadequate” as the crypto market rapidly evolves. Lawmakers in the Senate must have been listening.

Senate Crypto Bill

Under a new bipartisan bill from Sens. Debbie Stabenow (Mich) and John Boozman (Ark), the CFTC would take the lead role in overseeing the two largest cryptocurrencies and the platforms where they are traded under the bill. Oversight of the remaining cryptocurrencies would be divided between the CFTC and the SEC – the methodology to be used in determining who has higher jurisdiction is not yet fully specified.

The two agencies have been positioning for more authority over digital assets. As the assets are still very new to the world, there has certainly been confusion in Washington over how to classify and regulate cryptocurrencies and its digital ecosystem. While lawmakers looked to the regulators for guidance, in the end, the official determination is the responsibility of lawmakers. The major goal of the Stabenow/Boozman bill is to provide some clarity by deeming as commodities both bitcoin (BTC.X) and ethereum (ETH.X), which account for roughly two-thirds of the cryptocurrency outstanding.

If passed by the Senate and House and signed into law, both bitcoin and ethereum would primarily fall under the CFTC, which already oversees futures markets for both. Online platforms that allow investors to trade the coins, such as Coinbase (COIN), would be required to register with the agency.

Two other members of the panel, Sens. Cory Booker (D-N.J.) and John Thune (R-S.D.), are co-sponsoring the measure. Stabenow, said the committee could mark up the bill as soon as September.

The bill comes after another introduced by Sens. Cynthia M. Lummis (Wyo) and Kirsten Gillibrand (N.Y.) in June unveiled what they announced as a comprehensive plan to regulate the industry. Their proposal outlines primary responsibility for the industry to the CFTC, but unlike the bill from Stabenow and Boozman, it would make it optional for crypto exchanges to register with the agency.

 

Related News

This week Gary Gensler who Chairs the SEC, is facing massive criticism after being accused of being complicit in criminal activities “perpetuated by Citadel Securities & Citadel Market Maker. He is being accused of “obstruction of justice due to his lack of enforcement of the laws pertaining to naked short selling and lack of competent oversight of the market makers activities,” according to the petitions home page. The petition also demands, “Mr. Gensler needs to step down as the chairman, and a thorough, detailed, forensic analysis and investigation into Citadel Securities and Citadel Market Maker. This cannot go unpunished.”

 

Take Away

Both Senate bills would allow the CFTC to assess fees on crypto industry players to fund an expanded agency budget. The agency, roughly a sixth the size of the SEC, is already tasked with overseeing a section of financial markets, from grain and oil futures to more complex products.

The SEC has been seen as regulating without proper authority. Agencies can not overstep the powers granted to them by Congress. Members of the Senate, to their credit, have been looking to determine how best to develop oversight between these two agencies and the others that are also impacted.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.stabenow.senate.gov/news/stabenow-boozman-booker-and-thune-introduce-legislation-to-regulate-digital-commodities

https://www.change.org/p/retail-investors-fire-gary-gensler-as-sec-chairman-for-obstruction-of-justice

https://www.cryptotimes.io/sec-chair-gary-gensler-accused-in-citadel-market-maker-manipulation/

https://cointelegraph.com/news/senators-stabenow-boozman-introduce-crypto-bill-that-extends-cftc-s-regulatory-powers

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Image Credit: Jernej Furman (Flickr)

Why Alibaba and Other Companies are Changing Their Primary Listing to the Hong Kong Exchange

Will there be a mass delisting of Chinese companies from U.S. stock exchanges? A deadline clock is ticking on an elusive agreement between the SEC and Beijing. Once thought to be assured, the possible negative outcome has now caused companies to resign themselves to the idea that an agreement to prevent mass delistings of Chinese companies from U.S. exchanges may not happen. The companies involved are already preparing for this potential.

Most recently, the highly recognized e-commerce giant Alibaba (BABA) said it will be applying for a primary listing on the Hong Kong exchange. BABA is currently listed on the NYSE (since its IPO in 2014) and has had a secondary listing in Hong Kong since 2019.

 

At
Issue

Under a U.S. law that took effect last year, companies whose auditors are not permitted to be inspected by U.S. regulators for three consecutive years will be delisted from U.S. exchanges. The Securities and Exchange Commission (SEC) has already named more than 150 Chinese
companies that may be removed from trading in the U.S. as early as 2024, or sooner if U.S. lawmakers have their way by shortening the deadline. Alibaba will likely join this growing list after it publishes its 2021 annual report this month.

Beijing and Washington have been negotiating to try to avoid the need to delist, but there hasn’t been noticeable progress. SEC Chair Gary Gensler said two weeks ago that he isn’t confident the two sides can reach an agreement.

The
Benefit to Listing on a U.S. Exchange

Although being listed in the U.S. often means learning new processes and more paperwork for foreign companies, it is considered worth it for the longer term. Although they may be subject to increased scrutiny and transparency, the SEC oversight requires, investors take comfort in the strict regulatory compliance.  

A company like Alibaba can use the extra protection provided by its NYSE listing to position itself as a rival to U.S.-based companies like the online retailer Amazon (AMZN). The listing elevates shares of companies on the “radar” of U.S. investors if they are looking for exposure to, in this case, online retailers. Investors can also be assured of a certain level of uniformity in reporting.

The NYSE states the benefits of their exchange include improved branding and visibility, access to capital, and increased liquidity opportunities.

 

Take
Away

Time is running out for more than 150 Chinese companies listed on U.S. exchanges as the SEC and Beijing are failing to come to terms with U.S. compliance requirements.

Alibaba is likely to be added to that list after its annual report is made public this week. Many of these companies have had a vibrant relationship with the U.S. capital markets but are now preparing to list Hong Kong as their primary market.

This is important for U.S. investors of Chinese ADRs to see coming well in advance. Being delisted from U.S. exchanges could substantially reduce global interest in these stocks and subject holders of the companies to lower transparency standards.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.nyse.com/why-nyse

https://www.wsj.com/articles/alibaba-to-pursue-primary-listing-in-hong-kong-11658794611?mod=article_inline

https://www.investopedia.com/articles/investing/112614/alibaba-ipo-why-list-us.asp

https://www.wsj.com/articles/u-s-listed-chinese-firms-get-a-new-lease-on-lifemaybe-11649073448?mod=article_inline

https://www.wsj.com/articles/alibaba-prepares-for-its-u-s-divorce-11658832946

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Company Reporting Investors Follow Closely

Four times a year, companies that issue shares of stock release financial statements covering the prior three months. The publicly traded companies are required to disclose, among other things, their quarter-end balance sheet and income statement information. There is a big focus from investors on the companies’ income numbers. These reporting periods have come to be known as “earnings season.”

There are no official or specific dates that mark the beginning or the end of the period; however, the majority of publicly traded U.S. companies disclose their quarterly earnings more or less around the same time. The only official requirement is that the earnings reports be released within 45 days of the end of each of the company’s quarter-ends.

When is It?

Most companies follow a fiscal calendar from January 1st through December 31st, with the earnings season being the weeks following the calendar quarter-ends (March, June, September, and December). The end of each month will mark the “beginning” of earnings season for that quarter; at this time, company earnings reports begin hitting the tape, and markets begin to react accordingly.

Why it is Important

By the time a company’s financial disclosures are released, expectations from analysts and market participants have already been baked into the stock price. Earnings season has the power to dramatically move stock prices by how expectations match up with reality. If a company’s results beat or fall short of analysts’ expectations, then its stock may experience an unexpected price move as the market adjusts the price to what it is now believed to be worth with the updated financials.

Volatility in the market tends to be higher during these periods as a higher number of stock prices readjust dramatically. Market sectors may do better or worse if several companies in the sector beat or miss expectations. Others in the industry that haven’t yet reported may trade in anticipation of also performing similarly. There is a ripple effect one company’s results may have on others in its sector and even the broader market.

Earnings Season May Affect Your Stock-Level Investment
Decisions

If you are considering buying a company’s stock, earnings reports and earnings trends offer a way to gauge the health of its business. Channelchek is a resource for financial
information on over 6,000 small and microcap companies, not often reported on mainstream financial news.

Paul Hoffman

Managing Editor, Channelchek

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Image Credit: Ivan Radic (Flickr)

The New Coinbase Insider Trading Case May Finally Define Crypto Tokens

Whether cryptocurrency tokens are securities or should be treated as securities by regulators is being tested yet again. This time a Coinbase (COIN) employee and two others are being charged with insider trading by the Securities and Exchange Commission (SEC). The outcome of this legal disagreement could have industry-changing ramifications for the crypto industry.

 

Details
of Case

In a press release last week, the SEC alleged that, while employed at Coinbase, Ishan Wahi helped to coordinate the platform’s public listing announcements that included what crypto assets or tokens would be made available for trading. According to the SEC’s complaint, Coinbase treated such information as confidential and warned its employees not to trade on the basis of, or tip others with, that information. However, from at least June 2021 to April 2022, in breach of his duties, Ishan repeatedly tipped off the timing and content of upcoming listing announcements to his brother, Nikhil Wahi, and his friend, Sameer Ramani. Ahead of those announcements, this usually resulted in an increase in the assets’ prices. Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were “securities,” and then typically sold them shortly after the announcements for a profit. The long-running insider trading scheme generated profits totaling more than $1.1 million.

The tokens in question would be considered outside of the Securities and Exchange Commission’s jurisdiction if they are not securities. The SEC alleges that they fall within that classification.

The chief legal officer at Coinbase, Paul Grewal, issued a statement in response where he said, “Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform. None of these assets are securities. Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed. This process includes an analysis of whether the asset could be considered to be a security and also considers regulatory compliance and information security aspects of the asset. To be explicit, the majority of assets that we review are not ultimately listed on Coinbase.”

Grewal’s statement says these charges put a “spotlight on an important problem: the US doesn’t have a clear or workable regulatory framework for digital asset securities.” He continued, “And instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities.”

“Coinbase does not list securities. End of story” wrote the chief legal officer.

Struggle to Define

The question of whether tokens should be classified as currencies, commodities, or securities has created a cloud of uncertainty over the industry. According to the SEC, some tokens most likely meet the definition of a security.

One legal battle involving the SEC is the payments network Ripple’s token (XRP.X). According to the SEC, the payments token is a security. Ripple Labs and the Commission are engaged in a legal battle over the distinction.

Bitcoin (BTC.X), according to SEC Chairman Gensler, is a commodity.

The definitions help compartmentalize the assets. If the crypto tokens are not securities, then the SEC isn’t likely under its current mandates to have much jurisdiction over exchanges like Coinbase – then it wouldn’t be in a position to regulate the listing and trading of tokens.

Image: Tweet from Coinbase co-founder and CEO.

Coinbase does not support wrongdoing; according to management, however, they want a clear set of legal guidelines for their industry.

As part of a string of Twitter posts, CEO Brian Armstrong wrote, “we actively monitor for illegal activity and investigate any alleged misconduct.” The company launched an investigation in April after being tipped off about possible frontrunning, Armstrong said the company provided the names of three individuals to law enforcement and terminated an employee.

However, Coinbase intends to strongly dispute the SEC’s premise that some tokens on its platform are securities.

The SEC’s insider-trading case also seems to be at conflict with the beliefs of other regulators. CFTC Commissioner Caroline Pham said that the SEC’s move was an example of “regulation by enforcement.” The SEC’s allegations “could have broad implications beyond this single case,” she called on regulators to work more closely.

Take Away

On the road to defining and classifying digital tokens, the industry is likely to experience higher levels of regulatory scrutiny. The Department of Justice is beginning to get more involved in prosecuting crypto crime; the DOJ filed criminal charges in the Coinbase case, and it has filed insider trading charges against a former employee of the largest NFT platform, Opensea.  

The SEC has said it aims to beef up its crypto
enforcement. The Commission added 20 positions to its crypto asset and cyber unit in May, bringing its dedicated headcount to 50.

The outcome of defining the asset class and proper jurisdiction and rules surrounding cryptocurrency is a process. During the early stages of this process, investors in tokens tolerate an added level of uncertainty surrounding the outcomes.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.sec.gov/news/press-release/2022-127

https://blog.coinbase.com/coinbase-does-not-list-securities-end-of-story-e58dc873be79

https://twitter.com/CarolineDPham/status/1550159347984044033/photo/1

https://www.breakingviews.com/considered-view/bidens-sec-pick-is-ominous-sign-for-wall-st/

https://www.reuters.com/legal/government/gary-gensler-has-set-sec-perilous-path-2022-07-22/

https://www.barrons.com/articles/sec-says-ripple-improperly-sold-cryptocurrency-51608675654?mod=article_inline

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Image Credit: Pok Rie (Pexels)

Gaining Competitive Edge: The Data Arms Race in Capital Markets

Capital markets firms are facing competition from many corners, from the continued dominance of passive investing on the buy-side to retail brokers that operate like quasi-fintechs on the sell-side. Gaining competitive edge over both new entrants and incumbents therefore relies on better use of all of a firm’s available assets.

That means gleaning valuable insights in real time from a wide variety of data sources, both internal and external, to better arm your front office decision-makers and trading desks. It also means better understanding your clients’ activities and tailoring your services more appropriately to their requirements.

Over the last decade, much has been written about the rising tide of external data sources from which firms can gain information about particular market trends or opportunities. Whether it’s the evolution of sentiment analytics based on social media data or the addition of new sources of data for tracking environmental information such as satellite imagery, data has been at the forefront of firms’ development of innovative trading strategies, and it will continue to play a significant role in the future.

However, there are many internal sources of data that firms have yet to mine fully for business insights and opportunities, as well as building a 360-degree view of a firm’s clients. Moreover, it’s often the combination of different data sets that makes for greater insights.

Combining internal transaction data with external sentiment data, for example, can highlight patterns of behavior over time that can feed into predictive models. From a transformation standpoint, the successful implementation of artificial intelligence (AI) and machine learning (ML) also requires a high volume of high-quality data.

The evolution of the sell-side front-office has seen personnel change from pure sales traders to quants, who rely on these technologies and reliable data to deliver better returns. It has also witnessed an increasing role for risk management in a front-office context, with related increased demand for real-time risk data analytics.

Technology has become a catalyst for change and the deployment of next generation tools to handle more volume and to better manage risk is a competitive advantage. On the buy-side, there is also an efficiency play around better managing data to reduce the transaction costs for client portfolios. Staying ahead of market risk is key to better managing liquidity, which has been a regulatory concern over the last 24 months within the funds space.

Static reports based on stale data won’t cut it in today’s fast-moving market environment. The past two years have been characterized by market volatility and black swan events, which make up-to-the-second information critically important. For example, think of the difference in responding to breaking news as it happens versus a few hours or even days later. Everyone in the market understands that revenues can be seriously negatively impacted due to latency of information from a trading perspective. Yet C-suite executives often rely on internal reports that are based on stale data due to legacy technology and operational silos.

Many large financial institutions are in the throes of a multi-year transformation program, and most have placed data alongside digital as a pillar of their strategies for the future. After all, the target of aligning business units from a horizontal perspective across the organization can only be achieved via the introduction of a common data foundation.

From a cultural perspective, transformation requires lines of business to be on the same page as each other and greater collaboration can be enabled via the sharing of common data stores. This is where many firms have introduced application programming interface (API) platforms, taking a lead from the retail banking industry in Europe and its focus on open banking.

The move to a cloud environment is also part of this journey and given the regulatory and industry focus on resilience, ensuring the firm is able to switch cloud providers in the future, if required to, is increasingly important. Avoiding cloud platform lock-in is also a commercial imperative for firms that wish to retain negotiating power with their service providers. A data disintermediation layer between a firm and its cloud or software as a service provider is therefore important to enable faster onboarding and future resilience.

However, firms cannot stop and rebuild everything from scratch; they must work within the parameters of their existing technology architectures. APIs also expose the quality of the underlying data from source systems, which can result in a ‘garbage in, garbage out’ quality problem. This is where technologies such as data fabrics can come into play to normalize data from multiple sources and allow it to be consumable by downstream systems and applications. Business decision-makers can then rely on the high quality of the data on which they base their strategic insights, risk management and future plans.

The industry will continue to find new data sources to exploit and add new data-intensive services and technology applications. Just look at the growth of digital assets or the rise of environmental, social and governance (ESG) investment strategies for proof of this dynamic over the last few years. As these new products and services evolve, the complexity of data is only going to increase, and the volumes will grow as firms add more required data sources. How teams surface insights from this data and how quickly they can turn these insights into client-focused activities is already an arms race within the industry. Adding AI and ML into the mix will accelerate the race further.

Firms will also continue to grow organically and inorganically. Silos are almost impossible to eradicate, so learning how to better live with them is part and parcel of a digital transformation program. Interoperability has become a keyword within the industry, due to  the need to connect multiple entities, internal systems and market infrastructures. Interoperability isn’t something that firms should only demand from external providers; it is equally important within the four walls of their organizations. At the heart of interoperable operations is the simplification of the data stack, not by ripping and replacing but via augmentation.

There is little appetite for big bang projects that require multi-year implementations with promised return on investment (ROI) several years down the line. Firms want to become more agile and deliver incremental benefits to their clients sooner rather than later. Building vast new internal platforms from scratch is therefore something best avoided, especially given the ongoing burden to maintain these systems over time. Partnerships with specialist vendors, who can offer the right level of expertise and support is more palatable for those looking for faster deployment and incremental delivery.

Building a more resilient financial institution that can withstand the volatility of the markets, address the new product and services whims of its varied client base, increase its overall agility, and stand its ground against its competitors, new and old, requires a solid data foundation. Firms with reliable, accurate, on-demand data can adapt as the market, regulators and their clients demand.

About the Author: Virginie O’Shea is CEO and Founder of Firebrand Research. As an analyst and consultant, Ms. O’Shea specializes in capital markets technology, covering asset management, international banking systems, securities services and global financial IT.

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The Winds are Changing for Housing, How Long Can Prices Remain High?

Is the Housing market in a correction? Corrections, although unpleasant if your long the asset class, are viewed as normal and healthy. Home values have been climbing for a while. The forces that helped drive other markets higher over the past few years were also at work pushing residential properties up at an unsustainable pace. This year the stock and bond markets have come off of their steamy highs, it appears real estate and housing are setting up to do the same.

On Tuesday (July 19), it was reported by the National Association of Home Builders (NAHB)  that Single Family Starts fell to a two year low of 2%. This came just one day after it was reported that home builder confidence dropped by a steep 12 points to 55 in July. That separate report was a release of the National Association of Home Builders/Wells Fargo Housing Market Index. Sentiment has accelerated downward since December when it stood at 84 (based on 100). It is now at its lowest level since May 2020 and faced with tighter money conditions going forward.

In addition to tighter money (ie, higher mortgage rates), housing headwinds include building material supply chain bottlenecks and elevated construction costs. According to the NAHB, for the first time since June 2020, both single-family starts and permits fell below a 1 million annual pace.

Housing Starts

By falling 2%, housing starts were at a seasonally adjusted annual rate of 1.56 million units in June, according to the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The June reading of 1.56 million starts is the number of housing units builders would begin if development kept the current pace for the next 12 months. Using this overall number, single-family starts decreased 8.1% to a 982,000 seasonally adjusted annual rate. This is the lowest single-family starts pace since June 2020. Multifamily dwellings, which include apartment buildings and condos, were on the upswing; this sector increased 10.3% an annualized 577,000 pace.

“Single-family starts are retreating on higher construction costs and interest rates, and this decline is reflected in our latest builder surveys, which show a steep drop in builder sentiment for the single-family market,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB). By itself, fewer homes being built and entering the market could be bullish for home sales, but the reason for the slowdown, according to Mr. Konter, is “Builders are reporting weakening traffic as housing affordability declines.”

NAHB Chairman Konter said 13% of builders who participated in the monthly survey said they had reduced home prices over the last month to lure buyers.

Rober Dietz, the chief economist at the NAHB said, “While the multifamily market remains strong on solid rental housing demand, the softening of single-family construction data should send a strong signal to the Federal Reserve that tighter financial conditions are producing a housing downturn. Dietz is concerned that supply may not match needs, “Price growth will slow significantly this year, but a housing deficit relative to demographic need will persist through this ongoing cyclical downturn.”

Regionally and on a year-to-date basis, combined single-family and multifamily starts are 4.4% lower in the Northeast, 4.7% higher in the Midwest, 11.1% higher in the South, and 0.4% lower in the West.

Housing Permits

Overall, permits to build a new home decreased 0.6% in June. Single-family permits decreased 8.0%. This is the lowest pace for single-family permits since June 2020. Multifamily permits again increased by 11.5% to an annualized 718,000 pace.

Regional permit data on a year-to-date basis, permits are 5.1% lower in the Northeast, 2.5% higher in the Midwest, 2.9% higher in the South, and 3.0% higher in the West.

Interest Rates

The average contract interest rate on a 30-year fixed-rate mortgage climbed to 5.51% for the week ending on July 14. The same rate was just below 3% one year earlier.

 

Take Away

The NAHB indicated a drop in confidence within the housing market due to the impact of high inflation on building costs and rising interest rates. This has resulted in “dramatically slowing sales and buyer traffic.”

Mortgage rate increases come at a time when houses are still at or near their highs from the surge experienced during the pandemic. The housing “correction” could bring monthly costs of owning a home in line with what they had been prior to recent mortgage rate increases. This would mean prices low enough to equate to the same monthly outlay to the buyer. Should the economy weaken further, there is the potential for home prices to decline further.

All markets impact the others. When housing prices rise, people feel better about their financial situation. Owners also find it easier to borrow against their home’s appreciation. The economy and stock markets all tend to do better. Home prices have remained near their highs, a shallow correction might be welcome to those that are just now looking to enter the market for a home.

Paul Hoffman

Managing Editor, Channelchek

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Image: ARK Funds

Cathie Wood is Unwinding One of Her Firm’s Nine Funds

On August 31, 2021, ARK Invest, run by Cathie Wood, filed with the SEC to create her company’s first indexed-based fund. Up until then, all ARK funds were managed by the founder and Chief Investment Officer. Yesterday it was announced the fund will close by the end of July 2022. The ETF, Transparency Global (CRTU), an ESG inspired fund based on The Transparency Index™ (TRANSPCY), will have opened, then closed in less than a year.

Fund Description

The ARK Transparency ETF held companies deemed to be the 100 most transparent companies globally by the index provider. The top five holdings included Teledoc (TDOC), Spotify (SPOT), Bill.com (BILL), Netflix (NFLX), and Acushnet (GOLF). Each of the top five represented about 1% of the fund. The ARK website explains the principle behind the fund in this way, “ARK believes that transparency enhances the performance of companies while benefiting the well-being of people. Transparency implies openness, communication, accountability, and trust.”

The ARK Transparency ETF, which was launched in December, will close later this month, according to a regulatory filing. ARK currently has nine ETFs, including the transparency fund. This is the only fund of ARK’s nine ETFs that is not managed but instead index based. The ARK Transparency ETF followed an index developed by Solactive, a German-based financial index provider, and tracked by Transparency Global.

In early summer Transparency Global told ARK it would no longer calculate the ETF’s underlying benchmark after July.

Fund History

It was
reported when the fund was announced last year that Cathie Wood, the founder of ARK Invest, believes that while this carve-out index has many of the same attributes of popular ESG funds, the transparency screen could provide superior performance. The Ark application to register the then new fund came at a time when there was a massive appetite for ESG investing. At the time, ESG funds were on track for a record year of inflows after amassing $21 billion 

The Transparency fund had accumulated $12 million in assets and had fallen nearly 36% since its inception, according to FactSet. Some of the fund’s largest holdings included Teladoc Health Inc. and Bill.com Holdings Inc., which are both down about 50% this year.

The transparency fund will no longer accept creation units after Thursday and will cease trading on the Cboe BZX Exchange after July 26, according to a statement from the firm.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.bloomberg.com/news/articles/2022-07-19/cathie-wood-s-ark-shutters-transparency-etf-in-first-closure

https://etfs.ark-funds.com/hubfs/1_Download_Files_ETF_Website/Prospectuses/ARK%20ETF%20Prospectus%2011.12.21%2021.pdf

https://www.sec.gov/Archives/edgar/data/1579982/000110465921111628/tm2126418d1_485apos.htm

https://transparency.global/transparency-index/

https://www.wsj.com/articles/cathie-woods-ark-to-close-transparency-etf-11658273924?mod=hp_lead_pos12

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Newly Concocted Securities Draws a Warning Statement from Director at SEC

 A new form of ETF with its own risk/reward attributes is about to converge on the markets. The exchange-traded, derivative-based security will, over time, provide investors a new breed of investment vehicle to gain exposure to price changes in an underlying stock. At the Securities and Exchange Commission, Lori Schock, the Director of Investor Education and Advocacy, put out a statement last week on what the Commission is calling Single-Stock Levered and/ Inverse ETFs. 

For the benefit of Channelchek members,  I have reposted the full contents of the SEC statement below.     We know our readers want to keep up to date on all that could impact small and microcap stocks, the broader financial markets, and their investments. This new breed of offering has the power to affect each of them.  

Paul Hoffman

Managing Editor, Channelchek

Statement on
Single-Stock Levered and/or Inverse ETFs

Lori J. Schock, Director, Securities and Exchange Commission

Today and in the coming weeks, a new type of complex exchange-traded product will become available to investors in the U.S.: single-stock levered and/or inverse exchange-traded funds. For years, the Office of Investor Education and Advocacy, staff in other Divisions and Offices, and a number of Commissioners have warned that complex products present several risks to investors. These new products are no exception, as they provide levered and/or inverse exposure to a single security, which can present risks for investors.

Holding a levered and/or inverse single-stock ETF is not the same as holding the underlying stock, a traditional ETF, or even a non-single stock levered and/or inverse ETF. It is riskier for several reasons. Importantly, like many other complex exchange-traded products, levered and/or inverse single-stock ETFs aim to provide returns over extremely short time periods (in some cases even a single day). New risks may emerge for investors who hold these products for longer than that. Investors should be aware that if they were to hold these funds for longer than a day, the performance of these funds may differ significantly from the levered and/or inverse performance of the underlying stock during the same period of time.

Additionally, unlike traditional ETFs, or even other levered and/or inverse ETFs, these levered and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Because levered single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.

Though these products will be listed and traded on an exchange, they are not right for every investor. Levered and/or inverse single-stock ETFs pose risks that are unique and complex. We encourage all investors to consider these risks carefully before deciding to invest in levered and/or inverse single-stock ETFs.

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Source

https://www.sec.gov/news/statement/schock-statement-single-stock-levered-and-or-inverse-etfs-071122

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Image: Yahoo News (July 14, 2022)

SEC Claims Authority Over Cryptos and Says Revised Securities Law Could Apply

During an interview this week, Securities and Exchange Commission (SEC) Chairman Gary Gensler covered several cryptocurrency-related topics and shared for the first time how the Securities regulator may define its authority and deal with a myriad of digital-asset issues and concerns. Gensler assured the interviewer and listeners that the regulator does have broad enough powers from Congress to institute changes to protect the public involved in the asset class. His statement about authority seems to give a nod to a recent Supreme
Court ruling related to the FDA but impacting all agencies created through Congressional legislation.

During the interview, which was streamed on Yahoo Finance,  Gensler said that the Commission may exempt parts of securities law in order to help companies involved in cryptocurrency fall into compliance. He referred to other examples where this has been done. The Chairman insisted that there are many non-compliant companies offering crypto, which he views
as securities. Although the SEC Chairman views the digital assets as securities, other regulators, such as the Commodities Futures Exchange (CFTC) have treated them differently. The two oversight bodies have been at odds over cryptocurrency since even before Chairman Gensler was appointed.

Security and Exchange Commission Oversight

Source: SEC.gov

The SEC has targeted several crypto companies, accusing them of conducting unregistered securities sales. The most high-profile case is with fintech firm Ripple, which is to be settled soon. Victory for Ripple would set a precedent that would almost certainly buoy the beaten-down cryptocurrency sector.

In March, the Executive branch issued an Executive Order for federal agencies to “play a leading
role in international engagement and global governance of digital assets consistent with democratic values and U.S. global competitiveness.”

Very little headway has been made since then and crypto legislation is unlikely to be passed this year. It is an election year, and digital assets are more of a political issue than they may seem. Several politicians and bankers are proponents of fostering the innovation that could make the country a fintech hub, which is what the industry advocates want. And others look for a heavy-handed crackdown on the U.S.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.youtube.com/watch?v=Gy2IF_og2Nw

https://home.treasury.gov/news/press-releases/jy0854

https://finance.yahoo.com/news/sec-chair-mulls-waiving-crypto-025531991.html?.tsrc=fin-srch

https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/

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Polls Closing for CFAs Voting to Alter the Institute’s Framework

Forbes Magazine once called CFAs (Chartered Financial Analysts) “The Rock Stars of Finance.” Each year the CFA Institute consisting of 195,000 financial analysts that have succeeded in acquiring one of the top designations in investment and finance, holds its annual meeting. This year’s meeting has created significant disunity among CFAs. The division in thought is with three of the 11 proxy votes. 

Along with the election of four governors and a Chair and Vice Chair, charter holders vote on proposals. This year three of those proposals could serve to change the Institute’s Constitution. One of them would provide for new degrees or classes of membership. This doesn’t sit right with many of the current members that are casting their ballots.

Annual CFA meetings are rarely controversial. However, this year, some of the organization’s 160 regional societies have recommended that their members vote against some of these proposals. 

Battle of the CFAs

The CFA exam is a three-part test, usually taken over as many years. The pass rate for each of the three test levels is quite low. Since 2010 Level 1 ranges from 22%-49%, with an 11-year average of 39%; Level 2 ranges from 29%-55%, with an 11-year average of 44%; Level 3 ranges from 39%-56%, with an 11-year average of 50%. Some financial analysts, who have spent years working to earn the difficult and extremely coveted CFA credential, are pushing back against the CFA Institute’s attempt to become more inclusive and broaden its influence.

Members have until today (July 14) to vote on 11 proposals. This year the Institute’s board is asking for the flexibility to “change quickly and make a lot of changes” without input from its vast membership. This would have the effect of changing the organization’s bylaws.  

Voting Against

A significant number of members of the Chartered Financial Analyst community are voting against the institute’s current governing body by planning to vote against some of the proposals, which they argue would open the door to adding new classes of membership to people who haven’t taken the CFA exam, making the credential less valuable and diminishing the reputation of the Institute.

The overall mindset of those voting against is partly the lack of clarity or definition in the proposals. The concern is it would increase the organization’s flexibility, allowing it to make decisions rapidly without consulting members.

One member and former president’s council representative, Richard Mundinger, told Institutional Investor he is not surprised by the attention CFA members are paying to the proposal.    

“Everybody is an analyst,” Mundinger said, adding that analysts have spent time combing through the 108-page prospectus to determine how to vote and how the proposals will affect the value of their CFA credential. 

Supporter of the Change

The CFA governing board says the changes are mostly semantic changes that won’t affect how it operates. There are no new classes of CFA designations or membership yet.

“CFA Institute has many constituents, including the hundreds of thousands of candidates who take our exams every year but who do not qualify for membership either because they have not yet passed all three levels or because they do not have the required work experience,” Matthew Hickerson, CFA Institute’s head of global media relations and executive communications said to Institutional Investor. “This proposal simply acknowledges the reality of who we serve today, which represents a footprint that is considerably larger than our core charter holder base,” he added. “Full members will remain the only group that can vote.”

The CFA Institute said the passage of the proposal wouldn’t change how the organization operates. 

“It does not remove or diminish the rights of any stakeholder group,” Hickerson said. “The proposed changes preserve the important roles of members and societies, who continue to be featured in detail by the provisions of the CFA Institute Bylaws.” 

Take Away

The CFA Institute Board of Governors, in an attempt to gain more flexibility in directing the organization, is running up against voters who are “Rock Stars” when it comes to analyzing the value of proposals. Many have developed strong opinions and are not afraid to place their thoughts above that of the governing board. 

The board strongly disagrees that the CFA Institute brand is altered in a way by these proposals that would de-emphasize the Chartered Financial Analyst members.  

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://www.cfainstitute.org/en/about/governance

https://www.forbes.com/advisor/investing/cfa-chartered-financial-analyst/

https://www.institutionalinvestor.com/article/b1ywdnfxh9hz34/A-Clash-Between-the-CFA-Institute-and-Its-Members-Illuminates-the-Professional-Power-of-the-Credential

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Image Credit: Robert Rouse (Flickr)

SEC Fails to Reach Agreement with Chinese on Accounting Audits

Mass delisting of nearly 150 Chinese companies trading on U.S. stock exchanges may not be avoidable. This, according to The Securities and Exchange Commission Chairman (SEC) Gary Gensler said he does not expect that negotiations in Washington and Beijing on the U.S. Holding Foreign Companies Accountable Act (HFCAA) will reach an agreement. The Act came about as a response to the Public Company Accounting Oversight Board (PCAOB).

The PCASOB says that is pertinent to Gensler’s comments today (July 13): “If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the Public Company Accounting Oversight Board.” Over 50 jurisdictions have worked with the PCAOB to allow the required inspections; China and Hong Kong have not.

The HFCAA requires audits that the SEC made necessary to prevent Chinese companies from being delisted from U.S. stock exchanges. The HFCAA took effect in 2021 and bans U.S. trading of securities of companies whose auditors can’t be inspected by the American audit watchdog for three consecutive years. This gives Beijing until spring 2024 to comply, though Congress is considering legislation that would shorten the deadline by a year.

Image: Yum Chinese Holdings is among the 150 companies trading on U.S. markets that may be impacted if an agreement is not reached.

In recent months, racing the clock against a looming deadline for American regulators to oversee Chinese companies, the required audit requirements have been the focus of intense negotiations between Chinese regulators and their U.S. counterparts. Chinese authorities had recently indicated that they wanted to avoid these companies being delisted for having missed the deadline.

“It’s quite possible that there’s no deal here,” Mr. Gensler told reporters after an SEC rule-making meeting.

The SEC has identified about 150 companies as noncompliant. Many have become popular stocks for U.S. investors including Nio, Inc. (NIO), Dada Nexus, Ltd (DADA), iClick Interactive (ICLK), and JD.com (JD).    

“If anything has changed, it’s just time,” Mr. Gensler said. “This is the middle of the second year.”

The SEC Chairman, although he didn’t express there was any movement toward agreement, indicated that there was still time. The U.S. and Beijing have not reached the point of no return on finding terms that work to protect U.S. investors and, at the same time, retain the required secrecy expected of these companies back home.

Paul Hoffman

Managing Editor, Channelchek

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