Capital markets infrastructure set to change
London, February 20, 2011
Change is imminent in capital markets infrastructure with new business models set to displace incumbents and drive further industry growth and revenue opportunities, according to a new report.
Morgan Stanley and Oliver Wyman in a joint report, said the financial crisis propelled regulators to find ways to boost market transparency, cut systematic risk and trading cost through use of centralised clearing, trading automation and new trade reporting regimes.
Regulation has yet to be finalised, but there will be winners and losers, and many new business models will displace incumbents and drive further industry growth, said the duo in 'The future of capital market infrastructure,' report published on Sunday.
Robert Urtheil, partner, Oliver Wyman and Bruce Hamilton, analyst, Morgan Stanley investigate how the economics of the industry are likely to evolve in response to regulatory and other changes, and who the winners and losers are likely to be.
Traditional equity exchanges are under pressure from margin erosion in mature listed markets and new OTC regulation, which has led to the rise of competing Multilateral Trading Facilities and High Frequency Trading, it said.
European Central Securities Depositories’ (CSDs) will also suffer a revenue squeeze leading up to Target2-Securities (T2S) go-live, the report added.
OTC execution and clearing will benefit market participants, but greater transparency, competition and higher capital requirements will erode profit margins for industry players.
The report found that the emergence of several new types of infrastructure will create business opportunities for existing trading venues and custodians:
*New opportunities in OTC markets as a result of new infrastructure required by regulations, e.g. Swap Execution Facilities (SEFs) will automate trading and increase Central Counterparty (CCP) volumes
*Exchanges likely to launch or acquire distinct liquidity pools to safeguard equities trading volumes or increase their value chain coverage
*CSDs can expand banking services and collateral management offerings to offset lost revenues from TS2
*Custodians should benefit from increasing demand in collateral management, and could expand offerings to add value, e.g. to buy-side and hedge funds.
According to the report, the consolidation trend is set to continue as exchanges seek to extend their global reach and to drive scale economies, reflecting the margin and top line pressures that have beset the industry.
Whilst cost synergies offer attractions, implementation is non-trivial and compelling revenue synergies may prove more elusive. Key questions surround execution risk and how the various stakeholders seek to shape announced deals, and whether the wave spreads further afield (e.g. to Asia, Latin America), it added.-TradeArabia News Service