The primary focus of technology investment for financial market participants next year will be on improving internal IT infrastructures to comply with new regulations, claims a new survey from the Ovum consultancy. Entitled ‘2014 Trends to Watch: Financial Markets Technology’ the new report surveyed 387 IT decision-makers (CTOs/CIOs/IT directors) across the sell-side, buy-side and corporate banking arenas in North America, Europe and Asia-Pacific. It also finds that locking in customer loyalty via enhanced service provision is a top priority for next year.
The Ovum report found that 41% of respondents said their IT spend on compliance would increase by 1-5% next year and a further 16% said that it would increase by 6% or more. Meanwhile another 38% said their IT spend on regulatory reporting would increase by 1%-5% and a further 17% said it would go up by 6% or more. Adding those total together, means that 57% of the 387 senior IT respondents said their budget would go up to enable compliance next year, and nearly 55% said it would go up because of increased duties to report to the regulators once the compliance spending had been made.
The key conclusion of the Ovum research is that profitability is now more difficult to find than before the 2008 financial crisis, with the stricter regulatory regime now in place meaning 2014 will be a year of foundational investment for the financial markets as they adapt to the reporting and risk demands of the ‘new normal’ environment with centralised clearing, repositories and increased transparency all required in the over-the-counter (OTC) derivatives markets under Dodd-Frank and EMIR and the second EU Markets in Financial Instruments Directive (MiFID) impacting the equity trading venues.
According to the report’s author, Rik Turner, senior analyst for financial services technology at Ovum, capital markets technology investments next year are required to find new opportunities to drive profit as the cost of the new regulatory environment increases the operational expense of doing business. Financial market participants need to move into new markets, trading venues, geographies and asset classes, while managing the additional reporting and market complexity.
Over two thirds of the 387 respondents to the ‘2014 Trends to Watch: Financial Markets Technology’ survey questioned about infrastructure spending forecasted an increase of between one and six percent in their 2014 outlay. With 42% saying their IT spend on infrastructure would go up 1-5%; and 25% stating it would grow by 6% or more.
Meanwhile, the ongoing volatility in global markets is making profitability a challenge and, as a result, customer loyalty is declining. As neither the buy-side nor the sell-side can guarantee profit margins in current market conditions, both sides are set to invest in IT systems that improve service levels in the hope that it positively impacts customer satisfaction and ultimately customer loyalty and profits.
“Financial markets will face two main challenges in 2014, with the difficulties of achieving profits in a post-financial crisis environment and complying with the ever-increasing raft of rules and regulations the prime concerns,” concludes Ovum’s Turner. “This will drive an increase in IT infrastructure spending, as well as a focus on servicing systems to improve customer loyalty levels.
“Regulatory compliance will continue to be a particularly large area of spending,” added Turner. “The ever-increasing range of rules and regulations is requiring large investments and is currently consuming as much as 40% of overall IT budgets across the financial markets.” That doesn’t leave much for innovation projects and it remains a concern that so much IT budget is going on compliance projects and operational ‘keep the lights on’ procedures. As much as anything it is this prompting the need to investment in IT systems to reduce operational cost as FIs are now reaching a tipping point where long-delayed infrastructure improvements can no longer be delayed.
By Neil Ainger