As Swift celebrates its 50th anniversary, industry experts reflect on the future of capital markets – from atomic settlement in the near term, to the gamechanging impact of decentralisation and AI in the long term.
A lot has changed since Swift’s inception back in 1973. Five decades of technological advancements have left the financial world barely recognisable. With the capital markets industry changing so rapidly, where does it go from here?
The industry faces new regulations, new asset types, evolving customer expectations, shortened settlement cycles and the growth of AI – all making for a dynamicfuture. Meanwhile, financial institutions are at different stages of their digital transformation journey, and many are re-evaluating their business models, partnerships, regulatory compliance approaches and technology stacks.
So how can financial institutions work together to best prepare for the evolution of capital markets?
Approaching atomic settlement
While major improvements have been made to the operational process within capital markets, inefficiencies and slow settlement cycles continue to translate into significant costs and fees for the industry. Shortened settlement cycles are already being implemented worldwide, as markets begin the transition to a T+1 cycle. As a result, it’s expected that global markets will almost definitely reach atomic settlement over the next 50 years.
Jonathan Ehrenfeld, Head of Securities Strategy at Swift, also cites the importance of considering the impact on investors. “I think we’ll have atomic settlement much sooner than 50 years. But what’s the benefit of this move to the end investors? I would say speed can’t be prioritised over cost to the ultimate investor: not banks, but people.”
As North America prepares to move to a T+1 cycle, and with China already at T+0, it seems industry leaders might be right in expecting this change sooner rather than later. However, for all market participants, preparation will be key. Otherwise, between time zone pressures and un-suited manual processes, atomic settlement could lead to an increase in settlement failure rates and operational disruption.
“While the trading industry has always received the necessary funding to improve speed and efficiency, post-trade has always been lagging behind,” says Alexandre Kech, Head of Digital Securities, SDX. “But if you have a global digital asset agnostic settlement infrastructure that can work 24/7, you obviously deal with counterparty risk and post-trade processes in a very different way. I believe we’ll see this shaping the next 15 years, let alone 50.”
Decentralisation: A paradigm shift
While the current market capitalisation of tokenised assets is still relatively small, the World Economic Forum estimates that volumes could reach USD 24 trillion by 2027. So, looking forward 50 years, how important will tokenisation be to shaping the future of capital markets?
“We are in a new paradigm, and that's not going to change,” says Kech. “There’s no going back from here. We’ve demonstrated that value can be held, transferred and managed on the network – whatever that network is – rather than at the edge.
“There is a possibility of having a global infrastructure that is completely digital asset agnostic, and that can work 24/7. This is a revolution in the post-trade space.”
There are a number of potential benefits to tokenisation, including increased accessibility as a result of fractionalisation, greater trading transparency and condensed settlement times. However, there are likely to be ongoing roadblocks along the way. Interoperability is a key consideration – as different market participants transition at different times.
“In the same way that securities have been paperless for years, I think that in 50 years there will probably be a tokenised version of each asset – whether they are securities or real estate, or anything at all,” says Ehrenfeld.
“If you tokenise real world assets it’s going to have a big impact on how people invest. Typically, a certain percentage of the population has access to most assets.
“But part of the tokenisation paradigm lies in smart contracts. They depend on cryptographic truth. This means there’s no need to trust anybody: not a counterparty, or a referee. Today, there’s huge amounts of money lost because we have to pay referees and manage counterparty risk.”
How will AI impact capital markets?
The news in 2023 has been dominated by the rapid growth of language learning models like ChatGPT. But artificial intelligence has existed within the securities industry for several years. AI has the potential to drastically improve the speed of transactions and the accuracy of anomaly detection. Machine-learning models use large amounts of data to determine trading decisions. So, how might this continuously evolving technology impact capital markets over the next 50 years?
“We (the industry) have been using a form of artificial intelligence for decades,” says Jennifer Peve, Managing Director, Head of Strategy & Business Development, DTCC. “There’s risk with any emerging technology, so it is important to balance the risk with the opportunity. What is exciting about the recent evolution of the technology is that it can replace time consuming activities and free up teams to focus on more value-add tasks which can in turn drive greater value for clients and the organisation.”
Ehrenfeld adds: “I think advances in robotics and AI have already had a big effect in trading. Today we have fast trading algorithms that make most decisions. I think a revamp of back-office operations led by AI could be interesting – applying AI to things that happen after the trade. But overall, I don’t see there being huge leaps.”
Rules and regulations
Regulatory changes are a costly and complex challenge for many financial institutions, which must navigate the plethora of legal updates and varying financial authorities to ensure they remain compliant. But, with constantly evolving technology, alongside the rise in the importance of ESG, it appears that regulatory changes might continue to arrive thick and fast over the next 50 years.
“I think there will be better regulator guidance and standards that define ESG,” says Ehrenfeld. “There’s going to be whole new generations of investors who are going to be very hard to fool.”
“But it doesn’t make sense to change the regulations every time technology changes,” Kech adds. “It's moving too fast. Most markets are gearing up towards a technology agnostic of regulations and it is a good direction of travel.”
Peve adds: “I think the biggest challenge we have is education. In the same way that our companies have to think about broadening their skill sets and knowledge base, regulators will do the same. We are going to need regulatory experts that have a deep understanding of the technologies.”
Preparing for the future
Finally, how can financial institutions best prepare for the impact these changes will have on capital markets over the next 50 years?
“Position yourself to stay ahead of the game. Be involved in industry discussions to ensure you understand technology advancements and market structure changes,” says Peve. “I think it's easy to get swept up in hype and throw a lot of money at something in the very early stages because of the fear of missing out. Instead, start by asking ‘what process improvement am I able to deliver that will create client value’ and proceed from there.”
Kech says: “I think we are really only at the beginning. Institutions are working on the infrastructure required to deal with tokenisation and new processes. They’ll need to think about retiring legacy and experimenting with real transitions – because we are beyond proof of concept now. Also, we will need to work with regulators to influence them in the right direction.
“I think in 50 years there will still be banks and financial market infrastructures, but with different roles. At the end, the only relationship that will really matter – and that blockchain trully enables – is between the issuer and the investor. Any other players exist to support them. This will be a challenge for many institutions, and the industry must prepare.”
The views expressed on these pages are those of the authors and/or the institution they represent, and not necessarly those of Swift.