On Friday 22^nd of November, professionals gathered at IHS Markit in Amsterdam to discuss evolutions and issues within capital markets. Clearing banks were present, as well as trading platforms, asset management companies, consultants and data management firms. Find here the exhaustive list of participants.

Three main topics were at the centre of parties’ concerns: the opposition between innovation and regulation, the ICOs conundrum, or how capital markets will digest the in-coming technology, and cybersecurity issues in capital markets.

Regulation vs. innovation

Innovation in the industry, or at least its adoption, is not the fastest. In this regard, Don Ginsel (Holland FinTech, CEO) highlighted the underlying problem impeding capital markets: only a few truly understand their functioning and issues. Innovation is compromised because the amount of people directly affected by the problems slowing down the market is not enough to provoke a significant research. Industries such as insurance or retail banking do not have this problem, as they maintain a direct contact with public customers. This is not the case for capital markets. Innovation there is therefore lacking a serious dose of agility on the incumbent side. Novelty nonetheless exists, and competition is starting to appear on the market.

Hence the question of the reaction of incumbents in the face of innovation was a central theme of the discussion for the challengers around the table. Joost Bongers (IHS Markit) noted that, many elements being driven by regulations, it is hard to be able to look into new innovation. A fact Bob Koster (Owlin) agreed on, as for him regulation inexorably slows down innovation, especially in the Netherlands where the market is more conservative than in the US, the UK or Germany.

This barrier to innovation leads to a sense of urgency troubling incumbents, as Willem Jellema (Robeco) stressed. New technologies, such as AI or ML, put legacy holders into a somewhat delicate position, and the stance to adopt in the face of such change is not an obvious one. Such is the standpoint of ABN Amro Clearing Bank (Niek Van Rens), as the bank is focusing more on regulatory issues than innovation. The confrontation of legacy against tech is therefore rather serious. Lodewijk Bonebakker (Optiver, CTO) tempered this statement, as for him today no computer can reach the level of market understanding traders have.

This ‘huge sense of urgency’ striking capital markets today was a clear issue for more than one participant. Such urgency, according to Marleen Evertsz (NxChange), stems from the fact that communities are determining what is happening in the market, not fintechs, financial institutions or regulators. For the challenger, the future stock market will be the Internet, as borders are going to fall.

Still, regulators are aware of the upcoming changes and the need to adapt. The next large directive to impact global financial markets, MiFIDII raises a lot of concerns and debate, because knowledge of the new regulation is scarce. Joost Bongers (IHS Markit) stated that MiFIDII would bring more fragmentation, yet maybe more opportunities. Optiver’s CTO, Lodewijk Bonebakker, indicated the directive would change financial markets in the next three years.

In any case, the new directive raises expectations from stakeholders. Current frictions in the market wheigh on players, as post-crisis regulation is still heavy and do not integrate recent changes and trends. This is the case for fixed-income traders; according to a recent report from Greenwich Associates, trading desks’ spending on compliancy and regtech tops USD 20 billion a year. Traders are looking up to the new regulations in the hope that it will support technological development, facilitating a reduction of such costs and a smoother compliancy structure. On top of technological facilitation, MiFIDII is expected to greatly change the market rules. In the previously reached debate around regulation and innovatiot, MiFIDII is seen as the way to reconcile the two. “Where most regulation is seen as a barrier to entry, MiFID II might actually create opportunities for FinTech startups through the disruptive impact that the regulation can have on the business model of (research) brokers.” Willem Jellema (Robeco) indicated.

Yet nothing is sure at the moment, as MiFIDII remains surrounded by a cloud of smoke and the Netherlands along with other countries is late to be MiFIDII compliant. The several delays announced by the Dutch authorities may be an indicator of certain reluctance towards change.

ICO issues

Speaking of fogginess and reluctance, the conversation did not miss discussion of cryptocurrencies, and particularly ICOs; and none around the table had a neutral opinion about the hyped and controverted novelty.

In terms of regulation, CJ Welkzijn (Kempen) pointed out that, with 150 years spent by regulators to stabilize the current system, to organise the settlement of securities and others, it will be a considerable step for them to adapt to an entirely game-changing technology.

Still, this time has not come yet. Young organisations of a moderate size are the only one today to actually use ICOs, as larger ones fear the trickiness of regulatory gymnastics. This is despite the better use case that ICOs present in contrast to IPOs, according to Marleen Evertsz (CEO, NxChange). The ICO market is indeed occupied almost exclusively by start-ups, and the transition of traditional legacy flows to new markets will take time (Niek Van Rens, ABN Amro).

A lack of trust, doubts around its efficiency and compliancy issues are still in the path of cryptocurrency technology, which eventually needs to be integrated into financial markets. The way to integrate cryptocurrencies for CJ Welkzijn (Kempen) would be adoption by bigger players with sufficient credentials and trustworthy collaborators. Such firms would still find partners after having done the funding procedure, a concern for most of them.

Ultimately, innovation in capital markets, here blockchain-based, needs to focus on solving actual issues such as the friction on markets, the general availability of capital, and to optimize trade and the economy on a macroeconomic level.

Cybersecurity on capital markets

When the discussion reached cybersecurity issues, CJ Welkzijn (Kempen) pointed out the regrettable amount of budget allocated to security, which could be used to research innovative solutions if it was not for the cyber-threats looming over the industry. Capital markets are not spared by the booming cybersecurity concerns, as phishing, ransomware and DDoS attacks target the industry.

Security and innovation make a rather unstable mix as well, and new technologies bring new challenges. For instance, we have seen recently many financial authorities multiplying warnings regarding ICOs.

Participants of this roundtable were not overlooking the threats and were pointing out the danger of being too sure of oneself in everyday situations. Security protocols are in many cases remaining at a very administrative level, without concrete application to real cases. One thing is sure; cyber-threats can hardly be contained without a sharp and fast adapting system.

An insightful afternoon, this roundtable was a great opportunity for stakeholders to exchange their concerns and challenges in the face of digitization and systemic changes. It was particularly gratifying to witness legacy-holders discuss issues with new comers, and to see different parties genuinely debating over the means to achieve common goals, that is efficient markets and better access to finance.