Financial Market Resilience

Three waves of actions for market infrastructure firms in the aftermath of COVID-19

By Nikolai Dienerowitz, Hiten Patel, Daniela Peterhoff, Michael Wagner, and Tobias Wuergler.

This article was first published on May 12, 2020.

COVID-19 will play a crucial role in defining how financial market infrastructure evolves over the next decade. In our report we outline three waves of management actions to help navigate the challenges ahead.

Coronavirus (COVID-19) has had a major impact on the global economy. Financial markets have seen unprecedented activity, such as the MSCI World dropping by nearly 30 percent during a five-week period, with both the supply and demand-side fundamentally upended across the globe.

Financial market infrastructures (exchanges, clearinghouses, central securities depositories and custodians, financial data, and technology providers) have been robust, providing the community with stable platforms and operations, as well as timely information to transact throughout the turmoil. Operations of most firms have coped well with the crisis to date, as business continuity plans (BCP) have been deployed, and the workforce has adapted accordingly. Also, risk management systems provided the required buffers so far. Access to capital, liquidity and information has been maintained, and on even the most volatile days markets have functioned as expected.

The medium-term is likely to become even more challenging for the economy and financial markets, especially given the potential for significant credit issues. The corporate sector will be hit by supply disruptions and weak demand. Banks, in turn, while still well capitalized, will be hit by a combination of lower revenues from muted corporate client activity, lower interest rates, and potentially significant credit losses. The sell-side may be hit by substantial losses as a result (please see our joint report with Morgan Stanley, Steering Through The Next Cycle, for the outlook for wholesale banking this year). In parallel the buy-side has seen both outflows and dramatic portfolio rebalancing during the crisis.

The role of market infrastructure firms post-pandemic

In this context, market infrastructure firms will play an even more crucial role in the financial market ecosystem, maintaining functioning secondary markets as well as helping the real economy recapitalize in primary markets, and supporting the community more broadly longer-term. In the short-term, the increase in trading volumes will help exchanges and clearinghouses generate higher fee income, but volumes after the initial turmoil and the dearth of new public market issuances will slow growth in the medium-term. Data consumption and other services may be scrutinized and fall victim to further cost-cutting exercises amongst clients.

The global financial crisis triggered a decade long evolution for financial market infrastructure, resulting in an expanded role across trading, clearing and data. COVID-19 will play a crucial role in defining how financial market infrastructure evolves over the next decade, as the capital markets seek greater levels of resilience. To fully enable remote working across the ecosystem will likely require a broader role for infrastructure.

In our report we explore three waves of management actions to help navigate the challenges ahead.

Wave 1: Ensuring stability in volatile markets explores how market infrastructure firms are continuing to provide stability and continuity for their clients in turbulent times.

Wave 2: Maintaining resilience in a down-turn focuses on how to navigate the pandemic and credit cycle over the next 12-18+ months, re-opening and managing constrained workplaces, ensuring that financial risk management practices remain robust, and adapting business continuity and resilience plans.

Wave 3: Support the re-build and recovery looks ahead to the transformation activities which will be required as we will eventually re-emerge from the crisis, with the fundamentals of the industry (and its clients) having changed, and how to position for recovery and rebound.

Financial Market Resilience In The Aftermath Of Covid-19