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What’s Next for the Capital Markets: Finance in 2021

Traders Magazine Online News, November 9, 2018

Kenneth Bensen

Earlier this month, SIFMA gathered the most influential voices shaping today’s capital markets to look ahead at what’s next for the markets and the industry. What struck me in the conversations taking place at SIFMA’s 2018 Annual Meeting was the recurring theme of significant changes expected in close proximity. Indeed, there is a confluence of revolutionary events coming that will fundamentally alter our markets and make the world look radically different in even just three short years. From Brexit to “no deal,” LIBOR to SOFR, fintech to finreg, here’s what we heard on the floor of The Capital Markets Conference.

Brexit: It’s going to be rocky

With less than 180 days until Brexit and just two years before the end of the transition period in 2020, the divorce between the EU and U.K. remains stormy. And, like any divorce, the primary parties are not the only ones involved. Huge implications for the capital markets and third-party relationships – including those between the U.S. and the U.K. and EU – are becoming real. Can a deal be reached in time?

Financial institutions and regulators are hoping for the best but preparing for the worst. “It is going to be a rocky time,” said CFTC Chairman J. Christopher Giancarlo. “We have no choice but to assume the worst. We have to assume a hard Brexit.”

LIBOR: Time is of the essence

It is estimated that $200 trillion of financial contracts and securities are tied to LIBOR – a widely-used benchmark for short-term interest rates – and that matters to everyone. LIBOR is one of the most widely-embedded aspects of the financial markets and the transition from it and other IBORs to more robust alternative risk-free rates (RFRs) supported by larger, observable markets is a massive undertaking.

Financial Conduct Authority (FCA) Chair Andrew Bailey “put a line in the sand,” said JPMorgan’s Sandie O’Connor, when he said he would not compel institutions to continue to submit contributions to the benchmark past 2021. After that point, there is a risk that the production of LIBOR could cease.

By laying the foundation to transition away from the use of LIBOR, identifying and trading new risk-free rates, improving our fallbacks in derivatives and new securities transactions, and implementing other elements of the Alternative Reference Rate Committee’s (ARRC) paced transition plan, we are reducing financial stability risk in our markets and making the financial system more resilient.

Fintech: The pace of change is difficult to fathom

While the timelines for Brexit and the transition away from LIBOR are daunting but achievable, the pace of change in technology is rapid and relentless. The intersection of financial technologies and traditional business models is transformational: financial institutions are analyzing the use of fintech solutions to enhance client service, increase efficiencies in the back office, meet regulatory reporting requirements and more. RegTech, Robotics Processing Automation (RPA), machine learning, responsible AI – it is impossible to overstate the scale of transformation.

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