Banking Outlook 2017 - Market Infrastructure
Take a closer look
Market Infrastructure is heading towards a resilient and consolidated tomorrow. But how will developments shape the Market Infrastructure industry next year, and how can firms respond to these trends? Download the Banking Outlook 2017.
Exchanges are consolidating, however, the policy uncertainty brought on by a new US administration may slow M&A activity in the short term. Central clearing mandates in the US and EU are pushing derivatives to central clearing houses. And the SEC approved the Consolidated Audit Trail (CAT) plan in November 2016, signaling the creation of a system that would enable regulators to monitor trading activity in the US markets in National Market System (NMS) securities.
A shift to non-transactional business revenue will likely by a growth strategy. Exchanges will likely increase non-transactional revenue activity, both organically and via acquisitions. Data in particular is expected to become a strategic asset in the move to passive investing/indexation and regulatory reporting requirements. Derivative trading will remain an increasing source of exchange revenues, and the Tick-Size Pilot for small-cap companies could shift more off-exchange trading of pilot stocks onto US exchanges.
Myriad challenges will require operational agility both internally and externally. 2017 will likely be the year that major US exchanges collaborate to alleviate customer concerns over trading halts and make the markets more resilient in periods of extreme volatility. Also, regulators’ openness to cloud adoption (e.g., European Union’s Markets in Financial Instruments Directive reporting and the US CAT plan) could assuage individual firms’ concerns regarding security.
Risk and regulatory agenda
Compliance and regulations will focus on more security and reporting. The approval of the CAT plan will likely induce self-reporting organizations (SROs or exchanges) to focus on building enhanced reporting for equities and options. The new rules for the six too-big-to-fail US clearing houses approved in September 2016 will require them to hold minimum capital buffers and submit resolution plans.
Technology in the coming year will manifest as innovation put to tests. Artificial Intelligence and machine learning could shift the industry from post-trade historical analysis to pre-trade predictive analytics, and exchanges might launch machine-learning tools to track rogue traders. The Financial Industry Regulatory Authority is expected to test this machine learning application in 2017. In addition, blockchain pilots to bring efficiencies to the post-trade manual processes will gain momentum, though mainstream adoption looks unlikely in 2017.