Capital Markets ready for the volatility storm?

Surging trading volumes, geopolitical uncertainties, regulatory overhauls, and the ever-growing threat of technological disruptions. It’s the recipe for a perfect storm in capital markets and could end up shaping the trajectory of post-trade operations for years to come.

The evidence is clear to see. Trading activity keeps growing year on year and has reached unprecedented levels. Global futures and options volume hit a record 137.3 billion contracts in 2023 and show no sign of slowing down. This is the sixth consecutive year of record-setting trading and underscores the insatiable appetite for derivatives trading worldwide. With new markets coming to the fore, there seems to be no chance of a slowdown. Futures Industry Association President Walt Lukken even remarked, “This time next year, we could well be reviewing yet another record year of trading activity”.

This volatility is not isolated to any one market either. India has seen exponential growth, and their volumes were up 153% on the year before to 84.3 billion contracts whilst in Asia-Pacific trading rose 104% to 103.5 billion contracts. This reflects a shift in market dynamics and investor sentiment.

Other external factors are due to have a pivotal impact on volatility levels. At least 64 national elections are taking place this year, representing a combined population of about 49% of the world. These geopolitical tensions are expected to play their own role in driving derivative volumes to levels unseen before.

Regulators are wary of sustaining these levels of growth and are actively doing all they can to learn from past mistakes. Their ever-increasing involvement means that certain challenges loom large for capital market participants. Initiatives like the Emir Refit, shift to T+1 in the US and the recent emergence of DORA pose significant operational challenges. These challenges carry serious reputational and financial risks with BNY Mellon recently reporting that they found a third of trades would face issues in a T+1 environment with the current workflows.

One that is on everyone’s radar within Europe, is that of Emir Refit. It has raised concerns about data quality and reporting requirements, prompting firms to reassess their data management processes. With reporting fields rising to 203 fields once implemented, some market participants are seriously struggling to provide for all of them. It could cause some firms to manage some data attributes through manual processes and secondly, cause firms to transform their data to meet new reporting requirements and adhere to the imposed validation criteria.

With all this going on it makes one wonder if post-trade operations are at a crossroad. Neglected and relegated to the sidelines for years, post-trade processes have recently been thrust into the spotlight, grappling with the dual challenges of never seen before trading volumes and intense regulatory scrutiny. Things that were the norm, like manual processes, are simply no longer sustainable in these current conditions.

Surprisingly, we believe that post-trade operations have never been better prepared for the coming onslaught. In a recent study we did in conjunction with Acuiti, almost 40% of respondents had fully automated their reconciliation processes whilst 70% of respondents have upgraded their systems over the last three years. Covid was a tragedy that had horrible and severe consequences for many, but it inadvertently strengthened the industry to a position it hasn’t been in years.

Systems like HelloZero have become beacons of innovation in post-trade operations. Focusing on automation these new point solutions empower financial institutions to streamline their post-trade workflows, enhance operational efficiency, and mitigate risk. This is often achieved by leveraging advanced technology and industry expertise, enabling firms to navigate the upcoming complexities with confidence and agility. They have been built to scale and will handle the types of volatility that the markets will inevitably throw out this year.

Automation is just the beginning. Systems like ours and others offer a suite of solutions spanning across reconciliation, risk management, and regulatory compliance, providing a holistic approach to post-trade processing. Firms are now able to get the tools that they need to thrive in a rapidly evolving regulatory environment.

As the markets embrace for the impending storm, the role of post-trade operations has never been clearer or more critical. With solutions like HelloZero and vendors aligning as trusted partners, financial institutions can weather the storm, harnessing the power of technology and innovation to drive success in an increasingly complex landscape.