A CRIPPLING global cyber attack, new regulations restricting profitability of businesses and loss of market share to non-traditional players are the top three scenarios most likely to occur as capital markets transform.
This was according to a survey by audit and advisory firm PwC of over 250 capital markets executives around the world, published in its Capital Markets 2020 report.
Meanwhile, companies anticipate their top three challenges to be increasing the profitability of their clients, being impacted by new technologies, and attracting and retaining talented employees.
"As global interconnectivity and ubiquitous access to financial markets increase, we see a world where well-functioning, deep capital markets are needed more than ever," said Karen Loon, PwC Singapore banking and capital markets leader.
"Industry leaders must address the continually changing market forces and prove they can operate within this new equilibrium, which includes justifying their social utility," she said.
Scenarios that PwC considered include how the negative impact of regulations on business profitability and economic growth becomes apparent and governments scale back rules at the global and local levels.
Aggressive outsourcing, consolidation and streamlining of technology and organisational models can save some leading companies half of the current cost per trade.
However, returns on equity (ROEs) will not reach 2006-7 highs of over 20 per cent, but will settle at around 12-14 per cent, PwC said.
Another scenario was how financial technology companies will bring new management and regulatory challenges, along with cost and efficiency benefits.
Multi-asset and broker-neutral platforms could emerge, providing investors with a single source for much of their trading and risk management needs, according to PwC.
"The single-dealer/asset class platforms for each product silo and large data warehouses at the back end to consolidate risk, financial and client data are unsustainable," it said.
PwC said that other potential disruptions the world could face include:
- The US becoming energy self-sufficient, or technological developments mean every country could be self-sufficient, with implications for trade flows and economic activity;
- War between two major countries cause two or more financial system blocs, with questions of how a financial institution could operate across both;
- Markets lose confidence in a country, which formally defaults, with implications for contagion affecting banks, corporations and governments;
- Interest rate rises lead to questions of whether sovereign countries are prepared to service the debt of their highly leveraged economies; and
- The regulatory burden on the financial sector becomes so big that nation states pull out of international agreements like Basel III to gain short-term economic advantage.