Capital Markets 2016 Facing Regulation, Data and Disruption

Capital markets are in a state of flux thanks to new regulations and disruptive competition from fintech, so 2016 will be the year that defines the way financial services companies can move forward. The new landscape means they have to get creative to address new competition while still remaining in compliance.

Here are our predictions for 2016:

1) A compliance officer will go to jail.

In 2016 a compliance officer will go to jail for not stopping an illegal act executed by one of his colleagues. Regulations including MAD II (Market Abuse Directive) and MAR (Market Abuse Regulation) hold compliance officials responsible for anyone in their companies for breaking the law, which means criminal sanctions. The pressure on an already tight labor pool may send potential applicants elsewhere, even as in situ compliance officers head for the door.

2) Capital market firms will be buried in data.

Data requirements for reporting transactions, risk data (BCBS239), communications surveillance and swaps data repository reporting are creating a bureaucratic nightmare for capital markets firms. Few are prepared to handle the basic regulatory requirements never mind take advantage of what could be useful for market monitoring and transparency. The ability to analyse and act upon the data before it becomes stale and loses value will be a key differentiator for capital markets firms going forward.

3) Blockchain technology will transform capital markets.

Blockchain will evolve from something banks are suspicious of into “the” disruptive technology that will totally transform the banking system, eliminating the need for securities depositories and central clearing, and reducing settlements delays. One report notes that blockchain could cut up to $20bn a year off of a bank’s infrastructure costs. Blockchain will also help to nail money launderers through its distributed ledger and the historic traceability of funds.

4)  Predictive Analytics will destroy insider and rogue trading.

Regulators and financial services firms will monitor trades and traders to spot aberrant behavior and anomalous trades, using streaming analytics with predictive analytics models on top. This way they will be able to predict with a good deal of certainty when something bad might happen; insider trading, market manipulation, even money laundering will be halted before markets are affected.

5) FinTech will begin to disrupt investment banking.

While financial technology companies have already disrupted retail banking and investing business models, with lower cost banking and financial planning websites, they have only scratched the surface of the behemoth investment banks’ businesses. This will change in 2015 as fintech firms begin to target and invade wealth management, private investment and small business lending, beginning in the U.S.

Capital markets will begin to see some real disruption in 2016. The financial services firms that are prepared for the onslaught of new rules and data, and are proactively embracing fintech, are the ones which will still be there at the end of 2016.