Every year, we consider the priorities of the capital markets industry, mix in industry trends, and build out our research agenda. And every year, something pops up and has an impact we were not fully expecting. In 2023, it has been ChatGPT and discussions around the deployment of AI. In 2022, it was the impact of rising interest rates and their ripple effect across everything from electronic trading to collateral management agreements.
It’s somewhat sobering to think that we are in the second half of 2023 and that it is already time to start looking at business and budget priorities for 2024. As we look ahead, we welcome your perspective on how trends and priorities will play out.
The top drivers we’re anticipating will shape the priorities of the capital markets industry in 2024 include:
- AI – The adoption rush and reflection: With growing adoption and constraints being applied to the use of AI, we see the next year bringing business governance and increased regulatory oversight. The use cases firms have been exploring will mature, and the expanded use of AI will impact people, process, and technologies in ways we cannot fully comprehend today. Despite an initial level of reservation across certain parts of the marketplace, AI has indeed “arrived” in capital markets and will no doubt transform the industry over the next decade.
- T+1: The aftermath of shorter settlement cycles: Shorter settlement cycles have been planned for many years. While the actual settlement of securities may be relatively smooth, the implications across parallel and downstream processes like offsetting FX transactions and collateral management are unlikely to be seamless. Phase 2 will result in integrating learnings and the expansion of shorter settlement into new regions.
- Increased prominence of provider governance: As firms look at evolving products and operating models, the ways in which they manage broker, custodial, cloud, and fintech relationships will require more comprehensive and coordinated oversight. The increased emphasis on governance in 2024 comes as firms ready themselves for shorter settlement cycles and increased outsourcing of more business-critical functions.
- Adapting to a new rate environment: Volatility in interest rates is not only causing firms to look at the investment opportunities embedded across the yield curve and increase exposure to fixed income, it’s also having a broader impact across the business. Functions like securities lending, margin management, collateral management, and cash management have all seen a rush to optimize standard approaches, contracts, and capabilities. In 2024, those efforts will result in step changes in business processes and vendor capabilities.
- Optimizing non-equity electronic trading (FX, fixed income): On the back of higher rates, market structure changes, and the competitive fixed income landscape, we have seen significant growth in electronic trading. Roughly 45% of investment grade credit and nearly 30% of high yield are now executed electronically—a significant uptick from the pre-Covid landscape. Conversely, adoption of fixed income execution management systems (a bellwether for e-trading sophistication) is still less than 15% amongst the top tier of asset managers, which indicates significant opportunity for further market modernization. 2024 will see additional focus on the fixed income desk and new vendor capabilities. In this new environment, status quo workflows and alternative protocols and solutions need to converge to evolve. Traders will begin pushing the envelope within fixed income markets such as munis and repos that are ripe for electronification.
- Continued positioning around next generation market structure: While global regulators have had some of the most aggressive agendas in years, it is still far from certain how much of their agenda will actually get implemented. One could argue that over two decades of market structure changes driven by regulations, adoption of new technologies, competitive forces, and unintended consequences have resulted in rapidly growing markets that are overly complex and highly fragmented. Those firms with robust technology infrastructure and deep understanding of market structure changes have come out on top across the board and will no doubt fight tooth and nail to ensure their leadership position, confronting any potential regulatory frameworks that may disrupt the status quo.
- Operating models – global/local, insource/outsource: As firms look to focus on “what they do best”, we see the continued evolution of build/buy, insource/outsource/hybrid, and active decisions around creating central or geographic-/asset-class-specific teams. Structural changes like the growth in electronic trading, shorter settlement cycles, and new provider capabilities require firms to think again about who should do the work…and where. We’re watching as the next generation of middle office outsourcing evolves, and the growth in newer outsourcing functions includes data management and trading.
- Moving alternatives to the same table as traditional securities (real assets, private markets, etc.): As valuations in the private markets reset in 2023, we see alternatives taking increased prominence in 2024. Market participants continue to search for balance between manual processes (such as the use of spreadsheets and unstructured data) and automation in managing the deal life cycle (such as by adopting distributed ledger technologies) while ensuring compliance with regulations. Integrating alternatives into the existing operating models, including technology and data, is front of mind.
To quote the 21st century scholar Eminem, “The truth is you don’t know what is going to happen tomorrow. Life is a crazy ride, and nothing is guaranteed.” While that may be true, we take our best shot at how we should align business priorities against the changes we might anticipate. Let me know what you think and what key priorities you might envision for 2024 here.