What’s Shaping the Future of Capital Markets? 6 Takeaways from OPTIC

Capital Markets | Pierre Kovacs |
02 November 2023

From accelerated settlement cycles to quantum computing, there’s a host of trends that are impacting the capital markets space – and will continue to do so into 2024.

After attending OPTIC 2023 in Brussels last month, and keeping an eye on the market overall, we recognised six technology advancements and trends that have the financial services space buzzing, both in Europe and around the world. Below, we'll explore how these concepts will affect business operations, efficiencies and more.

#1: T+1 is a more profound change than expected – The impact is global, and the journey will not end in May 2024

The shorter settlement cycle being adopted by the SEC in the US and the Canadian Capital Markets Association (CCMA) in Canada will have a broader impact that goes well beyond North America. The US implementation date of May 2024 signals the beginning of a longer journey, in which UK and EU regulators are likely to adopt a T+1 settlement cycle themselves, with North America possibly working toward T+0.

Here are a few challenges the T+1 settlement cycle could present to the European market:

Shorter time windows for reconciliations
Accurate and timely processing of corporate actions
Less funding options and more costly liquidity
Security lending over one day will be less attractive
A lesser volume of netting
Misalignment with other asset classes, such as FX
A need for staffing in the US time zone (or US working hours), so as not to shorten the time window even more due to time zone differences

EU regulator ESMA launched a ‘call for evidence on shortening of the settlement cycle’ on the 5th October, with the general expectation that T+1 is four years away for Europe, and about two years away for the UK. Though once the US has adopted T+1, it may become paramount that the UK and EU start the adoption process sooner.

#2. There’s an imperative for a front-to-back transformation of systems to meet the operational efficiency and resiliency required by regulations

Regulations such as T+1 settlement and DORA (Digital Operation Resilience Act) will drive the transformation of core legacy systems. Automation comes to mind first in this scenario, especially AI-powered automation. Generative AI will assist and enhance teams’ efficiency.

UX is the most visible part of this transformation, and usually aims at creating a single workspace for operations teams. In an optimised environment, employees can do their work without jumping from emails to spreadsheets. However, to really unlock operational efficiency and resilience, there is a need for a more profound transformation of core legacy systems, and a shift of paradigm (for example, from batch process to a more event-driven architecture) to establish clear APIs and a performant data spine.

#3. AI opportunities are abundant

AI is being used as transformative technology at financial services companies, and has the potential to change business models and shape the whole industry. However, many organisations are still in the experimentation phase and must define clear use cases.

At Endava, we have identified use cases for AI in several spaces related to capital markets, including hyper-personalisation, next best action, knowledge assistants, interactive documentation, reporting assistants, performance monitoring and client profiling.

#4. The adoption of digital assets is slow, but real.

There is a real demand for digital assets (as a blanket term for cryptocurrencies, CBCD, decentralized finance and tokenisation) and its institutional adoption is making progress. This has the potential to streamline operations and drive operational efficiency.

The regulatory framework for digital assets is more mature, and includes such developments as: stablecoin regime, non-stablecoin regime, UK crypto financial promotions, MiCA, MLD5, FMI Sandbox and DLT Pilot Regime.

This regulatory development removes a key blocker to wider adoption of digital assets, supporting the view that this technology is poised to enter the mainstream. Some capital markets participants (banks, brokers) are already leading successful experimentations. The infrastructure for custody and Know Your Customer (KYC) is also moving forward.

One of the main adoption challenges with this trend is facilitating interoperability with traditional finance (TradFi), which often defeats the benefits of decentralized finance (DeFi). It seems that we are getting closer to a real ecosystem with the underlying product, the cash leg, derivatives and the ability to repo / lend assets or use assets as collateral.

#5. ESG: it’s all about the data

A well thought-out data strategy and data architecture is paramount to capital markets firms’ success, particularly in the area of ESG. Data standardisation is making progress in capital markets, but there are still many challenges to:

Extracting unstructured data, especially non-financial data
Harmonising conflicting taxonomies across several jurisdictions
Achieving data consistency and completeness
Establishing governance for external data sources

To optimise their ESG strategies, companies should continue to work on data harmonisation to respond to market changes and customer and regulator demand.

#6. Quantum computing is the real game-changer

Quantum computing brings a new way of computing using single quantum particles (qubit) to solve complex computational problems. Small computers have been built, with Tier 1 banks experimenting, following two years of co-operation with the UK National Quantum Computing Centre and the Bank of England.

It will be important to focus on getting ahead of the curve from a cybersecurity perspective (especially with concerns around current data harvesting to be utilised in the future) and to understand the regulatory lens that needs to be applied.

The real quantum computing era is still expected to be 5-10 years out, with likely use cases to include:

Portfolio and trade optimisation: Supporting the trend of exponentially becoming more complex
Asset pricing: Computing an increasing number of factors and taking the typically applied Monte Carlo calculation and baking in more complexity and real-time pricing
Real-time market valuation and scenario risk management: Supporting improved identification and analysis of risk

With these use cases already identified, quantum computing will be a concept to watch for capital markets and broader financial services space.

Moving Forward in the Capital Markets Space

Whether a newer development, like T+1 settlement cycles, or a continued and expanding trend, like AI and data, the capital markets space continues to evolve with the technologies that support it. As we realised at this year’s OPTIC event, there are plenty of opportunities for capital markets firms to stay ahead of the curve, with much of that transformational journey relying on technology adoption and optimising operational efficiencies across the business.

Learn about how we can support you in legacy technology transformation, AI opportunities and more here.

Pierre Kovacs

Banking & Capital Markets Industry Lead

Pierre is our Banking & Capital Markets Industry Lead based in London. He has spent 20+ years delivering systems from leadership positions at Investment Banks and Asset Managers. Prior to joining Endava, he was Chief Technology Innovation Officer at a fintech providing cross-asset, front-to-back office systems to hedge funds, investment banks, private banks, and energy trading firms. Over the summer of 2021, Pierre took a short break to complete the UK Ironman fitness competition in Bolton and the Ventouxman race in France.

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