The Wall Street Journal - 08.11.2019

B10| Friday, November 8, 2019 THE WALL STREET JOURNAL.

Italy’s largest lender,Uni-

CreditSpA, has shed its entire

stake in investment bankMe-

diobancaSpA, a move that

ends a 70-year-plus relation-

ship and has the potential to

shake up the country’s corpo-

rate landscape.

The sale was announced late

Wednesday. On Thursday, Uni-

Credit reported sharply higher

third-quarter net profit, its

shares rising 6%. Mediobanca

shares fell 1.8%.

UniCredit had been a share-

holder since Mediobanca’s

foundation in postwar Italy.

Mediobanca quickly became a

cornerstone of Italian capital-

ism, accumulating a web of

cross-holdings in large Italian

companies and turning it into

the country’s de facto corpo-

rate puppet master.

UniCredit’s exit from the in-

vestment banking could affect

Mediobanca’s strategy. Me-

diobanca has been the architect

of many financial and corporate

deals in recent years and holds

sway over the strategy of Assi-

curazioni Generali SpA, Eu-

rope’s third-largest insurer, in

which it retains a 13% stake.

Generali, in turn, controls hun-

dreds of billions of dollars in

funds and has been an impor-

tant investor in Italian bonds

and shares, helping Me-

diobanca deploy its strategy in

the country and providing an

important engine for the Italian

economy.

Mediobanca has used the

proceeds from numerous stake

sales in other companies over

recent years to invest in its cor-

porate and investment banking

divisions and retail and wealth-

management units. Mediobanca

declined to comment. The sale

of UniCredit’s stake leaves Leo-

nardo Del Vecchio, founder of

eyewear firm Luxottica, as Me-

diobanca’s largest investor,

with a 7.5% stake.

BYGIOVANNILEGORANO

ANDPIETROLOMBARDI

BYALEXANDEROSIPOVICH

Averagedailyvolumeofstock

tradessettledbytheDeposi-

toryTrust&ClearingCorp.

$1.4

0

0.2

0.4

0.6

0.8

1.0

1.2

trillion

2010

$1.3 trillion

2000

Participating banks deposit cash and

eligible securities into Paxos's accounts...

...Paxos creates digital representations of

the cash and securities...

...and ownership is recorded on the Paxos Ledger, a

database of which every participant has a copy.

On the settlement date chosen by the

participants, Paxos settles the trade by

simultaneously moving the digitized

cash and securities to the appropriate

accounts on the ledger.

The participating banks can then

access the proceeds of their trade.

When two participants agree to do a trade,

its details are submitted to the ledger.

Howitworks

In the two-year experiment, Paxos, a blockchain startup, will

settle trades in a limited number of stocks between up to seven

participating banks.

Sources: Paxos (new process); DTCC (average daily volume)

Technology from the bitcoin
world is coming to the trillion-
dollar plumbing that under-
pins the U.S. stock market.
Last week, the Securities
and Exchange Commission
gave the green light to a pilot
project in which blockchain—
the technology behind crypto-
currencies—will be used to
settle trades in stocks like
General Electric Co. and AT&T
Inc.
Paxos, the blockchain
startup leading the project,
hopes to construct a faster
and cheaper way to process
stock trades, reducing costs
for banks and investors alike.
The project will be limited
to a tiny slice of the U.S. stock
market and there is no guar-
antee it will succeed. Still, it
could eventually bring change
to the world of clearing and
settlement, which has evolved
slowly since the current sys-
tem was created in the 1970s.
Settlement is the delivery
of securities from sellers to
buyers, while clearing is the
process of handling trades
from when they are initially
agreed upon to when they are
settled. Today, the standard
time it takes to settle a stock
trade is two business days—
which is why investors must
typically wait several days to
get cash from their brokers
when they sell shares. Paxos’s
initiative is aimed at settling
trades at the end of the day in
which they are agreed upon,
or even sooner.
For decades, Depository
Trust & ClearingCorp. has
had a monopoly on the clear-
ing and settling of equities
trades in the U.S. Owned by a
financial-industry consortium,
DTCC traces its roots to a
1970s effort to eliminate paper
stock certificates and replace
them with electronic records.
Last year, it cleared an aver-
age of $1.3 trillion in stock
trades each day.
Now, DTCC is about to face
competition. On Oct. 28, the
SEC issued a letter that lets
Paxos set up an experimental
settlement service for stock
trades. Paxos, whose other

that constantly communicate

with each other to ensure the

data don’t get garbled or

hacked.

With cryptocurrencies, the

blockchain records who holds

how many coins at any time

and supports the transfer of

coins from one person to an-

other. Similarly, Paxos’s

planned blockchain would let

banks exchange digital repre-

sentations of cash and securi-

ties to settle trades.

It would also allow settle-

ment in less than two days.

Paxos plans to give participat-

ing banks the option of next-

day or same-day settlement,

or perhaps even to settle

trades multiple times a day,

Mr. Cascarilla said.

The SEC has put significant

limits on Paxos’s experiment.

Only about 140 of the most ac-

tively traded, least volatile

stocks, like Exxon Mobil Corp.

and Bank of America Corp.,

are eligible. The number of

trades Paxos can settle will

also be capped at 1% of aver-

age daily trading volume of

those stocks, according to the

SEC’s letter.

The electronic records that

officially record stock owner-

ship won’t leave DTCC but will

instead be housed in Paxos’s

account at DTCC.

“What’s happened in the last

10 years is that high returns

have also been associated with

the safety that comes with the

U.S.,” said Paul Sandhu, head of

multiasset quant solutions for

Asia-Pacific at BNP Paribas As-

set Management. “Usually

when you think of safety, you

equate that with low returns.

But that hasn’t been the case.”

There are several reasons

for the long-lived divergence.

After the financial crisis, the

U.S. and its banks rebounded

far faster than Europe. Japan,

meanwhile, has endured de-

cades of stagnation.

The U.S. also has been one of

the biggest beneficiaries of the

technology boom that is re-

shaping the world and its fi-

nancial markets. Many of the

U.S.’s biggest companies are

tech giants such as Apple Inc.,

Microsoft Corp. and Google

parent Alphabet Inc.

Through Thursday’s close,

the S&P 500 was up 23% for

the year, on pace for its best

year since 2013. That compares

with a 19% gain for the MSCI

All Country World Index, and

14.6% for an MSCI world bench-

mark that excludes the U.S.

One clear risk is that U.S.

stocks appear more expensive

than rivals. For example, the

S&P 500 trades at 18 times pro-

jected earnings over the next 12

months, according to FactSet,

higher than benchmarks in

countries such as France, Ger-

many, Japan and South Korea.

Those gaps might simply re-

flect expectations for faster

profit growth in the U.S., plus

the steadier record U.S. compa-

nies have shown in growing

earnings. But if perceptions im-

prove for other markets, bar-

gain hunters could be tempted

to switch out of the U.S.

Gerry Fowler, an investment

director and global multiasset

strategist at Aberdeen Standard

Investments, said the firm has

in recent weeks put more

money in equities, especially in

Europe, as several indicators

suggested a trough in the global

economy. “A cyclical upturn can

have more of an impact in Eu-

rope than elsewhere,” he said.

Other factors could also hin-

der the U.S. rally. Impeachment

in the U.S. and the 2020 presi-

dential election are two of the

risks confronting investors.

strong all year and has shown

few signs of abating. Many are

looking to deploy higher-than-

usual cash piles, which could help

push stocks even higher, she said.

Investors are betting that

the U.S. market’s unusual com-

bination of low risk and robust

performance will continue. In-

cluding this year, the S&P 500

has outperformed world stocks

innine of the past 10 years.

Continued from page B1

Foreign

Cash Aids

U.S. Shares

Foreignprivateholdingsof
U.S.stocks

Source: Treasury Department

Note: Excluding sovereign-wealth funds and
central banks; Data through July

$8

0

2

4

6

trillion

2012 ’14 ’16 ’18

businesses include a crypto-

currency exchange, expects to

launch the service by year-

end. Credit Suisse Group AG

and Société Générale SA have

said they would use it and

Paxos hopes to bring on more

banks.

The appeal to banks is that

a faster, more efficient settle-

ment service could reduce

costs in stock trading, an area

where profit margins have

shrunk in recent years.

“There has been so much

innovation in the way trading

happens over the past 20

years, with people trading in

microseconds, but there hasn’t

really been innovation in

clearing or settlement,” Paxos

Chief Executive Charles Casca-

rilla said in an interview.

DTCC said it welcomes the

competition. “That kind of in-

novation is helpful for the in-

dustry,” said Michael McClain,

head of its equities clearing

and settlement business.

DTCC said it has modern-

ized its processes, studied

blockchain technology and

shifted the U.S. stock market

from three-day to two-day set-

tlement in 2017.

That two-day delay comes

with various costs. Banks col-

lectively set aside tens of bil-

lions of dollars in capital to

cover the risk that firms else-

where in DTCC’s network will

fail before the trades settle.

There are also separate sys-

tems at each big bank, as well

as at DTCC itself, that track

what different market partici-

pants are expected to pay or

deliver at settlement time.

Bankers say this is inefficient

and results in errors.

“We are constantly recon-

ciling that data,” said Jeffrey

Rosen, a New York-based man-

aging director at Société Gé-

nérale. “That is hugely expen-

sive. While we’ve built tools to

do it efficiently, it would be

better not to do it.”

Paxos’sgoalistoeliminate

redundant systems by creating

a unified record of trading ob-

ligations using blockchain

technology.

A blockchain is essentially a

database with many copies

distributed across the internet

Blockchain’s Use

In Settling Stock

Trades Advances

Depository Trust & Clearing Corp. traces back to a 1970s effort to replace paper stock certificates.

BOB PETERSON/THE LIFE IMAGES COLLECTION/GETTY IMAGES

BANKING & FINANCE

websites or mobile apps to ac-

cess their accounts, according

to a Federal Deposit Insurance

Corp. survey, up from about

39% in 2013. But nearly one-

quarter of bank customers vis-

ited a teller more often than a

bank’s website, the survey

found.

“Customers want the physi-

cal and the digital,” said Tom

Brown, founder and chief exec-

utive of Second Curve Capital, a

hedge fund that focuses on the

banking industry. “And you

have to deliver both.”

How to best do that remains

an open question. Banks are

still trying to figure out exactly

how to balance spending on

branch upgrades and digital of-

ferings to maximize deposit

growth.

Banks are approaching this

challenge in different ways, Mr.

Brown and his employees found

on a recent tour of bank

branches in downtown Phila-

delphia. In September, they

gathered at the city’s 30th

Street train station, where Mr.

Brown handed them $100 bills

to open bank accounts at a

number of branches. Mr. Brown

told his team to look out for

anything unusual: “Funny is

great,” he said.

Among the branches visited

was the Capital One Café with

its coffee happy hour.

Capital One FinancialCorp.

has about 480 branches and

around three dozen cafes. It

has been opening around 10 an-

nually for the past few years,

said Lia Dean, the bank’s head

of bank retail and marketing.

Customers can expect the full

suite of banking services at

both the company’s cafes and

its traditional branches.

In modeling the cafes, Capi-

tal One responded to what it

heard from consumers: Bank

branches were intimidating and

stressful. At the cafes and

branches, the employee dress

code is relaxed, and customers

can open accounts on iPads.

The cafes also host community

groups and hold workshops

such as “Talking Money With

Your Honey,” which focuses on

finances in relationships.

Ms. Dean said the customer

response to the cafes has been

positive, but she declined to

provide details about how they

are performing compared with

the bank’s traditional branches.

Another challenge for banks

trying to figure out how to map

out their physical spaces: Con-

sumers have grown used to the

ease and speed of doing busi-

ness on their phones.

Second Curve managing di-

rector Zach Maxfield opened a

TD Bankchecking account on

his phone in nine minutes while

he waited to speak with a teller

at one of the bank’s branches

on South 11th Street. He spent

nearly an hour waiting in line

to fund an account he opened

online and get a debit card.

“It’s much less painful to

open an account online,” said

Mr. Maxfield.

“We regret if we didn’t de-

liver on our goal in this in-

stance, and we’ll continue to

work with our store teams to

ensure consistently great cus-

tomer experiences,” a TD

spokeswoman said in an email.

Across town at the PNC on

South Broad Street, no one was

greeting customers at the door.

The teller windows made the

location feel unfriendly, Mr.

Brown said. He struggled to

work a computer encased in

glass.

Linda Morris, PNC’s head of

retail branch banking, said the

bank has plans to upgrade a

number of its branches.

PNC has been opening what

it calls solution centers around

the U.S. with open space and

areas to gather, she said. ATMs

handle routine banking ser-

vices; branch bankers work

with customers who need more

attention.

The early results are promis-

ing: The solution centers bring

in four to five times more de-

posits than other new

branches, PNC Chief Executive

Bill Demchak said at a finan-

cial-services conference in Sep-

tember. The bank expects to

have 25 of them by the end of

next year, he said, more than it

originally projected but still a

tiny fraction of its 2,400

branches.

PHILADELPHIA—It is happy
hour at the Capital One near
Rittenhouse Square, and drinks
are on the house at thePeet’s
Coffeeon the branch’s second
floor. Staff tell customers to
make themselves comfortable.
At aPNC Banka few blocks
away, customers approach tell-
ers stationed behind windows.
There is a Keurig machine for
anyone who wants coffee.
A visit to the two locations
on a recent morning illustrates
one of the biggest head-
scratchers in the banking busi-
ness: what to do with the in-
sides of their bricks-and-mortar
storefronts.
U.S. banks have closed thou-
sands of branches in recent
years and poured billions of
dollars into the smartphone
apps that customers increas-
ingly use for many of their
daily banking needs. But cus-
tomers still want the option of
a physical branch, especially
when they have problems that
are tough to solve over a web
chat.
In 2017, some 52% of people
primarily used their bank’s

BYALLISONPRANG

Banks Rethink Role of Branches

Banking apps are

popular, but many

customers still want

a physical location.

BYDAVEMICHAELS

Largest

Penalty

Settles

Spoofing

Case

UniCredit

Unloads

Stake in

Mediobanca

WASHINGTON—High-

speed trading firmTower Re-

search CapitalLLC agreed to

pay $67 million to settle regula-

tory allegations that its traders

manipulated the price of stock-

index futures, the biggest pen-

alty ever imposed by the U.S.

derivatives watchdog in such a

case.

New York-based Tower, has

been one of the most active par-

ticipants in equity and deriva-

tives markets. It signed a de-

ferred-prosecution agreement

with the Justice Department,

which has worked closely with

the Commodity Futures Trading

Commission on such cases.

The misconduct alleged is

known as “spoofing,” which in-

volves entering phony orders

that give a false impression of

supply and demand. The fake

bids and offers are intended to

push prices in a direction that

favors the spoofer’s other or-

ders.

The CFTC has filed or settled

more than a dozen spoofing

cases in the past year, with the

Justice Department still pursu-

ing some of those traders on

criminal charges.

The resolution follows the

guilty plea of two former trad-

ers at Tower who were involved

in the scheme. Kamaldeep Gan-

dhi and Krishna Mohan pleaded

guilty to conspiracy to engage

in wire fraud, commodities

fraud and spoofing, while a

grand jury indicted Chinese citi-

zen Yuchun “Bruce” Mao on

similar charges.

Messrs. Gandhi and Mohan

are scheduled to be sentenced

in February. Their lawyers

didn’t respond to messages

seeking comment. Mr. Mao

couldn’t be reached.

Tower said it was “deeply

disappointed” by the three trad-

ers’ conduct and added that

they all left the firm nearly six

years ago.