Join “The Capital Ratio” as U.K. and EU financial institutions regulatory head Sebastian Barling sits down with Chris Rich, general counsel of the Financial Markets Standards Board (FMSB), to discuss the FMSB’s in-depth report on the future of financial markets. They explore the four key drivers of change — societal trends, geopolitics, technology and regulation — and how they are reshaping market participation, trade execution, the growth of regional financial hubs and the emergence of new asset classes like stablecoins and cryptocurrencies.
Episode Summary
Join host Sebastian Barling and Christoper Rich, general counsel of the Financial Markets Standards Board (FMSB), as they delve into the future of global financial markets, exploring how technology, regulation and new asset classes like crypto are reshaping the industry. Discover why the lines between public and private markets are blurring, how global financial hubs are evolving and what the next decade could hold for market participants.
Voiceover (00:02):
Welcome to The Capital Ratio where Skadden explores the dynamic world of financial institution regulation, offering insights for institutions navigating the regulatory environments in the UK, EU, and US.
Sebastian Barling (00:16):
Hi and welcome everybody to the next edition of The Capital Ratio, I’m your host, Sebastian Barling, a partner in the Skadden’s Financial Regulatory group. Today we have a guest speaker. Chris Rich is joining us and he’s the GC of the Financial Markets Standards Board. With him we’re going to look at some of the work the FMSB has been doing to identify some of the future trends that likely to impact financial markets over the next decade. But before we get into that, and for those of you’re not familiar with the FMSB, I’ll ask Chris to introduce himself and talk a little bit about what the organization is and what it does.
Christopher Rich (00:48):
Well, Seb, thank you very much. I’m delighted to be here and the time of this conversation is perfect. So we had our 10-year anniversary of the Fair and Effective Markets Review, gave birth to the Financial Markets Standards Board (FMSB) a decade ago, and it was conducted by the FCA, the Bank of England and HM Treasury in light of serious instances of misconduct in wholesale financial markets, in particular the Libor and FX scandals. And the goal really was, and this was very much driven by Mark Carney at the time who was governor of the Bank of England, to put greater responsibility on market practitioners for conduct in wholesale markets. The organization’s overarching goal is to drive improvements in standards of conduct, and within that there are four core objectives. So the first is to think about horizon scanning. Where might risks or vulnerabilities come from in wholesale markets and practitioners being in a better position or in a particularly privileged position to think about where risks might emerge from on their desks or instruments that they’re trading.
(01:50):
The second goal was to look at ambiguities and existing market practices and shine a light on those ambiguities and seek to clarify or amend or set standards in relation to those areas of market practice, which were perceived to be ambiguous and perhaps over time could become problematic. Third goal was to drive adherence to standards, and we do that through attestation mechanism. So every member signs an annual attestation saying that they comply with the standards and forcefully to drive international convergence of standards. Markets are global. The clients that are being served often have global footprints and so to the extent possible and working with within existing legal and regulatory frameworks, trying to have consistent standards of practice around wholesale conduct issues.
Sebastian Barling (02:35):
Thanks, Chris. And then what are some of the key publications that you’ve issued to date that people are now using in the market as their standard?
Christopher Rich (02:42):
So we’ve put out, I think 11 standards and about 15 or so statements of good practice. I think to highlight some of the key ones, we’ve done a lot of work around large trades and pre-hedging and now the large trades work that we did sets the international standard around the management of large trades, the disclosure in relation to the execution of large trades. We’ve also done work in the new issuance space around conflicts of interest and other areas.
Sebastian Barling (03:09):
Thanks. And then that’s clearly coming out of the standard setting parts of the business and we saw the publication that you guys have just put out the future of financial markets. Clearly that comes out of your horizon scanning remit, looking at things that people need to think about over the next decade or so. And having read through this, it’s clearly a pretty substantial document. You just let us know how long have you been spending on all of this? Who’s been involved?
Christopher Rich (03:33):
Yeah, so I mean it was a fascinating exercise to undertake and we started this in the early part of the summer and interviewed or received input from 60-odd firms and individuals around the world from Dubai, from Hong Kong, from London, from New York, from many of the global financial centers and tried to engage as broader set of actors within wholesale markets as we could. So you’ve got the traditional sell side, the new liquidity providers, some of the firms that are very active in private markets, the traditional asset managers, and then some of the platforms and data providers within the market. So it does really seek to capture a broad set of views, sort to do with translate those diverse set of opinions into a document which lays out both how the market has quite fundamentally changed since 2015 to now and then where do people think it’s going to go over the next few years in light of the trends that we’ve seen.
Sebastian Barling (04:27):
I think, Chris, that’s a really good point. In fact, this is looking at the post-GFC issues, given that those have largely been digested by a lot of the markets and within the documents you identify four key drivers of change both over the last 10 years, but also those that you potentially see trickling forward in the future and running through the four of those quickly. I mean there’s societal trends such as aging demographics and climate change, which I don’t think anybody’s going to disagree is going to continue to be a concern for people.
(04:53):
Also identifies geopolitics and people know we’ve been in a world of higher inflation and potential pressures on the historic move towards globalization, whether that continues tech, I think everyone expects to see here the endless march of tech is not going to be changing. Again, you pull out the particular use of AI and distributed ledger technology as well as regulation over the last few years and how that has been increasing to capture both new markets, but also looking at improving things like operational resilience and transparency around those markets. Given a lot of this is looking at what’s going to happen in the future of those trends, do you think any of those are going to die off, any of those are going to become more acute?
Christopher Rich (05:28):
I would start with regulation. We’ve obviously seen a period of very significant regulatory change post GFC. I think we’re coming to the end of... Or we’ve perhaps reached a high cyclical water market regulation. And certainly as you know that the message from regulators and central banks around the world is changing and there is much greater emphasis on the competitiveness of national financial centers of economic growth and seeking to strike right balance between that and traditional regulatory concerns around investor protection, around stability and other things. So I think we are likely to see at a minimum regulatory simplification and perhaps a move to in some places an unpicking of specific rules that may not be central going forward.
Sebastian Barling (06:17):
Thanks. And I think that’s certainly consistent with some of the stuff we’ve seen with an increased look towards regulatory competitiveness and regulatory arbitrage, particularly with new financial centers that are cropping up outside of the traditional hubs. And I’m sure we’ll talk about those a little bit later. Looking at the themes that you’ve identified, you’ve sort of taken those and then you’ve looked at how those will then impact the financial markets in again, another kind of four broad headings. I think the first one the report picks out is looking at a market participation and how those trends will potentially impact how that develops in the future.
(06:51):
What’s interesting is the report looks at those four large trends that you see continue to develop and has picked out four themes that you see impacting financial markets over the next decade. And we’ll talk about all of those in turn. But the first one that you guys have pulled out is market participation and how that is likely to change. And in particular you identify how prop trading houses have become more important. There’s consolidation that’s been happening on the buy side. There’s been a larger rise of credit, we’ve certainly seen a lot of that here at Skadden’s. But what do you think these trends mean for the future and how are those going to continue to develop?
Christopher Rich (07:26):
The way that the market and the participants in the market have changed since 2015 is quite marked. And as you say, those three areas, and I’ll expand on them in a moment, are sort of key areas of development which have happened, but I think are also likely to continue. So the first one being the proprietary trading firms and their growth in part in response to client demand to greater levels of specialization within the industry and also in part reflection of the post GFC regulatory environment, the Volcker Rule and other things that move proprietary risk taking out of the banks and into some of these new entities.
(07:59):
So they have grown from very much a traditional dealer led market, say in 2015 to one where in data rich liquid asset classes, the proprietary trading firms are very significant players. And I think looking forward, certainly the view of the people that we spoke to in conducting this exercise was that trend is likely to continue and indeed the proprietary trading firms perhaps will expand their presence from the most liquid data rich asset classes to slightly lower down the liquidity spectrum and into credit, which we’re already seeing and sort of a broader focus on fixed income.
Sebastian Barling (08:33):
So effectively we’re looking to see their significance potentially increase beyond the already relatively high amount of significance they have in certain markets.
Christopher Rich (08:40):
I think that that’s right.
Sebastian Barling (08:41):
We’ve certainly acted on a lot of deals here at Skadden’s which fall within the broad bucket of buy side consolidation. And as we’ve seen a bit of integration in that part of the sector, do you think that’s going to continue?
Christopher Rich (08:50):
When we think about buy side consolidation, I guess within the traditional asset we’ve seen significant growth of passive investing and ETFs. There’s been a lot of fee pressure on the buy side, which has resulted in economies of scale and the growth of the biggest asset managers quite significantly. And I guess towards a winner-takes-most type model. Many of our contributors talked about the potential revival of active asset management over the next few years is a degree of volatility returns to market. So it’ll be interesting to see how that trend comes back. Then within the pension fund sector, the very largest pension funds have grown significantly, partly driven by demographic demand obviously as well. And then finally in the hedge fund space, we’ve seen the growth of multi-strategy, multi-manager funds that now encompass a number of portfolio managers within them and their scale and market impact and the overall power of the buy side I think is significantly greater than it was in 2015. And again, I think that trend is expected to have some longevity.
Sebastian Barling (09:56):
That’s interesting. I think that aligns with some of the themes we’ve seen particularly around the cost of doing business with a greater reliance on tech and the need for economies of scale at various other levels, the need to have size of the buy-side to be able to remain efficient. So I think that’s interesting. I think we’d agree that that is something we’d probably continue to see happening in the future. And I think the other big topic that you pull out is on private credit and it’d be really great to hear your views as to what the FMSB thinks is going to happen to that in the next decade.
Christopher Rich (10:25):
Yeah, so again, I mean everything I’m saying is based on the input that we receive from contributors and I said on the one side the traditional bank model is being challenged by the proprietary trading firms and on the other side you’ve seen significant growth of private markets and private credit in particular recently. And again, this is in part driven by the regulatory framework and the prudential rules that exist, but I think many of the contributors that we spoke to expect there to be, again, longevity to the growth of private credit markets.
Sebastian Barling (10:57):
And do you think that distinction between private and public markets is something that’s going to disappear a little bit?
Christopher Rich (11:04):
And this was actually a broader theme that came out within the paper, but around the blurring of boundaries, the in-asset classes between wholesale and retail and then between public and private and obviously there’s a push to getting more data on private markets. As retail money moves into private markets, there’s also a push to get greater liquidity in private markets and more secondary market liquidity. And as you have more data, you potentially have more liquidity, you have a growing secondary market, the fundamental features of a public market versus a private market perhaps do start to conflate or blur a bit.
Sebastian Barling (11:36):
Stepping back looking at that theme and market participation, there really is a lot in there and it feels like the markets already look very different to where they were 10 years ago to then predicting what they look like in another 10 years. It sort of feels like you’ve got more equality of scale between buy and sell side. You’ve got a slight between public private markets and you’ve got tech driven support to make trading in liquidity slightly more efficient to potentially open to retail. That to me feels like a very different world to what I grew up in and what people traditionally used to. Do you think there are any disadvantages of that?
Christopher Rich (12:09):
It’s interesting because one participant said to me, “Usually we overestimate change in the short run and we underestimate it in the long run.” I think clearly predicting what’s going to happen 10 years out is very, very challenging and it is very much informed by the themes of the last decade. I think there may be issues that arise in relation to transparency, for example, in private markets to ensuring that the growth of new participants in markets are subject to consistent standards. So there is a consistency of treatment across similar activity types and the lessons that have hard learned I guess over post-GFC and within the traditional dealer model that they are continued to be applied and considered in new contexts.
Sebastian Barling (12:53):
And then I think we’ll go and have a look at the next theme that comes out of the report and this one could be seen as a little bit more niche because it focuses on changes to the trade execution environment. It’s important to remember that trade execution is pretty fundamental to the efficiency of markets and minimizing that has all sorts of benefits for market participants to come across the value chain. So actually whilst niche it probably drives or probably has a relatively large impact on efficiency and returns, what do you see happening to trade execution and what are some of the big themes that are occurring?
Christopher Rich (13:23):
Yeah, so within that space, again, in this ties to market participation to some extent, we’ve obviously seen massive electronification of wholesale markets initially I guess in equities and FX, but that’s the electronification of fixed income has significantly grown. I think there will remain a role for voice for large complex bespoke transactions that the penetration of electronic trading is expected to go further. Whilst we’re at very early stages now, AI will likely start playing over the next few years, a more significant role in trade execution. And lots of this is driven by cost pressures and seeking to minimize the cost of trade execution and to do so in the most efficient manner possible.
Sebastian Barling (14:04):
Right. So it’s effectively a continuation of those existing trends.
Christopher Rich (14:07):
The other element actually said that I was going to come onto was in terms of where execution takes place. Again, we had perhaps a decade or so, very much a dealer to client model and in parts driven by some of the regulatory chain, lots of that activity has gone onto venue and the role of venues has become much more central. The role of data has become much more important in markets. It’ll be interesting to see how that trend plays out and whether we start seeing a return of more liquidity provider to client connectivity through direct streaming and other sort of alternatives to competitive RFQ on venue execution.
Sebastian Barling (14:44):
The third theme that the report identifies is the growth of new asset classes, and I don’t think there’s any surprises in what identifies as some of the future trends. So we’ve been talking about a lot of these already and in particular the report talks about cryptocurrencies in stable coins. Based on the discussion with your members, what does the FMSB identify as some of the key drivers or risks around those assets?
Christopher Rich (15:07):
Yeah, so as you say, what we describe as new asset class frontiers in the paper have developed and we’ve seen both the growth of the traditional FIC instruments, so massive growth in sovereign debt markets over the last decade for various reasons, COVID stimulus, other things, growth corresponding growth in FX. And then as you say, these new asset classes that have emerged both unbacked, crypto and backed instruments like stable coins. And interestingly, I think in the discussions that we had when producing this paper, there was a significant focus on stable coins, in particular, the role of stable coins and the increasing interconnectedness potentially between the traditional financial system and the stable coin market. And so to take one example, I understand that one of the biggest stable coin issuers now holds more US treasuries than Germany does, and potentially the overall stable coin issuer population could end up being the second-biggest holder of US treasuries.
(15:59):
And so suddenly you create this significant sort of interconnection between stable coin market and US debt market. Clearly at the moment the stable coin market is very much US dollar denominated market, but we will start probably seeing development of that in other jurisdictions. And there are concerns that have been expressed at Central Bank and other levels around sort of the privatization of money, the risk of deposit flights from banks, particularly if stable coins were able to pay interest on their holdings. This is clearly both from a policymaker perspective and also from sort of a practitioner perspective, a very sort of significant area of focus and potential opportunity and also risk.
Sebastian Barling (16:41):
We’ve certainly had conversation with regulators including treasury here about those macro risks as and when you end up having very significant amounts of treasuries potentially being sold into the market in times of stress. And certainly they’re looking at how to best manage that as part of the developing UK regime. Thinking about crypto and stable coins, these are global regimes. Any appetite for the FMSB to start making any global standards in this space?
Christopher Rich (17:07):
The purpose of this report was to think about what have been the key thematic changes in markets over the last decade, and then to start looking forward as to where are the key trends and we need to think about who are the key participants in the market, who do we need to have at the table in addition to our existing banking members and asset management members and corporate members. We will then determine the topics of focus in light of potential future risks to fair and effectiveness of markets. And clearly if stable coins continue on the trajectory that they’re currently on, they would in the future have quite a significant role in markets and we would need to consider what we would do as a standard setting body in response.
Sebastian Barling (17:48):
And then staying on new asset classes for a moment. The report also talks about a related topic and that’s the growth of DLTs, distributed ledger technology. And again, we’ve been talking about these for a while and I think from our perspective we’ve seen these start to get rolled out, but do you think we’ve seen these really start to show their colors yet and is there much room for them to continue to grow?
Christopher Rich (18:10):
This was an area where certainly we heard a diversity of opinions from experts. As you say, there’s been a lot of discussion and a lot of promise associated with DLT technology and sort of tokenization of both existing assets and new or native assets. We heard varying views as to the likely speed of adoption. I still think it sounds as if we’re in relatively early stage and that some of the initiatives to date have been more proof of concept and testing rather than truly scalable. There are potentially very significant back office savings associated with the use of DLT and tokenization. I think the efficiencies that can be derived from it may well mean that longer term the market does shift very much onto DLT technology, but there are barriers to doing that in the short term. It’s a very significant investment in the short term even though that may yield significant savings in the longer term. So I think probably whilst we heard a variety of views, I think the majority perspective was long-term this is likely to have significant changes, but I wouldn’t overestimate necessarily the impact in the short term.
Sebastian Barling (19:22):
And then turning to the last theme identified in the report, which is geography and in particular this looks at the interplay between some of the traditional financial hubs such as London and New York as well as against some of the newer regional hubs such as Dubai, Abu Dhabi, Hong Kong and Singapore. We are currently recording this in the middle of the City of London. Do you think this is still the right place for us to be recording a podcast about financial markets? Is it going to stay that way?
Christopher Rich (19:46):
London and New York, as we say in the paper, remain key financial centers. Again, New York is obviously the center of equity markets and private capital and other things. London remains based on Bank of International Settlements report, very much a key player, the interest rate market in the FX markets. The role of these traditional financial centers I think will continue to be central. That said, I think there is a view that we are heading into a world, and this is linked to the geopolitics as well, but of greater regionalization and the growing role of regional hubs and as you say, the role of hubs in the Middle East, Abu Dhabi and Dubai in particular, the role of Hong Kong and Singapore and I guess also within Europe we’ve seen some trading and other activities shift to jurisdictions and like France. So there’s a little bit more fragmentation also within a European context. London, New York, I think the view is will continue to be key centers, but we’re likely see greater fragmentation and more regionalization of markets in the coming years.
Sebastian Barling (20:52):
Is regulatory arbitrage a large part of that do you think?
Christopher Rich (20:56):
Well, certainly we sort of touched on before post-GFC, a great effort was made to drive consistent international standards through the G20 and other, the FSB and IOSCO and other mechanisms. I think there is some concern that we may start seeing more regulatory fragmentation and a bit more of a patchwork approach across jurisdictions in part driven by competitiveness and growth agendas and a desire to attract business to your jurisdiction.
Sebastian Barling (21:25):
I suppose coupled with increases in technology and ease of trading cross-border, it sounds like to me that there is some scope for there to be a bit more rivalry between financial centers and not necessarily looking to serve their own immediate population, but actually looking to do so on more of a cross-border international basis.
Christopher Rich (21:43):
Look, I think the shift to regional hubs is certainly underway and London and New York have had very privileged roles in global finance and no doubt other jurisdictions would like to have more activity happening and to be facilitating more international finance activity in their hubs.
Sebastian Barling (22:00):
It sounds like London is here to stay for a while longer, but they could be a little bit more competition around the edges.
Christopher Rich (22:06):
I hope so.
Sebastian Barling (22:07):
They’re the main themes in the report. Any other interesting points that you’d like to pull out you think people should be aware of?
Christopher Rich (22:13):
I think two themes that it’s worth touching on, one is around the increasing interconnectedness of different aspects of the system. So to take private credit is an example. We’re seeing increasing joint ventures between banks and private credit firms. In other areas that as we mentioned before in the stable coin space, we have connection between stable coin issuers and traditional markets through the US treasury market, for example. And so there are various areas where we’re seeing interconnectedness between different segments of the market and also between traditional financial markets and DeFi. And again, the crypto space is an example of that as the traditional dealers start providing services in relation to the trading of certain crypto instruments as well, which may well grow over the next few years.
Sebastian Barling (23:00):
Yeah, I think we’d agree in terms of seeing that maturation of the crypto markets become much more palatable to traditional balance institutions is certainly a bit of convergence of old and new.
Christopher Rich (23:11):
The other trend, Seb, I think that just to highlight is around the blurring of lines between wholesale and retail participation and technology is obviously enabling greater retail participation into new asset classes. Again, the private credit space is an example below that. So I think perhaps in the past we had a very clear delineation between retail markets and products that were accessible to retail and institutional markets. So I think based on some of the input that we were getting and the democratization of access to financial products, those boundaries between what is an institutional market and what is a retail market may blur.
Sebastian Barling (23:45):
And that’s interesting. And other than telling our clients that they certainly should sit down and read this report, is there anything else you think we should be telling our clients here at Skadden?
Christopher Rich (23:54):
So I think we mentioned before that perhaps we’ve reached sort of a high cyclical watermark for regulators and policymakers still want to ensure good outcomes for users of markets. And I think as we may see regulators simplifying their rule books or in some instances slightly reducing them, and also to the point before around competition between regulators and between jurisdictions, we are likely to see the role of standards become more important in that landscape and clearly to the extent possible, having consistent standards for activity across jurisdictions is beneficial both to your clients who are service providers and also your clients as users of these markets. So we’re seeking to work more closely with regulators in various jurisdictions. We’re a member of IOSCO now in order to drive consistent standards of conduct across international financial centers.
Sebastian Barling (24:49):
There’s an opportunity here if we continue to see some deregulation that isn’t necessarily licensed to operate in the new Wild West, then actually the importance of light touch standards to drive conduct is going to become increasingly relevant.
Christopher Rich (25:02):
I think that’s a possibility. Yes.
Sebastian Barling (25:04):
That’s super interesting. I think that brings us to time other than just to say we’ve skipped through an enormous amount of topics here and I think there’s some fantastic themes coming out of all of this. So certainly asset classes, tech, geography, all feel like things that people are going to have to continue to look at over the next few years. And actually there sounds like there could be some material changes in 10 years time to what we’re sitting looking at now in terms of how people trade and interact with those markets. I also think that just leaves me to say, Chris, thanks very much for being so generous with your time and coming in today and hope to speak with you soon.
Christopher Rich (25:36):
Thank you, Seb. Delighted to be here.
Voiceover (25:40):
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