With Brexit and Donald Trump’s election victory, who knows what will happen in 2017. Industry experts do their best to give their views on the year to come.
Avoidance of the balance sheet in transactions
James Treseler, global head of cross-asset secured financing, Societe Generale
“The most important feature of tomorrow’s market will be the need for banks to avoid using balance sheet in transactions. This prevailing mandate will impact a wide range of activities not limited to but certainly including securities finance.
“I expect centrally cleared repo and securities lending will gain a solid foothold in the markets for the same reasons that listed derivatives products make sense – lower balance sheets.”
Small-scale adoptions of DLT
Thorsten Peisl, CEO, RISE Financial Technologies
“For financial institutions, 2017 will be the year of small scale adoptions of use-case specific DLT products beyond in-house experimentations based on generic products, often unfit for productive environments. In particular we anticipate more activity around information flows on DLT such as proxy voting. We also expect to see new solutions emerge catering to asset flows, especially OTC traded assets or those which are subject to less stringent regulation.
“For technology providers, 2017 will see a continued trend towards increased openness (open source), the adoption of more open technology architecture principles, and more clarity around how different solutions can interoperate.
“For regulators, 2017 will be a year of greater understanding of the technology and an even higher degree of willingness to engage with solution providers, with a view to setting-up blockchain sandboxes and the publication of guidelines for DLT regulation.”
The year of uncleared margin rules
Pierre Lebel, head of collateral advisory, prime services, Societe Generale
“If 2016 was the year of the mandatory clearing, 2017 will be the year of the un-cleared margin rules, with mandatory daily variation margin calculation starting 1 March for most non-cleared bilateral OTC derivatives contracts. How the buy-side will cope with challenges such as the cost of the new infrastructures and the rise in operational risk will be one to watch.”
Demands for blockchain results
Lars Ottersgård, EVP and head of market technology, Nasdaq
“In 2017, I predict it will be ‘show me the money’ time for a lot of these projects. In other words, next year will see—hopefully—plenty of implementations of the 2015/2016 innovation projects, particularly the very much publicised blockchain developments. Speaking of which, while blockchain is still very exciting, I think it’s worth mentioning some of the other technologies like cloud and FPGA are also at the forefront of shaping the way the capital markets function, particularly relating to trading and post-trade spheres. We believe that leveraging these technologies together will create some interesting opportunities for competitive gains coming into the New Year. A lot of adoption and new technology development we’re seeing is driven by flexibility, efficiency, time-to-market and the willingness to accept and adopt new technologies to be more competitive and reduce costs.”
Getting to grips with collateral management
Ted Leveroni, chief commercial officer, GlobalCollateral
“Buy-side and sell-side firms facing the March 2017 deadline for the introduction of variation margin rules have two key challenges to overcome. First, the effort required by major swap dealers to comply with highly intricate new initial margin (IM) rules for bilateral OTC derivatives introduced in September means that many market participants are only now getting to grips with the documentation and operational implications of the VM deadline. Second, the workflow-related decisions that firms take in order to achieve compliance in March must be set in the context of the need to reengineer collateral-related processes, perhaps on an enterprise-wide level. A misstep today, could saddle a firm with crippling costs, risks and inefficiencies well into the future.”
New approaches to data
Mahima Gupta, business consultant, Sapient Global Markets
“The sheer scope of MiFID II is going to require greater granularity on source and reference data. For the sake of comparison, the data fields required under EMIR included 20 fields whereas MiFID II is expected to have roughly 65 to 85 fields. Apart from transaction reporting, there are new requirements to report pre-trade information i.e. order/quotes data which may not be always be available in a structured format. There are other complex requirements on generation of best execution reports and reporting of commodity positions. There will also be certain data that firms will have to formularise to new source systems requiring more formal enterprise systems within your organisation.
“As regulators seek more transparency around the parties involved pre- and post-trade, the use of more data identifiers, conduct peer reporting comparisons and look for efficient reconciliation, the need for a comprehensive rethink of how firms are managing data, operational systems, external providers and costs is clear.”
MiFID II to take centre stage
Mark Hemsley, CEO, BATS Europe
“MiFID II will take centre stage as its implementation date of January 2018 moves ever closer. We expect the buy-side to continue to adjust their trading patterns well in advance of the regulation’s implementation date by increasing their volume of block trading, in order to qualify for MiFID II’s large in scale waiver.
“More generally, we expect the trend of the empowerment of the buy-side to continue and this is particularly important in terms of secular trends we are seeing in market structure. The potential Fed rate rise in December along with the Italian referendum and elections in France and Germany next year mean that volatility is likely here to stay and, therefore, we expect that buy-side traders will make use of all of the tools available to search for and execute on liquidity.”
Making use of blockchain in post-trade
Joshua Satten, director of business consulting, Sapient Global Markets
“The challenge is no longer what a firm, or the industry, can do with the technology. Rather, it’s potentially challenging what firms do by dismantling and re-imagining elements of the value chain and the associated infrastructure.
“A trade repository is one potential use case. If you can visualise a trade repository that is real-time and two-way, then it would evolve from something that is inherently batch-processing and reconciliation-based to something that is real-time and more verification or synchronisation-based. Identifiers and other kinds of reference data used in regulatory reporting could also be issued onto a blockchain network to be consumed by end users. That would mean legal entity identifiers (LEI), International Securities Identification Numbers (ISINs) and perhaps instrument reference data would appear on a blockchain, which could then be accessed by firms. This kind of application could mean savings for firms which constantly have to upgrade their reference data platforms.
“While DLT allows us to imagine a world where post trade activity becomes a series of smart transactions, the complexity of these processes means that is still years away from fruition. Instead, 2017 is likely to be a year of more sober development and the delivery of applications, such as those offered by the likes of Chain, Ripple and SETL that further showcase the benefits this technology can provide.”
Embracing technology in fixed income
Stu Taylor, CEO, Algomi
“In terms of trends for 2017, innovation around data, which enables banks to gain better insight into their trading relationships and become smarter, quicker and better able to service their clients is likely to continue next year at an even greater pace. Ultimately, trading tools which match buyers and sellers more efficiently and smartly, without moving the market, will deliver banks and buy-side firms such as asset managers with a competitive advantage.
“While adopting new technology is a continual process, those firms able to harness a business advantage on a cost effective basis will be best placed to thrive. Embracing SaaS is one way in which large financial institutions can achieve this, and is another trend we’d expect to see next year. It removes the need for physical hardware, and has grown sharply in popularity, as IT departments recognise the operational benefits it delivers.
“As MiFID II approaches in Europe, focus on compliance will intensify as firms prepare themselves for the January, 2018 deadline. While adhering to new market rules remains critically important, now more than ever before, financial institutions will need to delicately balance compliance demands with operational efficiencies to ensure business lines continue to generate revenue.”