Capital markets in 2025: Preparing for regulatory shifts

With the reelection of President Trump to a second, non-consecutive term, financial regulatory policy is likely to reverse course for the second time in eight years. The change in control of Washington likely shifts the pendulum back to a deregulatory focus with plenty of implications for organizations. Certain priorities of the Biden administration may no longer move forward or may be reimagined, such as the SEC’s predictive data analytics proposal. Other unfinished proposals from the outgoing administration could likely languish for the foreseeable future. Finalized items of the Biden agenda, such as the expanded definition of a dealer, could be undone.

With the SEC’s final rule mandating clearing eligible Treasury and repo transactions through a covered clearing agency (CCA) starting in March 2025, organizations should prepare for this shift. The new requirements have vast implications for the Treasury market, aiming to ensure it remains deep, liquid, and transparent. The rules target the 87% of US Treasury secondary market transactions currently settled bilaterally, viewed as a source of counterparty risk. Central clearing, while adding complexity and cost, is expected to enhance price visibility, risk mitigation, and crisis prevention.

AI offers numerous benefits to broker-dealers, investment banks, and exchanges, such as automating repetitive tasks, enhancing customer service, and supporting various institutional functions. However, regulatory concerns about privacy, bias, and systemic risks will need be addressed. Regulators are keen to ensure responsible AI use, scrutinizing organizations’ applications and compliance measures. AI’s initial success in banks and capital markets will likely shape future regulatory actions. Organizations should be prepared to explain AI models and their outputs. Multiple regulators have issued AI-related guidance. Financial organizations should integrate AI implementations with a governance process that meets regulatory standards and addresses regulator inquiries.

Since March 2022, the SEC has issued three staff bulletins on Reg BI concerning account recommendations, conflicts of interest, and care obligations. These bulletins detail expectations for compliance. The SEC is expected to take a comprehensive approach to Reg BI exams, focusing on organizations’ abilities to prevent, detect, and respond to violations. Meeting these heightened standards may require additional compliance tools like surveillance, testing, training, and remediation programs. Organizations should have a systematic and integrated approach to Reg BI compliance.

The SEC’s agenda continues to focus on disclosure (e.g., the adoption of Rule 10c-1a); transparency (e.g., Rule 13f-2); and price discovery (e.g., Regulation National Market Securities [NMS] and Rule 605 amendments).