Having just read my own editor’s letter from our fourth quarter magazine in 2021, there were a handful of low-hanging fruit predictions I successfully managed to forecast: a big year for fintech partnerships, digital assets, more M&A and custody exits, and a bucket-load of talk about settlement cycle reductions around the world.
Perhaps they were easy wins, but what really stands out with each passing year is the stuff that nobody saw coming for example, the FTX collapse, snowballing rumours of State Street buying Credit Suisse and the big BBH deal falling through. Though to be fair – there would have been some legal ramifications for predicting those at the time.
That’s essentially how predictions work though, it’s like house money. Nobody remembers if you get it wrong, and you can bring up all the things you got right. For that reason, let me throw out a left-field prediction for next year that a BigTech – let’s say Amazon – will buy an asset servicer! *Please note: there’s a reason this is being published in our opinion section, and over the next few weeks there will be far more legitimate predictions from industry experts.
But while predictions are enjoyable, let’s talk about some realities, because the agenda for the next 12 months is very much set across the custody and fund services world as we emerge from a year defined by geopolitical events, the possible end of globalisation and digital asset mayhem.
Starting with the most prominent topic not named digital assets, any major markets not already committed to T+1 at this point are readying to do so in the near future, meanwhile, for those who are in the planning phase – the next 12 months are going to be critical for structural preparation and understanding. The market is awaiting a date for the US transition with great anticipation, while we will likely be discussing the challenges of readiness and implications of the rollout for the next 12 months and beyond.
Direct talk about ‘cryptocurrencies’ will likely take a backseat while industry scandals linger, however in its place tokenisation will be widely discussed and probably evolve at pace in the coming year. Talk of the critical role of the traditional market structure player in the space will only heighten as the fallout from FTX continues to snowball.
Regulation will likely come in around this area as result – particularly around the definitions of using qualified custodians in the US – which could boost digital asset custody towards the end of 2023, but there’s also the risk of regulators growing warier of the sector depending on what the next few months bring.
Regulation-wise, we should see more clarity on ESG and Central Bank Digital Currencies, along with updates on the likes of CSDR, SRD II, Mifid II and a lot of reporting requirements in the US as the SEC continues on its unrelenting pursuit of transparency.
To tick off more obvious talking points, the digitisation of custody processes is going to continue as will countless conversations around data, meanwhile we are going to see more and more asset servicers exit the space or sell to larger acquirers as the challenges of the custody model for local providers only increase with each passing year, while the global players seek scale and regional expertise.
One of Global Custodian’s big projects in 2022 was highlighting the 16 fintechs that would shape the future of securities services and we anticipate another big, big year for those outfits. The industry appears in agreement with the best and brightest among these and we are seeing almost wholesale adoption of the likes of HQLAx, Proxymity and Saphyre – to name a few.
We think the recent plummet of assets under custody and administration may subside next year, while interest rate rises and new opportunities will see revenues increase across a handful of the largest players and inflationary pressures will see price rises in the custody business.
A consolidating service provider space and client base means that the asset servicing landscape will significantly shift in the coming years with huge changes expected in regions such as the Nordics, Australia and Europe. Countries and regions of growth and opportunity include the Middle East, Latin America and India, while China hangs in the balance as the industry continues to evaluate possible geopolitical risk.
What has also been apparent over the past six months, is the bullishness throughout the upper echelons of the securities services industry, who appear to be as keen as ever to collaborate (this time with a bit more walk than just talk – for once), partner with fintechs, and capitalise on areas such as private markets, tokenisation, digital assets and clients outsourcing more of their non-core functions than ever before.
Unfortunately, geopolitical tensions and the demise of globalisation hangs over all optimism like a dark cloud, and will remain the number one concern for network managers over the next 12 months. But as long as tensions and conflict don’t rise any further, expect some positive developments in the industry and a slew of new opportunities in 2023.