Uncertainty hangs in the air, but the Coalition Greenwich report predicts that electrification, technology and less red tape will be hallmarks of this year.
It is that time of year when the predictions come in fast and furious. Although it is always difficult to forecast, 2025 is expected to be even harder than most, according to the Coalition Greenwich’s annual Top market structure trends to watch report.
In fact, the consultancy said that this year “is arguably the most unpredictable since the start of the pandemic. Geopolitics are complicated. US regulatory policy is uncertain. And although it seems like U.S. equity markets can’t stop going up and interest rates have nowhere to go but down, we know neither is a sure thing.”
Despite the uncertainty, the report highlights a few intractable trends including the electronification of trading, workflow automation, artificial intelligence and machine learning (AI/ML). which it notes will continue to be a significant catalyst for innovation in financial markets in the years ahead.
On the derivatives front, the report expects that demand for products will continue to be “insatiable”. Last year, traditional futures contracts tracking interest rates and equity markets saw record volumes while event futures contracts, which became official in the US last year, boomed before the election. These contracts allow traders to speculate on the outcome of specific occurrences such as the result of a political election, the winner of a sports championship, or the closing point value of a benchmark average like the S&P 500.
Bitcoin and ETH futures also enjoyed healthy activity while equity options became mainstream with the zero days to expiration options contracts driving volumes even higher. Also known as 0DT, these are options contracts that expire and become void the same day that they’re traded although they may have been listed days, weeks or months ago. The contracts could be tied to the price of indexes, exchange trade funds (ETFs) or single stocks.
The report believes that institutional traders and investors will drive the bulk of the market volume, but that the full-scale entry of retail into the futures market will also have a significant impact. Derivatives markets will also benefit from a rise in crypto-related ETFs because they will generate greater crypto-ETF options volume while credit futures may finally come of age this year. They have tried for more than a decade to find their footing, but there are signs that the market is finally ready for these smartly crafted instruments,” it adds. Add link
The report also expects there to be fresh competition for the US interest-rate futures complex which will only be advantageous for end users, regardless of the outcome. “All of this will unfold against a backdrop of less regulatory red tape that could accelerate new product approvals,” it said.
Although it is too early to gauge what the new adminstration’s exact gameplan will be, the report believes that many of the proposed but unpassed rules at the Securities and Exchange Commission (SEC) will be scraped. This particularly the case with the agency’s mandates for centralised clearing of treasury and repo transactions to enhance transparency, stability, and resilience in the $ 27trn Treasury market.
There were rumblings even before Trump won a second term. This is reflected in the recent report by Acuiti and ION Group –US Treasury Markets: Plotting the Sell-Side’s Path to Mandatory Clearing. It found that future commission merchants (FCMs) were worried over the timeline and the economics of providing clearing services in treasuries and repos. In addition, many questioned the capacity of the market to absorb the demand for clearing and were uncertain about their approach to the market as well as the models they will offer clients from day one.
According to Coalition Greenwich, the SEC mandate should stick, despite the change in leadership in Washington. “We and our study participants believe it will be a net positive for the market, even though development costs for market participants and short-term complexities must be ironed out. The repo market is one of the most critical of all financial markets, so injecting some standards and additional risk management processes into the market just makes sense.”
It argues that the proposed new rules will lead to greater volumes through the incumbents as well as potentially new entrants seeing new opportunities. Trading mechanisms, in turn, will likely get smarter, taking cues from innovations used to electronify other parts of the fixed-income market.
The report also notes that these same market standards and trading mechanisms could also open the market to new repo buyers and sellers. An easier process to generate returns for those with cash on hand or to borrow cash for those with strategies to deploy it should inject more liquidity into the market overall.
Overall, industry initiatives such as T+1 and the Treasury clearing mandate are positive as they have forced change and improvement to existing technologies and processes. For example, the investments have not only accelerated the pace of processing, but also increased the value that the back office provides to the front office. Better post-trade data means portfolio managers have a more accurate and real-time view of risk, while smart compliance checks keep capital moving with a greater assurance of no regulatory surprises.
