Market participants will benefit from greater transparency while the industry will suffer from tighter profit markets under new regulations for OTC derivatives -- a nearly $600 trillion dollar market -- according to a report from consultant Oliver Wyman and Morgan Stanley.
LONDON, 17 February 2011 – Change is imminent in capital markets infrastructure according to a joint Morgan Stanley and Oliver Wyman report, The future of capital market infrastructure, published today. 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.
The financial crisis propelled regulators worldwide to find ways to improve market transparency, reduce systematic risk and drive down the cost of trading through greater use of centralised clearing, automation of trading, 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 and revenue opportunities.
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. European Central Securities Depositories’ (CSDs) will also suffer a revenue squeeze leading up to TARGET2-Securities (T2S) go-live. 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 finds 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 2 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
- (I)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
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).