2019: market turmoil to drive fintech demand

Ed comment: innovation required to dig financial markets out of trouble

By Michael McCaw | 28 December 2018

If a number of economic indicators are to no longer be ignored, financial markets are not far off a sharp correction, followed by a deep and lasting depression. Alarmingly, economists are pointing to a variety of factors – from US corporate bonds to household wealth – that could drag markets into serious trouble.

That, as a number of exchanges – including the Nasdaq – look volatile, fluctuating unnervingly from record plunge to bear rally. In Europe, and as the Brexit transition enters another phase, businesses are starting to call for urgent clarity from the UK Government on transition agreements. It could be a tricky year for banks and traders.

And compliance departments are expected to have no less of a quiet year. Since the G20 announced a push for more transparent financial regulations, global, regional and national authorities have put in place a slew of rules that have both driven and stifled markets. Next year will be no different – yet while the regulatory work to be carried out next year will be a continuation of compliance requirements to those rules already in force, many of the work to be carried out next year will be done around rules coming into force over a longer times horizon.

A major operational challenge for firms will be the Libor transition, by the end of 2021. Firms will need to begin adjusting systems and process to one of the alternative rates (Sonar, Saron, or Tonar), to work out what exactly it will mean for them. The transition means a significant amount of work, and recalculations within risk management, accounting models, other financial contracts, and just about every department within most banks. Once the calculations are done, only then will each bank be able to holistically assess what the transition means. From there, they will need to concern themselves with the auditability of their data.

And of course there’s the Fundamental review of the trading book (FRTB), which has been pushed back until 2022. While the industry breathed a sigh of relief when regulators delayed the deadline by three years, the impact of the rules means many banks’ compliance and risk departments will spend significant amounts of time next year considering how to make it work. For many, FRTB is the number one regulatory concern for banks in the years ahead.

The Securities Financing Transactions Regulation (SFTR) – while impacting a significantly volume of the market compared to some of the wider finregs to hit market participants over the past few years – and which is expected to go live in 2020, represents a significant operational burden to those in the securities financing market. The reporting obligations are onerous, and the volume of data required weighty.

There are various updates to rules expected this year, but of course of most immediate importance will be removing the uncertainty surrounding Brexit. Removing the European Union’s most significant market will have repercussions for just about every rule constructed in the EU – and the UK government’s – gaze. A significant task, and one with which firms will start to feel they are running out of time.

Within fintech, the need for assistance around regulations is showing: in a December survey conducted by Intertrust, the trust and corporate management firm, 85% of financial services professionals predict demand for regtech solutions will grow over the next two years. As the market continues to grow, so too does the ability among those firms – with new ways of rendering trade data and technological advances relieving the pressure of those strained by the regulations, and the predicted problems that could face financial markets in the months to come.

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