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 ...
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?

Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
Welcome                                                                   3
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
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
How relevant will New Zealand be on the global financial stage in five years’ time?

From a New Zealand perspective, capital          This paper covers the future of capital            develop the right balance between investor
markets in 2020 will look vastly different to    markets, a subject of increasing focus since       and system protection as well as the need for
what they do today. Many have predicted a        the financial crisis. The vitality of capital      markets to function freely and efficiently in
shrinking capital markets landscape and the      markets is critical if the world is to return      order to support economic growth.
fall of the traditional financial powerhouses,   to an environment of sustainable economic
such as London, and this would not bode          growth. Moreover, effective capital markets        As a capital markets participant,
well for New Zealand.                            are crucial to the allocation of credit and        understanding the future is imperative.
                                                 investment.                                        Otherwise, how can you best determine
We have a different vision for 2020 – one                                                           whether to invest in a certain area, grow or
where the traditional financial centres          Looking to 2020, capital markets will play         reduce your footprint in a country, or launch
enhance their positions as the world seeks       an increasingly important role in providing        or discontinue a particular product, business
certainty around questionable geopolitical       everything from financing to the world’s           or strategy? As a user of capital markets, you
environments. Given New Zealand’s                most innovative companies to generating            will need to develop a view of the types of      Sam Shuttleworth
                                                                                                                                                     PwC New Zealand
standing, this should ensure we are not          the investment returns needed to support an        products and financing options which are         Banking and Capital Markets Leader
wiped off the global stage. However, the         ageing population in the developed world.          available to support your business.              T: +64 9 355 8119
landscape where New Zealand banks                                                                                                                    M: +64 21 976 949
operate will undergo major change as a           Our survey of top capital markets executives       We hope you find our report insightful.          E:
result of innovation, customer requirements,     from around the globe clearly demonstrates         Please feel free to reach out to me or your
technology and the emerging shadow               that leaders believe it is important to have       usual financial services partner to start
banking system.                                  a better understanding and a more clearly          the conversation.
                                                 articulated vision of their place in the capital
                                                 markets industry in 2020 than they do today.
                                                 Furthermore, other stakeholders such as
                                                 policymakers and regulators also need to
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...

We believe that capital markets in 2020 will look very different than they       As global interconnectivity and ubiquitous        Today’s challenges
do today. Based on feedback from clients, many have gloomily predicted           access to financial markets increase, we see      The challenges for capital markets players
                                                                                 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                                                             the industry, although many players are
                                                                                 which includes justifying their social utility.
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
                                                                                                                                   surveyed executives who cite top challenges
                                                                                 need to relentlessly execute against today’s
                                                                                                                                   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
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
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
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
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
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

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%
poses a challenge to organisations as only a     partnership opportunities and the remaining                        financial assets

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
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
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
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
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


             Scenario 1                             Scenario 2               Scenario 3                       Scenario 4               Scenario 5

  Source: PwC Capital Markets 2020 Survey

8 PwC Capital Markets 2020
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
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     • A
                                                     s 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 (
                                                    with rules loosened at both global and
                                                    local levels.                                                          PwC Capital Markets 2020 9
Capital Markets 2020 Will it change for good? - Are capital markets participants and users prepared and capable to reimagine the future, innovate ...
• 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.

                              • T
                                 he 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     • T
                                                                                 he overregulation of financial markets
                                as well as measures to manage these risks.      will stimulate significant additional
                                                                                growth in the shadow banking system,
                              • A
                                 s 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 2020
Within 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

  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

will need to understand how global trends
impact the industry in order to develop
their winning strategy. They realise the                                                     New regulation restricting ability to
                                                                                             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

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,

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 11
Impact 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 13
Project 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

                                                                                                                                                                       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
                                                                                                      • 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
                                                                                                         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
                                                                                                      • Talent                       • Attitudes to FIs
                                                                                                                                                                       that are reshaping the global economy and
                                                                                                                                                                       transforming the behaviour of consumers,

                                                                                                                                                                       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
                                                                                                         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
                                                                                                      • Key commodities                 sustainability
                                                                                                                                                                       macro themes or drivers of change. Although
                                                                                                                                                                       each trend is important, for discussion here
                                        * Primary impact on capital markets and commercial banks, but with secondary and tertiary impacts on retail
                                                                                                                                                                       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 2020
Global 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 15
that 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.       • A
                                                                                                                                                              s 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%
                                                           • L
                                                              iquidity 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          ithin financing, we will see similar
                                                                                                             W                                               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                                                         and direct access to markets). Users of
   market capitalisation                                     on the most likely location: Hong Kong
                                                             (28%); Shanghai (20%), Tokyo (19%)              capital markets such as pension funds,
3 Global systemically important banks
                                                             and Singapore (18%). We see a financial         hedge funds, private equity firms, as well
4 Domestic systemically important banks

16 PwC Capital Markets 2020
On 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                                                            ew 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 17
Rise 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,
                                                                                                    and we expect this to continue. Historical       or exit these markets altogether. Cross-
6	FINMA – Swiss Financial Market Supervisory
   Authority                                                                                        advantages, such as economies of scale,          border investment and capital flows will

18 PwC Capital Markets 2020
lag, 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
• T
   he 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 2020
Technology – 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 serve   earn the trust of the regulators in this area
                    across the board and present challenges to      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

                                                                                                                                       PwC Capital Markets 2020 21
a burgeoning growth area, something that           componentise operating costs, as well as
Technology – an               is already becoming apparent as over the
                              last 12 months venture funds in the financial
                                                                                 to increase the reliability of enterprise
                                                                                 IT. By 2020, it is quite possible that we
enabler of change             technology space have more than tripled.           could see for example nascent utilities
                                                                                 in areas such as Know Your Customer
(continued)                   Predicting which technological innovations         (KYC), anti-money laundering (AML),
                              and changes will be the most disruptive            surveillance monitoring and valuation
                              is difficult, if not impossible. However we        services operating on utility-like platforms
                              believe that whatever changes may occur            for a large number of institutions. Beyond
                              they will be far-reaching, giving rise to new      2020, we will see a number of operations
                              products, value drivers and players across         and technology carve-outs run as separate
                              capital markets. For example, it is unclear        companies that provide specialised
                              how the rise of Bitcoin and electronic             services to multiple players across the
                              currency in general will impact the foreign-       capital markets landscape. While the
                              exchange markets and the payments business         challenge will be to maintain control in a
                              overall. These changes of course affect some       cost-efficient manner, we believe that the
                              markets and geographies more significantly         entire industry will benefit, due to greater
                              and faster than others.                            transparency and better risk management
                                                                                 – something that regulators will favour.
                              In 2020, we consider a handful of scenarios:
                                                                                 Multi-asset platforms will change the
                              • O
                                 perations and technology will form
                                                                                 client experience. The business models
                                the basis of the next generation of core
                                                                                 of traditional capital markets participants
                                vs. non-core capabilities, giving rise to
                                                                                 will go through a fundamental shift with
                                the ‘utilisation’ of these functions. A
                                                                                 the introduction of multi-asset class,
                                combination of declining revenue pools
                                                                                 integrated and in many cases, broker-
                                and higher compliance costs is creating an
                                                                                 neutral platforms. The single-dealer/
                                urgency to solve deep-rooted operational
                                                                                 asset class platforms for each product
                                inefficiencies in a fundamental way.
                                                                                 silo and large data warehouses at the
                                Leading players will ultimately need
                                                                                 back end to consolidate risk, financial
                                to address these issues in a more
                                                                                 and client data are unsustainable. The
                                revolutionary rather than evolutionary
                                                                                 new platforms that emerge will provide
                                way; both capital markets participants
                                                                                 capital markets participants and their
                                and users will look increasingly to spin
                                                                                 clients (capital markets users) with a
                                off or carve out their operations and
                                                                                 single source for many of their trading
                                technology functions that do not provide
                                                                                 and risk management needs. At the
                                a measurable competitive advantage.
                                                                                 same time the classic trader model will
                                Virtualisation or ‘utilitisation’ has become
                                                                                 continue to be marginalised, ushering in
                                a widely accepted way to reduce and
22 PwC Capital Markets 2020
new front office functions, increasingly        • H
                                                      arnessing big data will be paramount        •	
                                                                                                     Technology risk shifts from managing
   consisting of a smaller group of IT-savvy         to remain competitive in capital                operational and implementation
   traders, supported by an army of data             markets. Historically the capital               failures to controlling cyber risk.
   scientists and technologists. In terms            markets industry has faced challenges           Historically the capital markets
   of players, there will be significant flux        in harnessing data – both structured            industry has focused the vast majority
   and disruption with new, unexpected,              and unstructured. Within institutions,          of its technology risk activities on
   entrants such as technology-led players.          data is typically not managed well across       new infrastructure launches, change
   Technological innovations will also               business and geographical units, leading        management and operational
   allow firms to equip their sales teams            to an inordinate amount of time spent on        performance. While these activities
   and managers with increased amounts               conducting reconciliation activities and        will continue to remain important in
   of information, predictive analytics and          creating unmanageable data warehouses.          2020, the emergence of cyber risk is a
   decision-making support. Such additions           Across institutions, participants, although     potentially mortal threat for all capital
   to the front office will ensure an enhanced       recognising the power of data, struggle         markets participants and users. As we
   client experience.                                to leverage it in meaningful ways and in        have seen with recent hacker-driven
                                                     a timely fashion. Forthcoming advances          thefts and disruptions, nation–states,
  Technological innovation will                      in technology (such as wider adoption of        criminals and terrorists are devoting an
  disrupt capital markets participants’              cloud computing and predictive analytics)       increasing amount of resources to disrupt,
  competitive advantages. As we have                 will enable speedier organisation of            steal from, and manipulate the capital
  discussed in the “Global Instability”              structured data and will allow large pools      markets. As world instability grows in the
  section, regulation is causing disruption          of unstructured data (e.g. blogs and social     years leading up to 2020, managing cyber
  and uncertainty. However, it is also               media) to be indexed and searchable in          risk will not only be a matter of national
  creating opportunities for new players.            shorter periods of time. Sophisticated          security, but one of the greatest risks
  In many ways technology is making it               analytics tools will be created to enable       facing free and fair capital markets.
  possible for new entrants to compete or            organisations to analyse vast stores of big
  become additive to existing players and            data easily and quickly, focusing on the
  value chains – examples include the use            importance of clean data and using fewer
  of artificial intelligence to displace ‘voice’     resources in the process. As such big data
  -dominated markets and alternative                 will serve as an important platform for
  research providers that leverage                   knowledge, insight and ultimately, a
  unstructured data to generate deeper               data-enabled competitive advantage that
  insights into existing trends and market           can be monetised across markets.
  opportunities. In short, technology will
  touch and transform business models
  in a vast array of areas, such as data
  management, market surveillance, cyber
  security, regulatory reporting, funding
  and alpha capture.

                                                                                                                    PwC Capital Markets 2020 23
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