Shaping the Future of Capital Markets: Six Financial Market Infrastructure Trends to Know

Capital markets continue to evolve at a rapid pace. Characterized by technology and augured by volatility, today’s burgeoning market ecosystem is fed by new demands, entrants, asset classes and client services. Financial market infrastructures (FMIs) not only have to navigate this shifting landscape but also contend operationally to remain resilient, efficient and competitive while contributing to the integrity and transparency of markets required by an increasing regulatory burden.

FMIs are at the heart of markets and thus also the intersection of a number of overarching themes and trends. Here are six things FMIs need to know about the drivers shaping the markets of tomorrow.

1. Settlement acceleration

The move to T+1 in North American markets has unleashed a wave of change across the globe as participants and FMIs adjust operations, processes and systems to accommodate the shortened window. But amid the noise surrounding the change lies the fact that the world’s second largest market, China, is already on T+0 settlement. India as well is already on T+1. While shorter settlement cycles represent a major change, it is not without precedence and organizations can look to the market for examples.

With the U.K., EU and Australia investigating T+1, FMIs should assess how they can optimize for settlement acceleration. The ultimate consideration is always automation. Markets need to take a holistic approach to implementing automation at various touchpoints to condense their own workflows to support T+1, with an eye toward T+0. Automation will not only help FMIs themselves and their members adapt but also put FMIs in a position to branch into new services around exception management and allocation management.

2. Tokenization

Digital assets are still a top priority for FMIs. Increasingly, the focus has been on tokenization and distributed ledger technology (DLT) use cases in discrete areas such as issuance, particularly in post-trade with major use cases emerging across the world.

• Depósito Central de Valores (DCV) has partnered with Nasdaq to support the issuance, registry and settlement of digitized securities
• Euroclear launched its Digital Financial Market Infrastructure (D-FMI) platform in 2023
• Clearstream’s D7 platform also allows for processing of digital securities

The growing consensus among FMIs is that DLT will be a bridge between traditional finance and digital securities. It’s not the radical transformation ascribed to DLT, but more of a coexistence and practical application that evolves the technology paradigm. FMIs need to think about what’s next, perhaps international custody is a good place to start to eliminate messaging and provide interoperability of platforms.

3. Treasury and repo clearing

At the end of 2023, the U.S. Securities and Exchange Commission adopted rules for mandated clearing of most transactions involving U.S. treasury transactions, including repurchases. The effort is intended to mitigate systemic risks and bring the buy-side under standardized clearing models. With more than 50% of EU and U.K. repo trades being voluntarily cleared, FMIs could benefit from thinking ahead to what post-trade products and services they can offer.

This may be especially pertinent as repo activity is incubating or increasing, particularly in Latin America. Repo markets provide a stimulus to inward investment in markets and are effectively hedges to over-the-counter swap markets, acting as a Swiss army knife of sorts for market participants. Repo markets thus work in parallel with many other markets and present further opportunities for FMIs in clearing, collateral management services and potentially basket repo services.

4. Cloud adoption

Cloud uptake continues among FMIs, with the first mission-critical cloud-enabled workloads coming online. As they advance their cloud strategies, FMIs will need to consider their unique position within markets and the changing regulatory environment around them, which includes the EU’s Digital Operational Resilience Act (DORA). As FMIs partner with hyperscale cloud service providers (CSPs) to drive transformation (ex. Nasdaq has partnered with AWS), FMIs must proactively work with regulators on managing vendor relationships and building compliant systems that meet the increased focus on resilience and cybersecurity.

This collaboration is key to realizing the benefits of cloud: scalability, agility and resiliency. It’s also needed for innovation around AI and advanced data analytics. These areas hold many growth opportunities for FMIs and embracing a cloud operational model will be central to unlocking them.

5. AI

Where DLT once promised to radically change markets, it’s AI that’s filling the position of innovation catalyst. AI adoption is increasing among market participants and FMIs to solve problems now, within a year of its rapid onset in summer 2023, delivering results as DLT continues to find its place.

The use cases have emerged across business operations, both in external products and services and internal processes. Newer and smarter modes of automation are freeing resources to direct toward value-add activities that power innovation and differentiation. Nasdaq, for example, has gained regulatory approval for the first exchange order type powered by AI, which will ideally improve fill rates and quote stability.

6. Carbon markets

The growth of voluntary carbon markets (VCMs) has been a global success story. As an asset, carbon credits represent a potentially significant opportunity for post-trade institutions. Currently, while carbon markets are growing, they are hampered by a number of scalability challenges including market structure inefficiency and a lack of price transparency and standardization. FMIs that act to solve those challenges by delivering standardization and technology may stand to benefit as VCMs mature.

Registries in particular are at the heart of the solution and the problem. Many market participants see them as critical enablers of change, but the fragmentation of registries across geographies and project types drags on the market ecosystem. Improving their infrastructure is a key priority to unlocking carbon asset growth and scale.

Learn more

As the landscape continues to shift, FMIs will need to find the capacity to keep pace. Modernization provides the best path forward for FMIs, delivering solutions for now while future-proofing for tomorrow. Learn more about Nasdaq’s post-trade technology for clearing, settlement, registry and more here.