We expect to see further growth in the ETF market next year as investors assess opportunities to broaden the diversity of their portfolios through investments that provide exposure to a variety of industries, asset classes and exchanges across the globe at low cost.
The European market in particular is expected to continue to grow quickly, following significant expansion over the past few years, with record volumes and assets now under custody.
Addressing the underlying inefficiencies in the European ETF market structure, which make it inferior to the US, will be key to enabling this growth. For example, 70% of ETF trading in Europe continues to be traded OTC, which is not cleared and therefore introduces credit risk, high settlement costs and increased risk of trade failure. EuroCCP will continue to engage European market participants in the ETF industry on initiatives aimed at increasing post-trade efficiencies, with a view to supporting further market growth.
– Cécile Nagel, CEO, EuroCCP
One of the key themes of 2020 has been technology and how it’s kept us all connected during very turbulent times. It’s been a year of real change, what I would call a clean slate moment for financial services, and next year will be no different. I’d expect to see new ways of finding and sourcing liquidity emerge, particularly in the credit space.
Electronic portfolio trading, which we introduced, already does this in a very elegant and sophisticated way, so I have no doubt markets will continue to embrace it. You see, we’re a financial markets technology business and we’ve always invested in innovation, working collaboratively with clients to offer them trading solutions that aggregate liquidity. Problem solving is at the heart of electronic trading, and with greater implementation of data and advanced automation tools, we should reach new digital frontiers in 2021, and I’m very excited about that.
– Billy Hult, president, Tradeweb Markets
The market volatility and subsequent economic uncertainty caused by the coronavirus pandemic earlier this year brought the importance of mitigating FX settlement and operational risks back to the fore. This, coupled with the December 2019 Bank for Internal Settlements report on the rise of settlement risk and other areas of focus such as amendments to the FX Global Code, means it will remain an important topic throughout 2021.
This focus is only one of the factors leading market participants to recognize the need for a strong infrastructure which can mitigate settlement risk from their FX trading activities.
For the buy-side, firms continue to look to deliver best execution, and as part of this, the move away from trading with custodians continues at pace. In a multi-dealer FX trading scenario, settlement risk exposure increases and as a consequence, an increasing number of asset managers are opting to mitigate that exposure by using CLSSettlement. In 2020, we have seen annual growth of 11% year-to-date in asset managers joining the service.
– Alan Marquard, chief business development officer, CLS
Fixed Income trading will continue to migrate from voice to electronic channels in 2021, across rates and credits. Repos will begin to move towards e-trading, driven by regulation and SFT lifecycle actions. This migration will drive further fragmentation – instead of consolidation, there are new venues planned for launch next year, like LedgerEdge. Large scale efficiency programmes will cut deep at trading firms, reducing costs and removing manual processes, which will involve replacing expensive incumbent vendors with modern technology to automate even complex workflows.
Cloud computing (which passed the test in 2020) is a low cost and scalable solution, which will be used for assets with infrequent price updates – alongside on-premise technology for volatile assets. Technology outsourcing for commoditised functions, like market connectivity, has already begun and will continue in 2021 as financial firms demand more flexibility in their technology stack, combining proprietary and vendor solutions.
– Steve Toland, co-founder, TransFICC
Central banks will continue their movement toward increased openness and a more responsive feedback loop with a wider range of investors. 2020 saw an acceleration of this trend, for instance, South African Reserve Bank (SARB) launched investor calls following every monetary policy committee (MPC) meeting, and around 200 investors regularly join.
In 2021, we anticipate other central banks will embrace this approach and use new technologies and connectivity to create channels that enable increasingly accessible dialogue with market participants. Should this momentum continue, the result will be a decrease in policy uncertainty and a healthier investor climate.
– Vladimir Demishev, senior fixed income and interest rates trader, Sova Capital
The past year has cemented the importance of adopting robust and scalable optimisation services that help free up scarce capital and reduce the costs of trading. In 2021, we expect increased focus on the transition to risk-free rates, which can be achieved through our market leading compression service, and on the implementation of SA-CCR, where we’re working closely with market participants to optimise risk-based capital.
There are also huge opportunities to reduce funding costs through initial margin optimisation. Quantile’s service operates across cleared and uncleared asset classes, connecting liquidity pools and generating increased capital and margin benefits for clients.
– Andy Williams, CEO, Quantile
The impact of the COVID-19 pandemic focused attention on the need to prioritise middle- and back-office automation, creating a strong case for strategic investment to enable a no-touch processing environment. In March 2020, we saw record volume and volatility, and firms were challenged by the operational backlog and reconciliation required due to manual processes and legacy interfaces.
As we move into 2021, firms have greater clarity about improving operations to better handle sudden increases in volume and volatility, and for ensuring transactions are handled seamlessly throughout the trade enrichment, matching, confirmation and settlement lifecycle. By leveraging a common industry trade processing platform and infrastructure, firms will seamlessly connect to their global community and be better prepared for the next unexpected market event as well as upcoming regulation like the CSDR Settlement Discipline Regime.
– Matthew Stauffer, managing director, head of institutional, trade processing, DTCC