Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
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Capital Markets 2020
Will it change for good?
Are capital markets participants and users prepared and capable to reimagine the future, innovate
and compete against this still unfolding backdrop?
www.pwc.com/banking
Contents Welcome 3 Visualising the priorities of participants through the lens of capital markets users 4 1 Introduction 5 Today’s challenges 5 The future landscape 9 2 Impact of global macro-trends on capital markets 12 Global instability – the winds of change 15 Rise of state-directed capitalism – regulation reshaping the industry 18 Technology – an enabler of change 21 War for resources – the filling of the gaps 24 3 Potential disruptions 26 4 Priorities for 2020 29 Proactively manage risk, regulation and capital 31 Establish stronger culture and conduct: Change for good 36 Redefine the business model 39 Strategically renew the operating model 41 Enable innovation, and the capabilities to foster it 45 Obtain an information advantage 48 5 Capital market users’ perspectives 50 6 Conclusion 54 7 Contacts 58
Welcome
Bob Sullivan
PwC US
Global Banking and Capital Markets Leader
Welcome to the second instalment of our Banking and Capital Markets As a capital markets participant,
understanding the future is imperative.
2020 series.
Otherwise, how can you best determine
whether to invest in a certain area, grow or
reduce your footprint in a country, or launch
This paper covers the future of capital Our survey of top capital markets or discontinue a particular product, business John Garvey
markets, a subject of increasing focus executives which is part of the study, clearly or strategy? As a user of capital markets one PwC US
since the financial crisis. The vitality of demonstrates that leaders believe it is will need to develop a view of the types of Global Financial Services Advisory Leader
capital markets is critical if the world is to important to have a better understanding products and financing options that will be
return to an environment of sustainable and a more clearly articulated vision of their available to support your business.
economic growth. Moreover, effective place in the capital markets industry in 2020
capital markets are crucial to the efficient than they do today. We wholeheartedly agree To make these decisions you will have to
allocation of credit and investment. To be – this is an area of strong interest not only consider various scenarios and possibilities.
most beneficial, capital markets must be for the ‘participants’ (i.e. investment banks, Where will the leading financial markets be
able to function freely, rewarding strong broker-dealers, financial market utilities and in 2020 and beyond? How will regulation Justo Alcocer
performers and penalising those who are the like), but also the ‘users’ (i.e. private shape capital markets in the future? How will PwC Spain
EMEA Banking and Capital Markets Leader
unable to deploy capital effectively. Looking equity firms, pension funds, hedge funds, megatrends such as urbanisation translate
forward to 2020, capital markets will play other non-bank financial intermediaries and into opportunities for capital markets and
an increasingly important role in providing corporates), who rely upon on global capital financial institutions to fund infrastructure
everything from financing to the world’s markets for funding, risk management, and and trade? What will be the revenue
most innovative companies to generating transactional banking services. Furthermore, drivers moving forward? Do you need to
the investment returns needed to support other stakeholders such as policymakers consider different business models going
an ageing population in the developed and regulators also need to develop the forward? Will new players disintermediate
existing financial institutions or provide for Antony Eldridge
world. This paper will provide insights right balance between investor and system PwC Singapore
and understanding into the future of this protection as well as the need for markets innovation and partnership opportunities? Asia-Pacific Banking and Capital Markets Leader
industry, which either as a ‘participant’ in or to function freely and efficiently in order to These are all critical questions to consider
a ‘user’ of capital markets, is critical to your support economic growth. when formulating a business strategy and
actions today and to your plans for more tactical action plans going forward.
the future. PwC Capital Markets 2020 3
To produce this paper, we assembled Imagine you are on a journey from the It is now a fast-growing USD 100 million
insights from PwC teams and our clients
from around the world. Additionally, we
Visualising the present to 2020 with one of the emerging
market’s new entrepreneurs…
software and services business with
subsidiaries in the US, China and Germany.
assessed challenges and opportunities the priorities of The company is managing business
evolving marketplace is creating for financial Rajiv symbolises the new India. In 2013, relationships in 15 countries and 10
market participants and users and how participants he, along with two other partners founded currencies. They are eyeing acquisitions on
they plan to respond. We then developed through the an offshoring firm focused on predictive
analytics. The company’s seed money came
two continents and considering a small debt
a point of view regarding how megatrends offering to finance further expansion, but the
will impact the future of the global financial lens of capital from a combination of savings, family loans trust of a key client has been challenged. His
and a government development grant. The
system using PwC’s proprietary Project
Blue framework. We considered how these
markets users business grew to 200 people and over USD
nevertheless optimistic partners are pushing
for a potential IPO in 2022.
trends will drive various scenarios for 10 million in revenue in 2017, so he and his
Are capital markets partners sourced a USD 2 million loan from Rajiv faces some daunting questions. Can
the future of capital markets, focusing on
questions such as: Where will the clients be participants and users a bank in Singapore to finance the purchase the firm rebuild the trust they once had with
in 2020? Where will the capital come from? prepared and capable to of new computer hardware and software to their key client? Where should he source
What will be the potential roles of capital reimagine the future, grow their business. They considered crowd- his capital? In India? Or in a global hub,
markets participants in the economy and sourced financing at the time, but the rates such as Hong Kong, London or New York?
innovate and compete and conditions were not as favourable as Should he consider seeking direct investment
in the context of government policy? We
then translated these trends and our view of against this still unfolding those offered through their bank. from a private equity firm, pension fund
the landscape into six priorities for capital backdrop? or sovereign wealth fund? How aggressive
In 2020, as the partners look to return to the should he be in raising capital? Can the firm
markets participants and users to help ensure
bank for a substantial increase in working absorb one or more acquisitions? Is this the
their future success. Finally as previously
capital, Singapore suffers a crippling right time to consider selling equity? Most
noted, we commissioned a survey of over
cyber-attack, shutting down markets and importantly, who can advise him on these
250 capital market executives and industry
undermining trust in technology-delivered strategic choices? Do his current bankers
leaders from around the world to obtain their
solutions. Conveniently, other competitive have the experience, product set and
feedback and insights in order to validate our
funding sources were available that were geographic reach to properly serve him? Or
hypotheses (or not!).
as competitive as those offered by their must he look elsewhere?
We look forward to hearing your feedback bank. Furthermore, these sources now offer
on our work and to engaging in a provocative increased flexibility in terms of scaling to The premier capital markets participants
dialogue with you and your colleagues going their growth plans. of the future must be able to address these
forward. We would be pleased to share issues and more.
As Rajiv considers the company’s future, he
additional points of view, information and
sees his business at a critical turning point.
insights as appropriate. Please feel free to
reach out to me or one of your existing PwC
contacts to start the dialogue.
4 PwC Capital Markets 2020
Introduction
We believe that capital markets in 2020 will look very different than they As global interconnectivity and ubiquitous Today’s challenges
access to financial markets increase, we see The challenges for capital markets players
do today. Based on feedback from clients, many have gloomily predicted
a world where well-functioning, deep capital are vast and include pressures from clients,
a shrinking capital markets landscape, overregulation and the fall of markets are needed more than ever. Industry stakeholders and regulators. Despite this
traditionally powerful financial centres such as London and New York. leaders must address the continually difficult environment, 84% of surveyed
However, we have a different vision for 2020 – one of a new equilibrium. changing market forces and prove that they executives indicated that they feel somewhat
can operate within this new equilibrium, or fully prepared for the challenges within
This new equilibrium consists of a traditional financial axis of power which includes justifying their social utility. the industry, although many players are
further solidifying their positions at the top and the world seeking stability struggling to meet more stringent risk and
and predictability in the context of riskier and more uncertain geopolitical Participants and users of capital markets capital requirements while maintaining
will need to choose what posture to adopt acceptable levels of profitability. Users of
situations. In addition, much of the landscape where financial institutions against this shifting landscape – whether to capital markets face a number of their own
operate will change significantly. This change will come from economic and be a shaper of the future or a fast follower. challenges – from finding yield in a period of
government policies, innovation, operational restructuring, technology, from To restore public confidence and position pervasively low interest rates to adhering to
businesses for long-term success, they will complex regulations that they had not been
smarter and more demanding clients, companies harnessing powerful data subject to before. Meanwhile, incumbent
need to take a leadership role in shaping the
and from continued growth of the shadow banking system. new equilibrium – whether by helping drive and emergent financial market utilities
the creation of new utilities, or by taking the (FMUs) are finding their places within the
lead on transforming entrenched businesses new capital markets landscape and need
and operating models. Staying the same will to reach sufficient economies of scale to
not be an option. Consequently, we believe operate effectively over the long-term. This
that the winners in 2020 and beyond will point of view is consistent with that of our
need to relentlessly execute against today’s surveyed executives who cite top challenges
ranging from increasing client profitability
imperatives, to radically innovate, and to
(36%) and attracting and retaining talented
transform in order to meet the client and
employees (33%), to adapting to new
industry needs of the future.
technologies (33%).
PwC Capital Markets 2020 5
At the same time, improving client seen as a critical component of success, not distribution channels, payments, and asset Executives are divided over who will be the
relationships is a more fundamental only to ensuring regulatory compliance but management/ brokerage systems). Finally, primary beneficiaries of overcoming the
challenge than it has been in the past. Our to remaining competitive with clients. More 16% of industry players believe that this challenges ahead. Nearly half of respondents
survey indicated that 31% of capital markets than 90% of our survey respondents believe shadow banking world may be set to expand believe that several large, leading sell-
executives view retaining existing clients as that clients will gravitate towards firms that beyond its current 25% market share of side participants will be the market share
one of their top challenges during the next have the highest ethical standards. financial assets and two-thirds of executives winners in 2020. However, a third see large
five years. It is not enough to simply fulfil expect that shadow banking assets will show institutions capturing only half of the market
immediate client needs. Backed by new Complying with growing and changing flat to moderate growth by 2020. share or less, and the remaining 18% believe
technology, more information and growing regulations remains a significant challenge, the market will further consolidate with only
confidence, clients will be more demanding as reported by 19% of executives. Capital a few significant players.
and more resistant to the status quo. As markets participants are still struggling to
such, capital markets participants will need get ahead of regulation and to develop a
to better understand what clients expect of proactive stance with their regulators. The
them and how they wish to interact with bottom line is that regulatory developments
their firms. Capital markets participants are profoundly changing operations, markets
Figure 1: As per the Financial Stability Board (FSB), shadow banking assets
recognise the need to enhance their client and cost structures. So who benefits? Our
accounted for 25% of the global financial assets in 2013 (at approximately
service offering and as many (56%) cited this survey participants believe that global
USD 70 trillion up from USD 26 trillion a decade earlier). By 2020, do you think
as their top investment priority. banks will benefit the most from proactively
shadow banking assets will be:
addressing these changes – likely due to
Capital markets institutions today face their ability to leverage scale to manage the
difficulties ensuring individuals act cost and complexity. Responses suggest also 55% or more of global
0%
appropriately and in the best interests of that smaller banks (community, regional, financial assets
their clients. Due to misaligned incentive credit unions) and broker-dealers will be
45% to less than 55% of global
structures and weak cultural values, threatened the most. financial assets
0%
businesses have struggled to live up to their
fiduciary responsibilities and significant Executives are highly concerned by the 35% to less than 45% of global
16%
reputational damage and distrust has threat posed by shadow banking players financial assets
resulted. Establishing a strong culture and such as crowd funders and peer-to-peer
25% to less than 35% of global
conduct is essential to correcting these lenders. Seventy percent believe they pose financial assets
66%
conflicts of interest and to restoring public a moderate to severe threat to traditional
confidence. Fundamentally however, this banks, 20% believe they present innovative Less than 25% of global 18%
partnership opportunities and the remaining financial assets
poses a challenge to organisations as only a
few are expected to succeed by 2020. Eight 10% believe that non-traditional players
0% 10% 20% 30% 40% 50% 60% 70%
in ten executives believe it could take up to only pose a threat to those with inferior
three years to strengthen their organisational technologies. Our survey participants see Base: (261)
culture. Despite the challenges, the this threat coming from disparate areas Source: PwC Capital Markets 2020 Survey
imperative to act remains as culture is now within the industry’s ecosystem (i.e.
6 PwC Capital Markets 2020
Figure 2: What do you expect to be your organisation’s top three challenges Figure 3: What are your organisation’s top three investment priorities
through 2020?1 through 2020?2
Increasing profitability of clients 36% Enhancing customer service 56%
Impact of new technologies 33% Filling talent gaps 39%
Attracting and retaining talented employees 33% New product development 35%
New market entrants 31% Implementing new technology 31%
Retaining existing clients 31% Regulatory compliance 27%
Digital transformation 28% Product rationalisation 27%
Product development 23% R&D and innovation 22%
Regulatory compliance 19% Combating internal fraud 16%
Increasing frequency of cyber threats 19% New M&A/joint ventures/strategic alliances 15%
Attracting new clients 18% Entering new markets 13%
Customers’ loss of trust in their financial institutions 14% Increasing product usage 8%
Demands from shareholders 6% 0% 10% 20% 30% 40% 50% 60%
Macroeconomic factors 2%
Inadequacy of basic infrastructure 2%
0% 10% 20% 30% 40%
Base: (261)
Base: (261)
(1) Please note that executives were able to respond with their top three choices.
(2) Please note that executives were able to respond with their top three choices.
Source: PwC Capital Markets 2020 Survey
Source: PwC Capital Markets 2020 Survey
PwC Capital Markets 2020 7
Figure 4: Which of the following scenarios do you believe to be the most likely to occur through 2020?
Sell-side dominance spectrum
Few, very large sell-side Several leading large Large sell-side Large sell-side Large sell-side
participants capture sell-side participants participants capture participants capture a participants capture no
market share capture market share roughly half of available minority share of the market share for capital
market share market markets products
1 49%
2 3 4 5
28%
18%
5%
0%
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Source: PwC Capital Markets 2020 Survey
8 PwC Capital Markets 2020
The future landscape All these changes cannot happen in a silo of
The demands of this new equilibrium an individual organisation. Collaboration will
will require businesses to transform. be crucial to extend reach and capabilities,
Technology and straight-through processing especially as many players are simplifying
(STP) are rapidly morphing from being and refocusing themselves around a core
expensive challenges to becoming critical- set of products, customers and geographies.
to-success components that create client For example, utilities that have started to
value and enable efficiency. Meanwhile, arise in recent months, bringing together
both non-traditional players and regional participants, users and technology vendors,
broker-dealers (many with little legacy are an illustration of players realising the
infrastructure) are challenging the critical role of partnerships. To drive the
established order by supplying capital and success of these joint ventures, there will
becoming leaders in product innovation. need to be real and embracing industry
leadership among some of the key
To ensure that capital markets in 2020 are participants and users of capital markets.
able to function efficiently and freely to
provide financing to corporations and returns Before we continue advocating for the
to investors, both participants and users will changes that must occur, we need to take
need to take on a leadership role within the a step back to understand the potential
capital markets ecosystem. Being reactive composition of the new equilibrium. We need
to regulators, public opinion and market to consider that between now and 2020 there
idiosyncrasies is no longer an option. is a possibility of certain events happening
that could have a substantial impact on
Participants, as well as users, need to address the future trajectory of the capital markets
the reputational damage that the financial industry. The following are just a handful of
services (FS) sector has suffered through scenarios to consider:
a fundamental transformation of conduct
and culture. Risk, regulation and capital all •
As the full consequences of new capital,
need to be managed holistically – taking into liquidity and other measures emerge,
account implications to business priorities firms realise that new regulation is
and operating constraints. Meanwhile restricting the ability to generate
the business model needs to be refocused profitable business. Negative impact on
to emphasise the clients and their needs. economic growth also becomes apparent.
Given the business strategy, the operating As a result governments consider the cause
models should be re-engineered to enable of economic stagnation. If regulation can
simplification and reduction of costs. be demonstrably shown to be the cause,
the regulatory tide may begin to recede,
1 Bank of International Settlements (http://www.bis.org)
with rules loosened at both global and
local levels. PwC Capital Markets 2020 9
•
A crippling global cyber attack will to erode the real value of the debt as
shut down global markets for some well as wages, wreaking havoc on capital
period of time, prompting a new markets. This will eventually lead to
round of government interventions an imposition of even harsher austerity
and unprecedented focus on cyber- measures to prevent hyperinflation and
crime, terrorism and their perpetrators, panic in a number of G20 countries.
including state actors. From a trust
perspective, a series of cyber attacks A combination of reduced bank-lending
•
on systemically important FMUs would capacity, the unprecedented need to build
have harmful consequences for capital urban infrastructure and the requirements
markets participants. Depending upon the of investors to earn greater returns will
perpetrators, this could lead to a serious fuel a new capital markets boom and help
fragmentation of the global financial revive securitisation markets, as local
system, which is already underway as financial institutions and capital bases
we speak. cannot support this activity on their own.
•
The majority of the technology and •
A convergence of old-age population
operational infrastructure will be growth and rising healthcare costs
operated not by the banks but by financial vis-à-vis the lowering of uninsured
technology (FinTech) companies, rates in Western economies will drive
outsourcers and industry utilities (both capital markets innovation, as insurance
bank and publicly owned), bringing companies and governments look for
both new management and regulatory new ways to offset risk. Combined with
challenges, along with cost and efficiency the growing need to address unfunded
benefits. liabilities (e.g. pension, etc.), investment
banks will lead the development of new
•
A large macro and idiosyncratic event and creative investor-based solutions to
that hurts global economies will cause the fund these challenges.
failure of a SIFI or FMU, prompting a re-
evaluation of systemic risk concentration •
The overregulation of financial markets
as well as measures to manage these risks. will stimulate significant additional
growth in the shadow banking system,
As governments meet mounting resistance
• which will further magnify growth for
to austerity measures (designed to address monoline finance companies, hedge funds,
sovereign debt payment shortcomings), private equity firms and other buy-side
key central bankers will agree to tolerate players. Traditional financial institutions
multiple years of higher inflation in order will lose share to non-traditional players.
10 PwC Capital Markets 2020Within shadow banking, competition will
Figure 5: Top five scenarios survey participants saw as being most likely to occur
mount and the classic result will unfold:
risk will be mispriced, poor decisions will
be made, and as a result debt will accrue
1st
at an accelerating pace. This will lead to
another series of failures and potential
government intervention and regulation
of the sector. A crippling global cyber attack
Given the transformation that is occurring,
banking and capital markets executives
2nd
will need to understand how global trends
impact the industry in order to develop
New regulation restricting ability to
their winning strategy. They realise the
generate profitable businesses
importance of having a view of where the
industry will be in 2020. A crippling global
cyber attack, new regulations restricting the
3rd
ability to generate profits, and/or a large
macro idiosyncratic risk that hurts global
economies are thought to be the more likely Loss of market share to
scenarios, as indicated by the executives in non-traditional players
our survey, and these may alter the industry’s
current trajectory. What is absolutely clear,
given the wide range of potential outcomes,
4th
is that developing an analysis of the impacts
of potential future scenarios and their
likelihoods will be essential. A large macro idiosyncratic risk that hurts
global economies
In Section 2, we address these questions
and concerns, and consider how global
macro-trends will impact the industry.
5th High inflation due to central bank policies
Source: PwC Capital Markets 2020 Survey
PwC Capital Markets 2020 11Impact of global macro-trends on capital markets Envisioning the future of capital markets – like forecasting the winning and losing stocks of the equity indices – is an extremely arduous task. So when we began thinking about the industry in 2020, we first had to characterise the current trends and transformations occurring globally. It was obvious to ground our assessment in the global macro environment. Additionally, we leveraged PwC’s extensive proprietary research and the Capital Markets 2020 survey to help shape our perspective. Finally, using PwC’s Project Blue Framework, we envisioned potential scenarios and disruptors that could shift the industry off its current path. We then leveraged the global macro-trends to shape and structure our perspective on capital markets in 2020. It is highly likely that the trends identified will be the driving forces behind any changes in the capital markets industry. This context should serve as a guide, for both capital market providers and users to navigate the uneven landscape of tomorrow. 12 PwC Capital Markets 2020
Four global macro-trends will be crucial 3 Technology – an enabler of
in shaping the new equilibrium for capital change
markets in 2020: global instability, the rise Technology will be the disruptive force for
of state-directed capitalism, technology the next five years, permeating innovation
and War for resources. Beginning with this and change. We will see it as a disruptive
top-down perspective not only helps to enabler of new products, services,
better understand where capital markets business models and operating structures,
will be in 2020, but also to structure the as well as a catalyst for the entry of new
expected microdynamics and scenarios for players which we would not have seen just
the future, which we describe later in this five years ago.
paper. Furthermore, it should be noted that
the drivers of these trends range from the 4 War for resources – the filling
regulatory environment, fiscal pressures, of the gaps
and political and social unrest, but the Scarcity of resources is of paramount
impact while far-reaching, affects users and importance for the next half century,
participants at a fundamental level. contributing to future geopolitical
tensions. Capital markets will help to
1 Global instability – the winds alleviate some of these tensions through a
of change reallocation of resources to where they are
A polarised world, with its tensions most needed.
and fragmentations, will create more
balkanised capital markets, reshaping In the following section we navigate the
participant business models and creating trends above in depth and we consider
opportunities for new players (e.g. users scenarios relevant to the capital markets
of capital markets) to evolve their roles industry in 2020. As mentioned, PwC’s
within the ecosystem. proprietary Project Blue framework has
helped guide us in identifying the key themes
2 Rise of state-directed and drivers of change within capital markets.
capitalism – regulation
reshaping the industry
Through 2020, the consequences of
today’s policies and regulations will lead
to a more fragmented and regionalised
financial markets ecosystem. Players will
need to adapt to understand and navigate
local regulations.
PwC Capital Markets 2020 13Project Blue Figure 6: Project Blue – Framework and impact on banking landscape Project Blue draws on the experience of the
PwC global network and has been developed
framework through interaction with FS leaders around
the world. It provides a framework to help
Global instability
Many industry professionals industry executives organise their assessment
Adapt
of a world in flux, debate the implications for
(particularly in the West) are Regulatory environment Fiscal pressures Political and social unrest
their business, rethink their strategies and,
focused on adapting to global if necessary, reinvent their organisations.
instability; however, the market is • Population growth • Changing family structures
Seeing the future clearly, being first to adapt
changing and opportunity exists
Demographic
discrepancies • Belief structures strategies and business models and breeding
change
• Ageing populations a culture that shapes, rather than reacts to the
for those who see it. changing business environment will be the
Project Blue Framework
• Disruptive technologies • Technological and scientific building blocks of a sustainable competitive
Technological
change
impacting FS R&D and innovation advantage in the future.
• Digital and mobile
As such, the Project Blue framework (see
Social and behavioural
• Urbanisation • Changing customer Figure 6 opposite) considers the major trends
• Global affluence behaviours – social media
change
• Talent • Attitudes to FIs
that are reshaping the global economy and
transforming the behaviour of consumers,
Plan
businesses and governments. These are
Rise and interconnectivity • Economic strength • Capital balances
of the emerging markets • Trade • Resource allocation the fundamental underlying drivers, but
(SAAAME) • FDI • Population business opportunities may be defined by a
combination of these trends.
• State intervention • Investment strategies
Rise of state-directed This proprietary framework has helped
• Country/city economic • SWFs/development banks
capitalism
strategies guide us in identifying the key themes and
drivers of change within capital markets. The
War for natural
• Oil, gas and fossil fuels • Ecosystems general framework makes sense of the capital
• Food and water • Climate change and markets world through seven influential
resources*
• Key commodities sustainability
macro themes or drivers of change. Although
each trend is important, for discussion here
*P
rimary impact on capital markets and commercial banks, but with secondary and tertiary impacts on retail
consumers
we have picked the four that have shaped our
thinking the most when it came to the future
of capital markets. Where we think the trends
are too uncertain to decipher, we explore the
potential sources of disruption and leave you
with leading questions to consider as you
prepare for 2020.
14 PwC Capital Markets 2020Global instability – Let us start off our discussion with what
we believe is highly probable in the world
regions are only beginning to be
understood; the full impact on the global
•
In the short- to medium-term, capital
markets players will continue to
the winds of change of capital markets through 2020; there will real economy will be felt over the next five experience staccato-like volatility, as
be quite a bit of uncertainty, instability and years or so. various markets undergo surges and
volatility, both in capital markets, and in retreats. Subdued average economic
the world at large. Over two-thirds of our Evolution of fiscal policy – many
• growth and government-imposed low
surveyed respondents agree or strongly agree governments will inevitably be forced interest rates have resulted in global
that there will be increased instability in to abandon fiscal stimulus programmes investors desperately seeking alpha –
the capital markets over the next five years. and raise interest rates, potentially chasing ‘flavour of the day’ instruments,
To date this instability has been primarily undermining fragile stability and and then abandoning them just as quickly.
due to the aftermath of the Financial Crisis throwing markets into a state of volatility. Both institutional and retail investors
of 2008–2009 and more recently, due to have recently increased risk exposures
•
Political and social unrest – a range of
the significant drop in oil prices. Moving and shifted more assets to alternatives.
factors including fiscal austerity, scarcity
forward we see macro-geopolitical trends The early 2015 drop in oil prices has been
of resources, corruption, social media
and the increasing use of financial market another source of volatility and sovereign
and religious conflict will continue to
access as a policy instrument contributing stress and is likely to continue for the
challenge existing political structures,
to future instability. An overwhelming foreseeable future. If some of these asset
contributing to global economic and
majority of executives in our survey (93%) classes or specific governments themselves
market instability.
believe there will be continued geopolitical experience troubles, sovereigns, with
tensions through 2020 and countries such Through the following scenarios, we looming fiscal pressures, may have
as Russia, Iran, Syria and the Middle East will explore the transformations that are difficulties in softening the blows, given
region could pose the greatest risk globally. likely to occur within the capital markets that interest rates are at an all-time low
We believe that four structural factors will ecosystem – to capital markets participants and sovereign debt is at historic highs.
be particularly important in driving global (e.g. broker-dealers, custodians, and market
instability through 2020: •
Given continued geopolitical tensions,
utilities) and to users (e.g. hedge funds,
capital markets participants and users
mutual funds and other buy-side players).
•
Continued geopolitical tensions – the will need to be vigilant regarding
In many cases volatility and instability will
conflicts between sovereign nations will sovereign risks. Over the past few years
create an impetus for the transformation of
continue to rise, heightening the risk we have seen numerous examples of
player roles and business models, creating
that certain countries will be restricted spikes in sovereign risk, ranging from
opportunities for some and challenges for
or entirely cut off from access to capital the Greek debt crisis to the United States
others. In light of these considerations, we
markets and financial infrastructure. flirting with a technical default. The
believe that the nature of the capital markets
developing world has not been immune
•
Evolution of severely balkanised ecosystem will be reshaped in the following
either, stricken in some places by internal
regulation – the implications of ways:
unrest and in others by cross-border
regulation and their divergence across tensions. Our survey participants agree
PwC Capital Markets 2020 15that this should continue to be a focus, hub bifurcation between Hong Kong as other non-bank financial intermediaries
Global instability – with two-thirds of our survey respondents
noting that structural changes related
and Singapore, as participants and users
of capital markets seek to diversify and
will play a critical role. Meanwhile
regional and national banks will have a
the winds of change to political and social unrest will drive hedge their bets in the region. pivotal role as well. They will fill gaps by
global instability through 2020. Leading providing specialised and tailored services
(continued) players on both sides will need to manage • B
usiness models of regulated banks to the under-served segments, such as
sovereign risk on multiple dimensions: will increasingly shift from principal middle market corporates and SMEs.
firstly by optimising their global to agent in the face of the rising cost
footprint, taking into account geopolitical of capital and regulatory restrictions. •
As costs continue to rise and revenues
considerations; secondly by managing We have seen this start to happen, as remain subdued, the market will face
their entity structure; and thirdly by participants have drastically cut inventory the ‘Jaws of Death’ (i.e. returns that
deeply understanding local specifics where in fixed income and have pulled back from barely surpass the hurdle rate cost of
they have exposure and then carefully principal activities. Through 2020, we capital). The pressures faced by market
monitoring associated sovereign risks. will see this trend accelerate and business participants will not be even. Within
models will noticeably shift; participants our Capital Markets 2020 survey, 43%
• Liquidity pools will continue to will reduce scale and introduce agency- of executives believe that only a few
aggregate in established global driven innovation, such as dealer-owned capital markets players will fully master
financial hubs. An Asian hub is likely trading platforms (“Ebay-ification” of redefining their business models to
to gain prominence. New York and trading desks), cross-player consortiums, generate mid-teen returns on equity, while
London are today’s two main epicentres collateral optimisation, and riskless 40% believe that some early adopters will
of capital market activity, handling principal through optimisation of master the objective of redefining their
nearly 45%2 of global capital markets available global inventories. The effects business model. As our survey points out,
activities. London and New York provide of such changes will be broad and will not all players will be affected equally,
a combination of stability, transparency, impact more than simply regulated banks, as each will face unique challenges.
and rule of law that will continue to lead creating opportunities for new entrants Larger institutions will be challenged
the global financial ecosystem through (e.g. FinTech firms and market utilities). by heightened regulatory scrutiny that
2020. However their dominance may be stems from G-SIB3 or D-SIB4 designations.
questioned by the continued rise of the Within financing, we will see similar Some may be forced to pare down certain
Chinese economy and the Asia–Pacific scenarios playing out as participants activities or hold extra capital. Meanwhile,
region as a whole. 76% of our surveyed continue to reduce lending capacity to smaller institutions will be hard-pressed
capital markets executives agreed, non-priority client segments. Through by scale limitations: challenged to on
expecting a financial centre rivalling 2020, we will see the re-emergence of the one hand, absorb rising compliance
London and New York to emerge in the capital markets-based alternatives to bank requirements and, on the other strip out
2 Based on a ratio of domestic market capitalisation of years through 2020. They are divided lending (e.g. greater use of securitisation fixed operating expenses.
stock exchanges of New York and London and global
on the most likely location: Hong Kong and direct access to markets). Users of
market capitalisation
3 Global systemically important banks (28%); Shanghai (20%), Tokyo (19%) capital markets such as pension funds,
4 Domestic systemically important banks and Singapore (18%). We see a financial hedge funds, private equity firms, as well
16 PwC Capital Markets 2020On the revenue side, most players, • Challenges faced by traditional capital and potentially expand into activities opportunities will be vast and will come in
whether large or small, will continue markets participants will create that were hitherto dominated by capital both traditional and new forms of capital
to rethink their business models, given growth opportunities for others. While markets participants. sourcing, including: (i) partnerships
the regulatory-driven changes to the regulatory reform and technological between participants and users for
fundamental economics of certain asset advances in particular have challenged • Risk taking and capital facilitation will sourcing and funding opportunities;
classes. Some of these changes will traditional participant models, these increasingly move into the shadow (ii) return of ‘safe’ securitisation, aided
include transition to agency models (as dynamics have created opportunities banking system. Like the balloon effect, by revived government interest; (iii)
we mentioned earlier), or building more for other institutions. Particularly, we risk when squeezed or reduced in one sovereign wealth funds, private equity,
client-centric organisations. Regardless anticipate four types of players emerging sector of the capital markets ecosystem, hedge funds, as well as non-financial
of the path that an organisation chooses, as winners in 2020: (i) FMU providers, will emerge in another. We anticipate that entities providing loans to credit squeezed
these changes will be critical to position such as clearing houses, market utilities, for regulated capital markets participants but high-grade corporates and specific
the business for longer term success. and exchanges as they expand beyond reduced risk-taking and financing projects; (iv) crowdsourcing and peer-to-
However over the short-term, in many their current offering set, diversify activities in the aggregate will shift them peer lending for SMEs and middle-market
ways the macroenvironment will continue vertically and consolidate horizontally; to a different set of players and create start-ups; and (v) BDCs5 and REITs.
to dictate annual top-line. (ii) electronic trading platforms that risks in new and perhaps unexpected By 2020, there is a strong likelihood
capitalise on traditionally voice only places. As such, assuming no significant that these new providers of capital and
On the cost side, there is still much to do. markets (e.g., fixed income); (iii) financial changes to regulation, shadow banking structures that support them will have
We believe that aggressive outsourcing, technology companies that are able to will continue to expand into the capital experienced a cyclical downturn in
consolidation and streamlining of capitalise on participants’ and users’ drive markets arena, growing through its the credit cycle. We believe that when
technology and organisational models to simplify and streamline; and (iv) new service of taking on otherwise avoided this downturn comes, the impact of
will allow industry leaders to operate at (shadow banking) entrants acting as risk by regulated institutions. these stresses will reveal both sources
about 50% of the current cost per trade. capital markets participants (more on that of strength and areas of improvement,
However in our view, despite all of these New entrants such as PE firms, hedge
in the next scenario). relative to our post-financial crisis global
measures the industry will not revert to funds and asset managers as critical
financial architecture.
the 2006–2007 highs of 20%+ RoEs. Each of these players will be able to sources of capital and are looking for ways
Rather, the industry will settle around capitalise on not only the changing market to interact directly with the consumers of
pre-boom returns of 12–14%. structure, but the changing business capital and at times, without using banks
models of traditional broker-dealers that as intermediaries. These players will
are looking to shed non-profitable and/or continue to participate in the primary
operationally expensive activities as and secondary markets, lowering trading
well as optimise their use of capital. costs and increasing overall liquidity.
They will be able to carve out niches We anticipate that the extent of financing
5 BDC – business development company; REIT –
real-estate investment trust
PwC Capital Markets 2020 17Rise of state-directed We have mentioned the effects of state-
directed capitalism and regulation upon
•
In contrast to the original G20
intention of eliminating ‘too big to
will be overcome by local regulatory
constraints, such as US-driven foreign
capitalism – capital markets participants, particularly fail’ institutions and dispersing risk bank regulation, the Vickers rule in the
in the regulated banking sector. One of the in the financial system, regulation UK, and Switzerland’s FINMA6 proposal
regulation reshaping impacts has been a search among nations will likely result in an unforeseen for rules governing non-Swiss banks.
the industry for increased control over domestic financial concentration of certain types of risks. In addition to curbing cross-border
systems and institutions. Nations have The G20’s intention of reducing risks financing activities, changing regulation
undertaken prescriptive rule-making, as will lead to unintended consequences will impose friction costs for the capital
they learned that a global banking system that will become more apparent with markets industry, driving a retreat of
is local in a crisis. As a result, regulation time. By 2020, there will be fewer capital liquidity from certain markets, especially
has shifted focus even more to promoting markets participants who will be able to emerging ones. In turn, banks will focus
domestic policy agendas (e.g. fighting successfully meet regulatory hurdles with on providing intermediation services
terrorism and exerting geopolitical power; sufficient economies of scale to maintain in key markets where liquidity is deep,
supporting housing markets; ensuring profitability on a cross-border basis. Mid- minimal use of balance sheet is required,
growth in preferred segments) and tier universals (e.g. regional banks) will and sufficient scale is needed to overcome
protecting sovereigns, rather than facilitating find room to expand in domestic markets profitability hurdles.
the efficient movement of global capital while meeting local regulations, but
flows. Although much of the regulation their ability to serve international clients •
Access to local financial markets will
and policy is here to stay, the proverbial will be constrained as costs of cross- become more restricted to cross-border
tide may begin to recede through 2020. border compliance will be just too high. institutions. Geopolitical uncertainty
Of course, major changes will only occur This regulatory overhead, rather than and the balkanised nature of financial
if other policy measures (e.g. monetary) promoting a more diverse banking sector, regulation will continue to swing the
fail to deliver economic growth and is forcing banks to further consolidate pendulum away from the globalisation of
regulation can be demonstrably shown everywhere, even in places that have financial markets. Traditionally restrictive
to be the cause. Although such a scenario traditionally had a significant number markets such as China, India and Korea
is not likely, we do anticipate a degree of of smaller banks, such as the United will be joined by others (even developed
regulatory harmonisation across regimes States and Germany, leaving a more countries) that limit the presence of
and the softening of some of the more concentrated banking sector behind. foreign institutions through local policy
onerous aspects of the regulatory agenda as and subtle preferences for domestic
memories of the financial crisis fade. Such • T
he playing field will shift from institutions. Under such restrictive rules,
trends in our view have a number of years global to local. National and regional multinational players will be forced to
to play out and will impact the nature of the institutions will dominate. Banks, either increasingly regionalise operations
industry in 2020 and beyond: especially in the EU, have been in retreat and seek local partners to intimately
to their home markets since the crisis, understand and comply with local rules,
6 FINMA – Swiss Financial Market Supervisory
and we expect this to continue. Historical or exit these markets altogether. Cross-
Authority advantages, such as economies of scale, border investment and capital flows will
18 PwC Capital Markets 2020lag, particularly to emerging financial •
State-backed banks will peak in terms
markets, as access remains restricted, of importance, with governments
either through direct regulation (e.g. influencing more through policy than
limitations on foreign ownership) or more direct ownership. The last three decades
indirect rule-making (e.g. US enhanced have seen the rise of state-owned banks
prudential standards rules). Interestingly, particularly in emerging economies, as
the eurozone is moving against this global governments have sought to channel
trend with the introduction of the Single credit, based on policy objectives. The
Supervisory Mechanism and other steps financial crisis increased government
outlined in the recent EU Green Paper, ownership as bailouts took place in many
“Building a Capital Markets Union”. We developed markets. However through
expect this to drive increasing movement 2020, the continued wind-down of
towards greater use of the single passport government stakes in banks of developed
concept within the zone to reduce overall economies, combined with the adverse
regulatory compliance costs. impact of rising non-performing loans,
capital constraints and weaknesses
• The size of a country’s banking sector exposed by subdued growth in emerging
will be more correlated with GDP. With markets, will diminish the importance
the reversion of the globalisation trend, of these enterprises, forcing them to
smaller countries with relatively large scale back their activities. Ambitions
institutions will have shrunk their banking of global prominence on the capital
sectors, relative to their GDP, through a markets stage will be curbed, with state-
combination of asset reduction, business backed banks returning to local pressing
sales and write-offs. Focus will shift away agendas, realigning internal capabilities
from global proprietary trading to client- and pursuing more conservative
driven businesses, which will increasingly growth trajectories that are rooted in
also be more local. Financial performance the core needs of their local clients and
of capital markets players will be linked macroeconomic fundamentals. Instead,
to a greater extent to domestic demand governments will increasingly look to
and domestic growth dynamics. Those policy – both in the form of regulation and
institutions that historically drew a engagement of the regulators – to control
significant portion of their revenues from and shape the activities of capital markets
international operations will either return participants and users.
to more of a domestic focus – consequently
shrinking their international breadth – or
turn significant overseas businesses into
subsidiaries to further insulate these
activities from the home country.
PwC Capital Markets 2020 19•
Regulation propelled a significant rise along the entire capital markets value
Rise of state-directed in the role of FMUs. As a result, FMUs
will be well-positioned and at the heart
chain. As such, FMUs and the entities that
own them will be both highly acquisitive
capitalism – of almost all capital markets investment and open to new partnerships, looking to
flows. In response to new regulation, adjacencies (e.g. reference data or trading
regulation reshaping FMUs have expanded and new players technology) to complement core offerings
the industry will emerge. While the introduction of and create ‘mutualised’ service models.
new utilities and services is designed to
(continued) create greater transparency and provide •
Leading institutions will be in a position
for risk reduction benefits such as netting to practice more proactive regulatory
of exposures, it does lead to a shift and, management. Twelve years after the
at times, arguably, a concentration of financial crisis, the relationship between
risk into these entities. By 2020, we will banks and regulators will have reached
see a significant increase in the types a new equilibrium as banks more fully
of available utilities, expanding from integrate policy objectives of governments
mandated FMUs – e.g. trading, clearing into their day-to-day business. Leading
and settlement activities – to market banks will take a comprehensive approach
consortiums that facilitate and lower to managing regulatory change – both
the cost burden of core functions such as internally and externally. Internally they
client onboarding, regulatory reporting will look at integration strategically,
and other non-strategic activities. Many, managing programmes holistically,
if not most of these emerging utilities will regularly checking interdependencies
be owned by different consortiums of and validating the implication on their
financial institutions, existing FMUs and business models. Externally banks
financial technology players. will continue to engage with their
regulators in meaningful dialogue, as
In response to these dynamics we expect well as facilitate lobbying efforts where
significant activity around feasibility necessary.
analyses and the eventual launching of
a number of new ventures. Eventually
we see the consolidation of a number of
these entities in order to reach acceptable
scale to operate efficiently in the new
environment. In fact, we do not discount
the possibility of the formation of a
network of regional mega-utilities and
FinTech players that provide infrastructure
20 PwC Capital Markets 2020Technology – an For the past 50 years, technology has
changed society in unpredictable ways.
centralised view by geography, product and
client. Secondly, age is a major challenge:
More than three-quarters of our surveyed
executives indicate that they will need an
enabler of change As the changes in technology accelerate, so outdated systems are often not compatible efficiency ratio of 50% or less to remain
will the impact on capital markets, both from with the current business and regulatory competitive for the longer term. Use of
the perspective of the markets themselves environments, requiring significant upkeep; big data and analytics will be paramount
and the technological platforms of capital a large chunk of legacy systems will have to gaining advantages in increasingly
markets participants and users. In terms of to be replaced, necessitating a substantial competitive markets, either to guide better
the markets themselves, we could write an technology spend sooner rather than investment opportunities and improve
entire paper on the impact of technology later. While seemingly daunting, tackling customer service or to better manage
in terms of the creation of new companies, these issues will require and certainly spur operations and risk through the organisation.
financing opportunities and on the prices of innovation.
basic commodities. The impact of fracking, Of course, this will only be possible if
for example, on the oil markets and capital Importantly, the impact of technological regulation does not continue to ring fence
markets as a whole is a great example change on the capital markets industry local operations in the hopes of greater
of how new technology is creating both will be different in comparison to the retail regulatory control. Regulators will need
opportunities and disruption in the capital and commercial banking sectors, which as to become comfortable with technology-
markets themselves. New technology-driven mentioned in PwC’s Retail Banking 2020 enabled business transformation.
companies in nearly every industry will paper, is focusing on bolstering analytical Meanwhile, regulated firms will need to
continue to drive M&A and IPO opportunities capabilities and mobile access to better earn the trust of the regulators in this area
across the board and present challenges to serve and understand the customer. The vast by working together to mitigate any crisis
the incumbents. majority (93%) of our surveyed respondents driven concerns around areas such as cross
agree that it is important for their border operations and third-party vendor
From the perspective of capital markets organisations to use technology as a tool to management.
participants and users, past changes gain a competitive advantage, as well as to
have largely affected the trading side of facilitate operational and regulatory change. How each player responds to the changes
businesses, but left the way that capital Furthermore, nearly three-quarters of the in the technology landscape will depend
markets players relate to their clients, respondents expect to invest more than on its strategic objectives as well as legacy
manage their internal operations and access 11% of their capital budget into technology. technology considerations. Regardless, we
their own data, largely untouched. Within capital markets, the notable effect believe that cost reduction opportunities
will be the complete transformation of the and pressures to stay ahead of market
Over the coming years financial institutions cost base and business model, as well as the trends will force capital markets players to
will finally be forced to address two rise in prominence of industry utilities to stretch towards new partnerships in order
technology-driven challenges that reduce costs and drive efficiency. to look for efficiencies from third-party
necessitate the need for disruptive thinking. services, such as cloud computing and
Firstly, many players have a huge dispersion reference data management. As a result the
of current technology platforms, with no financial technology vendor market will be
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