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J.P. Morgan Insights:
Unpacked Video Series

In a new video series, J.P. Morgan breaks down tough-to-explain topics across the industry. In four minutes, get a solid understanding of what it is, how it works and why it matters.

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Unpacked: Digital Treasury

Consumers demand seamless digital transactions in their personal lives, but how does this uninterrupted experience translate to the corporate world? Learn how the transition from paper and spreadsheets to automated cash management systems is driving business growth and resiliency in this episode of Unpacked.

In the earliest days of the stock market a trade was an exchange between two people of physical money for physical stock certificates. Since the trade was visible, each person's assets could be easily verified.

Today trading is done electronically, with enormous volumes moving through the global markets every day. So how do financial institutions keep track of all those transactions? That's where the middle office comes in. While it may sound like somewhere you go, it isn't a physical location. Instead, it represents what happens behind the scenes after a trade is made. Let's take a closer look.

This is middle office unpacked. As financial markets developed and became safer for investors through regulation, trading volumes reached levels that made it hard to support physical exchanges. In 1971, NASDAQ launched as a fully electronic stock exchange. For the first time, confirming a trade, transferring money from buyer to seller, and recording stock ownership all happened electronically.

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Unpacked: Middle Office

What happens after a trade takes place? Where do the details go? Within the Securities Services business, there is a function called Middle Office that oversees post-trade operations — and in the digital world, trades are happening at high speeds and enormous volumes. Learn about the critical role Middle Office places plays.

In the earliest days of the stock market a trade was an exchange between two people of physical money for physical stock certificates. Since the trade was visible, each person's assets could be easily verified.

Today trading is done electronically, with enormous volumes moving through the global markets every day. So how do financial institutions keep track of all those transactions? That's where the middle office comes in. While it may sound like somewhere you go, it isn't a physical location. Instead, it represents what happens behind the scenes after a trade is made. Let's take a closer look.

This is middle office unpacked. As financial markets developed and became safer for investors through regulation, trading volumes reached levels that made it hard to support physical exchanges. In 1971, NASDAQ launched as a fully electronic stock exchange. For the first time, confirming a trade, transferring money from buyer to seller, and recording stock ownership all happened electronically.

This new digital market also meant that investors, brokers, and investment managers had to find a new way to verify transactions. Their answer? It would be up to each participant to keep their own record of what was bought, sold, and owned. Then they would compare to make sure things matched.

This oversight was the beginning of what would become the middle office, which today has five main responsibilities. After a trade takes place, middle office confirms the details with all participants, things like the kind of asset bought or sold, its price, when and where it will be settled, and any fees to be paid. Next, it oversees trade settlement when the asset is electronically transferred to the buyer's account. Then the asset is closely tracked to ensure it's properly processed and reflected in the accounts record.

The middle office monitors cash flows like dividends and interest payments. It also manages tasks like adjusting records after a stock split or replying to a corporate action notification. The process of verifying assets in person now happens through reconciliation. This is regularly comparing digital records, correcting differences, and ensuring all activity is represented accurately across everyone who supports an investment portfolio.

Lastly, investment data management, the single most important middle office function. All the transaction and position details, client data, and analytics like risk, performance, and profit and loss must be up to date because this information is used to inform investment decisions and create risk, compliance, and regulatory reports.

Let's look at an example with the most common asset class, equities. When trading equities, there aren't many data points to manage, but the overall volume can be a challenge for the middle office. There are 60 stock exchanges around the globe. Across the five US-based stock exchanges, more than 50 million equity trades happen every day, and each firm's trades go through their own middle office.

Volatile markets drive greater volumes of trading, placing even more demand on the middle office. Transactions involving other kinds of assets like futures, foreign exchange, loans, and OTC derivatives can be even more complicated. There are often more participants, greater amounts of data, physical paperwork, and non-standard settlement practices.

Today, almost all asset classes are traded electronically, driving investor demand for immediate data and insights. In the last five years, the investment management industry has changed dramatically. Investing in complex assets is more common. Market and regulatory changes have challenged operations, and the competition for investor assets and greater returns has intensified, along with the technology and staffing required for an efficient middle office, while the speed, complexity, and data necessary to support their business and their investors is becoming harder to manage.

All of these changes are making it more risky and costly to keep middle office operations in-house. So investment managers are now at a crossroads. Many are considering outsourcing their middle office to a service provider with large-scale technology and operational capabilities.

So what's next for the middle office? Just like the transition from physical to electronic trading, technology will play a crucial role in helping the functions support growing complexity and volume and provide the insights that help investment decision making. With distributed ledger technology providing the potential solution that offers capabilities like instant verified trade confirmation and settlement to simplify things for the middle office, the question is, how far will technology take this evolution?

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Unpacked: Private Capital Markets

When a company goes public, it often makes headlines. But recently, more private fast-growing businesses are turning to Private Capital Markets to raise capital. In 2020, there were nearly 2.5 times more investments in the private market than the public market – why?

When a company decides to go public, it often makes headlines. But recently, more privately owned, fast growing, typically tech enabled businesses are turning to private capital markets, or PCM, to raise capital in order to keep growing. Take a look at this graph which shows the exponential growth in PCM over the past 10 years.

What is PCM? And why has this strategy become so popular? Simply put, private placements are a way for a private company to raise capital from investors without having to go public. It's becoming more common with businesses that are scaling fast, both small and global.

Let's say your family invests in your e-commerce startup in exchange for a small stake in the business. That's a PCM transaction. Within investment banking, think of PCM as another product, just like mergers and acquisitions. Here's how it works.

Your e-commerce business is becoming popular and growing fast. You open pop-up shops around the country. You have a loyal customer base, and you want to expand, move into a new region, control the supply chain, and even sell your shoes in national department stores. But to make all this happen, you need more capital.

Going through an initial public offering isn't an option right now, because you would prefer to stay private for another few years. This way, you can spend more time growing your business without the same level of scrutiny a public company receives. It could also mean more value for early investors.

So it's been catching on. In 2020, there were more than two times the investments in the private market than the public market. Although the technology and health care sectors represent about 2/3 of companies that are funded in the private market, PCM is an option for any industry. It's also an option for companies of all sizes, whether small or global.

The strategy has become popular for a few reasons. First, there is a lot more capital available. Historically, large private investments in new companies mostly took place through venture capital firms, which primarily focused on startups and small businesses with long term potential.

Secondly, a number of top internet companies were able to successfully scale their business in the private domain before going public. Today, there are many more types of private investors, like family offices, private equity firms, mutual funds, hedge funds, sovereign wealth funds, and pension funds. This means there is an abundance of capital now accessible to fast growing companies.

From a private investor's perspective, the earlier they can own equity in a company, the more capital appreciation or value their share could earn. This will hopefully pay off when the private company goes public one day. But back to your business.

Many companies will work with an investment bank to tap into a global network of private investors. Depending on the amount a client needs, it could require a few rounds of funding and more than one investor. While you focus on the business, the team will reach out to private investors who could potentially be a good match. They'll share your success to date, your vision, where you want to go, and your innovative customer service plans.

Some important factors that make a good match include, does your idea resonate? Is your business model future proof? If you plan to take your company public one day, does your time frame align with an investor's?

Interested investors will perform their own due diligence. Things like visiting your offices to get a feel for how things run day to day, conversations with company leadership, and a closer look at your financials and contracts. Interested investors will submit their terms, and the PCM team will help to evaluate the proposals. After that, legal, accounting, and other teams get more involved to complete the transaction.

PCM has seen an incredible amount of momentum and it's expected to continue. What will the next 10 years bring?

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Unpacked: Volatility

Dramatic spikes. Wild swings. Extreme uncertainty. These words are often used to describe a heightened state of volatility, like the trading environments in 1987, 2008 and 2020. But what does volatility really mean?

Dramatic spikes. Wild swings. Extreme uncertainty. We hear phrases like these whenever the stock market is in a heightened state of volatility. But what does that mean, and how does it impact the market?

This is volatility, unpacked.

In March of 2020, the coronavirus pandemic contributed to spikes in market volatility similar to the 2008 Global Financial Crisis. U.S. equity markets saw the largest single-day drop since 1987’s Black Monday – and global indices entered bear market territory, which is when the market falls more than 20% from its recent peak.

Volatility is a measurement of price movement, and it’s fundamental to how the stock market works. The price of a single asset – like a stock, option, or bond – can change millions of times a day. This perpetual fluctuation describes normal stock market conditions, and it’s driven by supply and demand. When demand to buy shares is high, the price goes up. And vice versa. Investors’ desire to buy or sell a company’s shares is typically influenced by things like earnings reports, perceived growth potential, economic trends and company news.

Volatility describes an asset’s potential to rise or fall from its current price. It is expressed as a percentage and measures the variability of returns – money made or lost – over a period of time. Assets with higher volatility are generally considered riskier. The more uncertainty about an asset’s value, the more its price fluctuates.

A state of heightened market volatility results from two key drivers. The first, anything that causes macro uncertainty, which makes it difficult for the market to value assets. And the second, a lack of liquidity. “Liquidity” refers to how easy it is to buy or sell an asset without affecting its market price. Not enough buyers means you have to sell at a lower price, and vice versa. There are two types of volatility: Realized and Implied. Realized volatility is how much an asset’s price has moved over a historical timeframe. Implied volatility is how much an asset’s price is expected to move in the future. Implied volatility is related to options, which give holders the right to buy or sell an asset for a certain price in the future.

Just like interest rates, volatility is quoted on an annualized basis, which means it’s converted into a yearly rate. This helps investors by making the volatility comparable over different time periods. To assess the level of risk and uncertainty in the market, investors commonly use a market-wide volatility gauge called the VIX. It indicates expectations of volatility over the next month – based on the prices of options on the S&P 500 Index.

When the VIX reaches high levels of uncertainty, fewer investors willing to trade. Liquidity drops, volatility rises even more, and a negative feedback loop is created, making it very hard to trade.

The VIX recorded the three biggest volatility spikes in 1987, 2008 and 2020 where the negative feedback loop and reduced investor holdings caused a bear market each time.

But heightened volatility can also hit bull markets. During the 1900s dot-com boom, volatility rose alongside stock prices. The growth expectations placed on the exciting but untested internet technology also gave rise to increased uncertainty – especially as the bubble grew unsustainably.

What goes up, eventually comes back down. After a volatility spike, at some point levels do find stability, situations resolve, market shocks subside, and people gain a better understanding of the economic environment.

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Unpacked: Development Finance

Learn how development finance plays an important role in funding sustainable projects, like clean water, in emerging markets, and why there’s a push for private institutions to play a more active role in having an impact.

Affordable and clean energy, widespread access to healthcare and education, quality jobs and infrastructure, safe and sustainable cities. These are pretty ambitious goals for developing countries, so how can we get there? By raising about an extra 2.5 trillion dollars of annual financing until the year 2030.

This is: Development Finance Unpacked

Back in 1944, the concept of development finance was born. Institutions like the World Bank were created to fund the rebuilding of vital infrastructure and services across efforts of war-torn European countries.

Since then, development finance has evolved into what it is today: Funding projects that improve the quality of life and well-being of people in developing countries.

In September 2000, a critical milestone took place when all United Nations members agreed on a set of development goals to achieve by 2015 called the “Millennium Development Goals.”

The idea? To rally world leaders around efforts to fight extreme poverty, expand access to quality jobs and healthcare, and more.

As 2015 approached, the United Nations formed 17 new Sustainable Development Goals to be achieved by 2030. They aimed to advance progress on things like: clean water, infrastructure, education, sustainable farming, improved mobility, and more.

Sustainability is the connecting force between them, emphasizing the necessary balance between economic growth, social inclusion, and environmental protection.

The estimated total investment needed to achieve the SDGs in emerging economies ranges between 3.3 to 4.5 trillion dollars per year.

Currently, we’re only half way there. According to the United Nations, there is a 2.5 trillion dollar gap of development finance – per year – until 2030.

Historically, the development financing has primarily come from public institutions, which are owned and operated by government shareholders.

It can also come from multilateral institutions, like the World Bank. They receive funding from multiple member governments and use it across projects in developing countries. Currently, around one hundred and forty countries are eligible to borrow from the World Bank.

However, this annual funding gap can’t be closed by public institutions alone. To do it the private sector – think multinational corporations or financial institutions – must play a leading role.

Private organizations can offer more capital, access to investors, structuring expertise and a global network.

It could be a direct investment like opening a factory, or a portfolio investment, like an asset manager buying a bond from a government to provide clean water.

Let’s look at an example of how development finance works. Let’s say a government agency in Saharan Africa, to build new infrastructure to provide clean water. While this may intuitively feel “developmental”, a development finance institution will thoroughly evaluate whether this qualifies as a development finance opportunity.

Certain questions could include: Will the infrastructure serve areas that struggle to access clean water? Will it be resilient to climate change? Does the agency provide quality jobs and training to employees?

If a project meets the necessary requirements, the development finance institution will connect this opportunity with potential investors – usually those interested in supporting development finance activities, like an impact investor or an ESG investment fund manager.

From there, projects that support the SDGs and have impact in developing countries, receive their needed funding and we move one step closer to closing that 2.5 trillion annual dollar gap.

The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein are solely those of the speakers and do not reflect the views of and opinions of JPMorgan Chase. This information in no way constitutes JPMorgan Chase research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.