Recently, SIFMA (Securities Industry and Financial Markets Association) hosted its annual capital markets conference. Analysts recap some of what was seen and heard, as well as key themes heard throughout the year.
The “Executive View” on developments is noteworthy for what industry executives said about regulations, technology and price compression.
Regulations: Panelists indicated regulatory recalibration is needed to remove frictions in markets, as some regulations have negatively impacted market liquidity. For example, corporate bonds used to have a larger number of issues trading in size, but that has come down post crisis. This created liquidity concerns for the asset management community, albeit electric trading has helped improve the situation somewhat. While panelists note that the industry needs sound regulations, this must be balanced with ensuring markets function efficiently. An area of concern is that the industry had to “overreach” to invest into compliance related areas, leaving them “behind” in investing in other areas which could be influencing the future of capital markets.
Technology: One area which already is and will continue to change the industry is advancements in technology. Technology has always played a key role in financial services – from the birth of screens decades ago (versus calling your broker to get a price quote) to the fintech applications of today – and firms have continued to adopt new technologies to create efficiencies and better serve clients. Panelists indicated that the game is a lot faster today. Technology provides opportunities for firms to increase transaction speeds and continue lowering costs for investors, though panelists indicated this needs to be balanced with human involvement to make “decisive decisions” when needed. Technology assists firms of all types in gathering, cleaning and protecting data. Further, technology has assisted with the democratization of markets, opening up access to individual investors of all income levels. As to competition from nontraditional financial institutions, panelists feel it is good for the industry as a whole, as long as everyone is playing by the same rules. The addition of fintech players provides firms the option to build, buy or partner, depending upon their technology needs and budgets. These enables firms of all sizes to adopt systems to better serve their customers.
Prices: Panelists indicated the industry has seen price compression across the board. Only 10 years ago, some trades were ~$18 per trade. Now they are $0, which is a quick transition period. While it is still early days, zero commissions are a positive for investors. Conversely, when the institutional space flirts with zero, it could cause firms to underinvest. The industry needs a balance – firms want to provide customers with low costs and high-level service, but they need to earn money to invest in system maintenance, compliance, new technologies, cybersecurity, etc. Therefore, panelists do not expect further price compression in the institutional space.
Key market themes meanwhile, included cybersecurity, fintech, and LIBOR transition:
Cyber: Cybersecurity Ventures predicts global spending on cybersecurity products and services (across all industries) will exceed $1 trillion cumulatively from 2017 to 2021, a 12-15% Y/Y growth rate through 2021 (Cybercrime Magazine, June 2019). The financial services industry alone is spending tens of billions on cybersecurity. A May 2019 Deloitte survey found financial institutions are spending 6-14% of their IT budget on cybersecurity (10% average) or 0.2- 0.9% of revenue (0.3% average).
This high level of spending coupled with industry collaboration puts financial services ahead of other industries in combating cybercrime. Cybersecurity is a shared interest in financial services, with firms working together rather than competing. The level of information sharing and cooperation between private and public (regulators; government agencies, like U.S. Treasury, Homeland Security) sectors is at an all-time high, with informal and formal processes in place. Informally, financial institutions experiencing an issue can call another firm to see if they had the same issue or know of an existing remedy. This also acts as an early warning system amongst market participants.
More formally, joint exercises exist to make market participants aware of existing threats but also develop and practice procedures should an attack occur. Cybersecurity knows no boundaries. Therefore, SIFMA’s Quantum Dawn exercise – which builds coordination capabilities among key financial institutions, regulatory agencies, central banks and government agencies to keep markets operating in the event of an attack – went global this year. This time the exercise emphasized cross jurisdiction communication and coordination across participants in North America, Europe and Asia. The industry processes keep improving, as the fight to combat cyber-attacks continues.
Fintech: The industry continues to analyze how fintech solutions can increase efficiencies in the back office, serve clients, manage risk or meet regulatory reporting requirements. As we moved through the year, the industry has made progress implementing some applications, and focus has shifted to prioritizing others. The ABCDs of fintech (as patented by Broadridge) – AI, blockchain, cloud and data/digitization – continue to develop.
Robotics and Robotic Process Automation (RPA) are currently being used by many financial institutions. Automation via these capabilities benefits firms by improving procedures and decreasing the time it takes to perform tasks, enabling employees to spend more time working with their clients. They also help firms increase transparency and reduce operational risk. We, therefore, expect the uptake of robotics/RPA to continue.
Cloud architecture in its various forms has become a bigger focus of financial institutions. One panelist indicated they never imagined a pace this fast to adopt cloud computing. Cloud enables firms to leverage infrastructures of specialized providers and can also provide a platform for partnerships with other innovative technology providers, explaining the appeal for many firms. As firms continue to expand their applications of artificial intelligence (AI), they remained focused on building the internal governance and oversight models to manage them. Blockchain continues to be examined but is a longer term play (there are some interesting use cases in repo and other areas).
And of course, data remains the new oil. Firms continue to explore ways to bring together data from disparate systems and increase efficiencies in gathering, cleansing and analyzing data. With the continual increase in the amount of data collected, data protection remains top of mind. As such, one panelist indicated the S in ABCDs should be capitalized to include security.
LIBOR transition: A year ago, market participants were starting to get their arms around the concept of the U.S. transition to the Secured Overnight Financing Rate (SOFR) from the London Interbank Offered Rate (LIBOR). Exchanges and clearing houses began launching SOFR futures/swaps; CME SOFR futures open interest now reached over 500,000 contracts. Questions abound around what the transition would mean and who would be impacted; now the Alternative Reference Rates Committee (ARRC) and other players have spent (and will continue to spend) a significant amount of time educating market participants, in particular end users and smaller financial institutions.
While questions remain and actions still need to be taken, market participants are further along in the discussion. The ARRC published fallback language for new transactions of syndicated loans, bilateral loans, FRNs, securitization & adjustable rate mortgages. Regulators (FASB, IRS, SEC, federal banking) published guidance/relief proposals to aid the transition. There is more to come – ex: CCPs expected to change cleared swap discounting to SOFR in 2H20, projected to drive significant trading activity of SOFR swaps/futures. As legacy issues remain challenging, the ARRC is considering the viability of a legislative solution to assist in transitioning existing deals.
The conversation has shifted and now includes a focus on timeline. The ARRC, regulators and market participants are stressing the importance for firms of all sizes to prepare for LIBOR’s end. At SIFMA’s LIBOR Briefing in July, President and CEO Federal Reserve Bank of New York John Williams started an unofficial official clock countdown when he stressed that firms need to get moving, as 900 days is not really as long as one might think in financial services. And the clock continues to tick down.