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Top 10 themes for capital markets post-COVID-19

John Da Gama-Rose John Da Gama-Rose

Capital markets institutions have seen all their current challenges amplified by the COVID-19 situation. Our capital markets team considers the areas to focus on in order to reset and position for the journey to recovery.

At the beginning of this new decade, environmental issues and climate change dominated the global risk outlook, while the Brexit transition period seemed the biggest economic uncertainty in Europe. Capital markets institutions faced significant pressures and challenges to transform their businesses to adapt and further drive down costs, continue to deliver regulatory compliance and embed innovation in their operating models.  

1 Restoring financial strength for capital markets

Regulatory reforms following the global financial crisis have enabled financial institutions to better face this unprecedented economic shock, allowing banks to draw on liquidity and capital buffers. This helps to maintain credit flow and intermediation in volatile markets, while managing heightened downturn market risks and exceptional operational risks. This period of stress puts measures to the test and will yield important insights, resulting in improvements to risk-model capabilities, effectiveness of risk-management frameworks, policies and analytics. As firms embark on the journey through macro-economic recovery back to steady-state operations, they can accelerate restoring their financial strength by restructuring early and adapting their operating models.

2 Refocusing on regulatory and compliance initiatives

Authorities have made concerted efforts to sustain stability of the global financial system, through central bank and fiscal policy measures, while regulators have offered flexibility and operational relief. Delayed implementation deadlines for major regulatory initiatives, such as Basel III, give firms an opportunity to re-prioritise programmes, focusing on essential initiatives, such as LIBOR reform, which strengthens the global financial system and is helped by the now-dissociated timelines. The exceptional operational resilience demands will re-ignite focus on governance, conduct and cyber-security topics.

3 Building more agile and resilient operating models

The impact of COVID-19 will drive a need to adopt greater agility and better resilience in bank operating models, in order to flex and meet changing service-delivery requirements. This will include improved burst capacity processing, as well as greater operational resilience. This revised focus will also drive wider stress-testing and updates to recovery resolution, operational continuity in resolution and wind-down plans.

4 Redistribution and new locations of the future workforce

Adjusting to the post COVID-19 environment will require a re-mapping of workforce to locations and functions. This will result in a more distributed workforce model and increased rotation in workspaces: increased working from home, reducing large concentrations of real estate, adopting more collaborative technologies and enabling better ways of working.

5 Accelerating cost-reduction and restructuring

Given the severe economic impact of the COVID-19 pandemic, in-flight cost reduction and restructuring initiatives will need to be re-planned. Smarter choices are needed to prioritise capital and resource allocation to core and periphery business lines. Greater creativity is needed to release capital, potentially leveraging balance sheets of large technology providers or generate revenue by commercialising technology assets to offer industry utilities.

6 Increasing FinTech adoption and innovation

Trading technology architectures have not fundamentally changed in the past 15 years. Due to acquisitions and regulatory demands, many banks have added to this complexity, failing to simplify and reduce costs. The COVID-19 challenge can now be the catalyst to kick-start the transformation with a focus on simplification of operations and technology. Adoption of FinTech and RegTech solutions, shared industry utilities and scalable services from cloud providers are to be embraced, as these innovations increase operational and technology resilience and agility.

7 Rebuilding and optimising the supply chain

The COVID-19 pandemic has tested, and in certain instances broken the third-party supply chains that had been designed and built within rigid operating models over the last 10 years to perform near- and off-shore services. There will be a re-think in how best to optimise or collaborate with new third-party suppliers, FinTechs and ecosystem platforms to perform services with greater business continuity over a more flexible, dis-aggregated value chain that provides agility, stability and innovation.

8 Understanding and responding to increase M&A activity

The near- to medium-term pressures on certain capital market entities who do not have strong enough balance sheets and a clear path to return to positive ROEs, could start a wave of consolidation or closures. Global and scale wholesale banks may start to look for discounted players in the market to acquire, and small-to-medium players will look to consolidate in an overcrowded market to shore up balance sheets and weather the storm.

9 The emergence of the new capital markets ecosystem

Financial market infrastructure, particularly CCPs, have so far proven resilient in these challenging financial and operational conditions. This will encourage further 'platformisation', as it facilitates remote work for trading staff, as well as providing transparent access to liquidity with appropriate governance and monitoring. The case for operational and technology mutualisation will accelerate and an effective, yet simplified and cost-efficient capital markets ecosystem will emerge.

10 The reset and purpose of capital markets

Unlike the global financial crisis, this crisis is an exogenous shock. Capital markets and financial intermediaries are essential to its resolution. Firms can individually and collectively innovate capital markets operations, reset their culture and reputation and renew their purpose: by focusing on the customer franchise, understand adaptive behaviours and evolving needs of customers across segments, who have been at the heart of this human crisis.

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